Nortech Systems Inc 10-Q for FY2022 Q3
Nortech Systems Inc (NSYS)
About this 10-Q
Nortech Systems Inc filed this 10-Q on November 9, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $35.28M
- up 19.8% from $29.45M a year earlier
- Net income
- $1.53M
- down 56.9% from net income of $3.56M a year earlier
- Diluted EPS
- $0.53
- down 57.3% from $1.24 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
State of Incorporation:
IRS Employer Identification No.
Executive Offices:
Telephone number:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
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).
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.
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Large Accelerated Filer ☐ |
Accelerated Filer ☐ |
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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
Number of shares of $.01 par value common stock outstanding at November 4, 2022 was
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | |||
| PAGE | |||
| Item 1 - Financial Statements | |||
| Condensed Consolidated Statements of Operations and Comprehensive Income | 3 | ||
| Condensed Consolidated Balance Sheets | 4 | ||
| Condensed Consolidated Statements of Cash Flows | 5-6 | ||
| Condensed Consolidated Statements of Shareholders’ Equity | 7 | ||
| Condensed Notes to Consolidated Financial Statements | 8-19 | ||
| Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations | 20-26 | ||
| Item 3 - Quantitative and Qualitative Disclosures About Market Risk | 27 | ||
| Item 4 - Controls and Procedures | 27 | ||
| PART II - OTHER INFORMATION | |||
| Item 1 - Legal Proceedings | 28 | ||
| Item 1A. - Risk Factors | 28 | ||
| Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds | 28 | ||
| Item 3 - Defaults on Senior Securities | 28 | ||
| Item 4 - Mine Safety Disclosures | 28 | ||
| Item 5 - Other Information | 28 | ||
| Item 6 - Exhibits | 29 | ||
| SIGNATURES | 30 | ||
PART I
ITEM 1. FINANCIAL STATEMENTS
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
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(UNAUDITED) |
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(IN THOUSANDS, EXCEPT SHARE DATA) |
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THREE MONTHS ENDED |
NINE MONTHS ENDED |
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SEPTEMBER 30, |
SEPTEMBER 30, |
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2022 |
2021 |
2022 |
2021 |
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Net Sales |
$ | $ | $ | $ | ||||||||||||
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Cost of Goods Sold |
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Gross Profit |
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| Operating Expenses | ||||||||||||||||
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Selling Expenses |
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General and Administrative Expenses |
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Research and Development Expenses |
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Restructuring Charges |
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Loss on Abandonment of Intangible Assets |
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Gain on Sale of Assets |
( |
) | ( |
) | ( |
) | ||||||||||
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Total Operating Expenses |
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Income From Operations |
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| Other Expense | ||||||||||||||||
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Interest Expense |
( |
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) | ( |
) | ( |
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Income Before Income Taxes |
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Income Tax Expense |
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Net Income |
$ | $ | $ | $ | ||||||||||||
| Net Income Per Common Share: | ||||||||||||||||
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Basic (in dollars per share) |
$ | $ | $ | $ | ||||||||||||
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Weighted Average Number of Common Shares Outstanding - Basic (in shares) |
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Diluted (in dollars per share) |
$ | $ | $ | $ | ||||||||||||
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Weighted Average Number of Common Shares Outstanding - Diluted (in shares) |
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| Other comprehensive income | ||||||||||||||||
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Foreign currency translation |
( |
) | ( |
) | ( |
) | ||||||||||
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Comprehensive income, net of tax |
$ | $ | $ | $ | ||||||||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(IN THOUSANDS, EXCEPT SHARE DATA) |
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SEPTEMBER 30, |
DECEMBER 31, |
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2022 |
2021(1) | |||||||
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(Unaudited) |
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| ASSETS | ||||||||
| Current Assets | ||||||||
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Cash |
$ | $ | ||||||
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Restricted Cash |
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Accounts Receivable, less allowances of $ |
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Employee Retention Credit Receivable |
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Inventories, Net |
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Contract Assets |
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Prepaid Expenses and Other Current Assets |
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Total Current Assets |
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Property and Equipment, Net |
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Operating Lease Assets |
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Other Intangible Assets, Net |
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Total Assets |
$ | $ | ||||||
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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| Current Liabilities | ||||||||
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Current Portion of Finance Lease Obligations |
$ | $ | ||||||
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Current Portion of Operating Lease Obligations |
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Accounts Payable |
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Accrued Payroll and Commissions |
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Customer Deposits |
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Other Accrued Liabilities |
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Total Current Liabilities |
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| Long-Term Liabilities | ||||||||
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Long Term Line of Credit |
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Long Term Finance Lease Obligations, Net |
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Long-Term Operating Lease Obligations, Net |
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Other Long-Term Liabilities |
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Total Long-Term Liabilities |
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Total Liabilities |
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| Commitments and Contingencies | ||||||||
| Shareholders' Equity | ||||||||
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Preferred Stock, $ |
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Common Stock - $ |
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Additional Paid-In Capital |
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Accumulated Other Comprehensive (Income) Loss |
( |
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Retained Earnings |
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Total Shareholders' Equity |
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Total Liabilities and Shareholders' Equity |
$ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
(1)
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(UNAUDITED) |
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(IN THOUSANDS) |
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NINE MONTHS ENDED |
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SEPTEMBER 30, |
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2022 |
2021 |
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| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
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Net Income |
$ | $ | ||||||
| Adjustments to Reconcile Net Income to Net Cash | ||||||||
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Provided By (Used In) Operating Activities: |
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Depreciation and Amortization |
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Compensation on Stock-Based Awards |
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Change in Accounts Receivable Allowance |
( |
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Change in Inventory Reserves |
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Loss on Abandonment of Intangible Asset |
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Gain on Disposal of Property and Equipment |
( |
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| Changes in Current Operating Items | ||||||||
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Accounts Receivable |
( |
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Employee Retention Credit Receivable |
( |
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Inventories |
( |
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Contract Assets |
( |
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Prepaid Expenses and other Curent Assets |
( |
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Income Taxes |
( |
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Accounts Payable |
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Accrued Payroll and Commissions |
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Other Accrued Liabilities |
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Net Cash Provided By (Used In) Operating Activities |
( |
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| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
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Proceeds from Sale of Property and Equipment |
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Purchase of Intangible Asset |
( |
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Purchases of Property and Equipment |
( |
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Net Cash Used In Investing Activities |
( |
) | ( |
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| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
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Net Change in Line of Credit |
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Principal Payments on Long-Term Debt |
( |
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Principal Payments on Financing Leases |
( |
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Debt Issuance Costs |
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Stock Option Excercises |
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Net Cash Provided By Financing Activities |
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Net Change in Cash and Cash Equivalents |
( |
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Cash and Cash Equivalents - Beginning of Period |
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Cash and Cash Equivalents - End of Period |
$ | $ | ||||||
| Reconciliation of cash and restricted cash reported within the consolidated balance sheets | ||||||||
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Cash |
$ | $ | ||||||
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Restricted Cash |
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Total Cash and restricted cash reported in the consolidated statements of cash flows |
$ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(UNAUDITED) |
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(IN THOUSANDS) |
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NINE MONTHS ENDED |
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SEPTEMBER 30, |
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2022 |
2021 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash Paid During the Period for Interest |
$ | $ | ||||||
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Cash Paid (Refunded) During the Period for Income Taxes |
( |
) | ||||||
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Supplemental Noncash Investing and Financing Activities: |
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Property and Equipment Purchases in Accounts Payable |
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Property Acquired Under Operating Lease |
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See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
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(UNAUDITED) |
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(IN THOUSANDS) |
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Preferred | Common | Paid-In | Comprehensive | Retained | Total Shareholders' | |||||||||||||||||||
| Stock | Stock | Capital | Loss | Earnings | Equity | |||||||||||||||||||
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BALANCE JUNE 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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Net Income |
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Foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
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Stock option exercises |
- | - | - | - | ||||||||||||||||||||
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Compensation on stock-based awards |
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BALANCE SEPTEMBER 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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BALANCE DECEMBER 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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Net Income |
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Foreign currency translation adjustment |
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Stock option exercises |
- | - | - | - | ||||||||||||||||||||
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Compensation on stock-based awards |
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BALANCE SEPTEMBER 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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BALANCE JUNE 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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Net Income |
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Foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
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Stock option exercises |
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Compensation on stock-based awards |
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BALANCE SEPTEMBER 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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BALANCE DECEMBER 31, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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Net Income |
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Foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
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Stock option exercises |
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Compensation on stock-based awards |
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BALANCE SEPTEMBER 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Shares |
Weighted- Average Exercise Price Per Share |
Weighted- Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in thousands) |
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Outstanding - January 1, 2022 |
$ | |||||||||||||||
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Granted |
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Exercised |
( |
) | ||||||||||||||
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Cancelled |
( |
) | ||||||||||||||
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Outstanding - September 30, 2022 |
$ | $ | ||||||||||||||
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Exercisable - September 30, 2022 |
$ | $ | ||||||||||||||
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September 30, |
December 31, |
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2022 |
2021 |
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Raw Materials |
$ | $ | ||||||
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Work in Process |
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Finished Goods |
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Reserves |
( |
) | ( |
) | ||||
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Total |
$ | $ | ||||||
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Customer Relationships |
Trade Names |
Patents |
Total |
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Balance at January 1, 2021 |
$ | $ | $ | $ | ||||||||||||
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Additions |
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Amortization |
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Abandonment Loss |
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Balance at December 31, 2021 |
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Additions |
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Amortization |
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Balance at September 30, 2022 |
$ | $ | $ | $ | ||||||||||||
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Year |
Amount |
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Remainder of 2022 |
$ | |||
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2023 |
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2024 |
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2025 |
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Thereafter |
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Total |
$ | |||
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily financial institutions, in the United States and in China. The account in the United States may at times exceed federally insured limits. Of the $
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 total accounts receivable. customer accounted for
At September 30, 2022, customers represented approximately
Export sales represented approximately
NOTE 3. REVENUE
Revenue recognition
Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately
Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.
On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.
Contract Assets
Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the nine months ended September 30, 2022 was as follows (in thousands):
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Balance outstanding at December 31, 2021 |
$ | |||
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Increase (decrease) attributed to: |
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Amounts transferred over time to contract assets |
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Amounts invoiced during the period |
( |
) | ||
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Balance outstanding at September 30, 2022 |
$ |
We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2022 to be transferred to receivables within 90 days, with the majority of any remaining amounts to be transferred within
The following tables summarize our net sales by timing of transfer of goods and services by market:
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Three Months Ended September 30, 2022 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Industrial |
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Aerospace and Defense |
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Total net sales |
$ | $ | $ | $ | ||||||||||||
|
Nine Months Ended September 30, 2022 |
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|
Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Industrial |
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Aerospace and Defense |
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Total net sales |
$ | $ | $ | $ | ||||||||||||
|
Three Months Ended September 30, 2021 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Industrial |
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Aerospace and Defense |
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|
Total net sales |
$ | $ | $ | $ | ||||||||||||
|
Nine Months Ended September 30, 2021 |
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|
Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | |||||||||||||
|
Industrial |
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|
Aerospace and Defense |
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|
Total net sales |
$ | $ | $ | $ | |||||||||||||
NOTE 4. FINANCING ARRANGEMENTS
We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $
Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of
The line of credit with Bank of America contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.
The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than
At September 30, 2022, we had unused availability under our line of credit of $
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 to years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At September 30, 2022, we do not have material lease commitments that have not commenced.
The components of lease expense were as follows:
|
Three Months Ended September 30, |
Three Months Ended September 30, |
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|
Lease Cost |
2022 |
2021 |
||||||
|
Operating lease cost |
$ | $ | ||||||
|
Finance lease interest cost |
||||||||
|
Finance lease amortization expense |
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|
Total lease cost |
$ | $ | ||||||
|
Nine Months Ended September 30, |
Nine Months ended September 30, |
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Lease Cost |
2022 |
2021 |
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Operating lease cost |
$ | $ | ||||||
|
Finance lease interest cost |
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Finance lease amortization expense |
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|
Total lease cost |
$ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
|
Balance Sheet Location |
September 30, 2022 |
December 31, 2021 |
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Assets |
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|
Operating lease assets |
Operating lease assets |
$ | $ | ||||||
|
Finance lease assets |
Property, plant and equipment |
||||||||
|
Total leased assets |
$ | $ | |||||||
Supplemental cash flow information related to leases was as follows:
|
September 30, |
September 30, |
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2022 |
2021 |
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|
Operating leases |
||||||||
|
Cash paid for amounts included in the measurement of lease liabilities |
$ | $ | ||||||
|
Right-of-use assets obtained in exchange for lease obligations |
$ | $ | ||||||
Maturities of lease liabilities were as follows:
|
Operating Leases |
Finance Leases |
Total |
||||||||||
|
Remaining 2022 |
$ | $ | $ | |||||||||
|
2023 |
||||||||||||
|
2024 |
||||||||||||
|
2025 |
||||||||||||
|
2026 |
||||||||||||
|
Thereafter |
||||||||||||
|
Total lease payments |
$ | $ | $ | |||||||||
|
Less: Interest |
( |
) |
( |
) | ( |
) |
||||||
|
Present value of lease liabilities |
$ | $ | $ | |||||||||
The lease term and discount rate at September 30, 2022 were as follows:
|
Weighted-average remaining lease term (years) |
||||
|
Operating leases |
||||
|
Finance leases |
||||
|
Weighted-average discount rate |
||||
|
Operating leases |
% |
|||
|
Finance leases |
% |
NOTE 6. INCOME TAXES
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.
Our effective tax rate for the three and nine months ended September 30, 2022 was
NOTE 7. RESTRUCTURING CHARGES
During the first nine months of 2021, we recorded restructuring charges of $
NOTE 8. EMPLOYEE RETENTION CREDIT
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
At September 30, 2022 and December 31, 2021, the Company has ERC benefits of $
NOTE 9. RELATED PARTY TRANSACTIONS
David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021. In the three and nine months ended September 30, 2022, Abilitech paid the Company $
David Kunin, our Chairman, is a minority owner (less than %) 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 worked 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 $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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, higher-level assemblies, and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. We maintain facilities in Bemidji, Blue Earth, Mankato, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.
Recent Developments
Global Pandemic
The COVID-19 pandemic continued to impact our business in the first nine months of 2022, primarily by continued supply chain disruptions and delays. The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.
We will continue to assess the current and potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations. We actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.
Results of Operations
The following table presents statements of operations data as percentages of total net sales for the periods indicated:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Net Sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 | |||||||||
|
Cost of Goods Sold |
82.1 | 72.7 | 84.4 | 83.9 | ||||||||||||
|
Gross Profit |
17.9 | 27.3 | 15.6 | 16.1 | ||||||||||||
|
Selling Expenses |
2.7 | 1.5 | 2.8 | 2.1 | ||||||||||||
|
General and Administrative Expenses |
8.4 | 6.9 | 8.5 | 8.9 | ||||||||||||
|
R&D Expenses |
1.3 | 0.5 | 1.2 | 0.4 | ||||||||||||
|
Restructuring Charges |
- | 0.1 | - | 0.4 | ||||||||||||
|
Gain on Sale of Property and Equipment |
- | (0.3 | ) | - | (0.2 | ) | ||||||||||
|
Income from Operations |
5.5 | 18.6 | 3.1 | 4.5 | ||||||||||||
|
Interest Expense |
(0.3 | ) | (0.4 | ) | (0.3 | ) | (0.4 | ) | ||||||||
|
Income Before Income Taxes |
5.2 | 18.2 | 2.8 | 4.2 | ||||||||||||
|
Income Tax Expense |
0.8 | 4.2 | 0.4 | 0.8 | ||||||||||||
|
Net Income |
4.4 |
% |
14.0 |
% |
2.4 |
% |
3.4 |
% |
||||||||
Net Sales
Net sales for the three months ended September 30, 2022 and 2021 were $35.3 and $29.5 million, respectively, an increase of $5.8 million or 19.7%. Net sales for the nine months ended September 30, 2022 and 2021 were $98.5 million and $81.7 million, respectively, an increase of $16.8 million or 20.6%. The three and nine month increases were driven by increased demand as well as price increases to counteract higher material and labor cost. We have also taken actions to scale the direct labor workforce and strengthen the supply chain for parts.
Net sales by our major EMS industry markets for the three and nine months ended September 30, 2022 and 2021 were as follows (in millions):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
2022 |
2021 |
% Change |
2022 |
2021 |
% Change |
|||||||||||||||||||
|
Medical |
$ | 20.5 | $ | 17.0 | 20.6 | $ | 54.3 | $ | 45.4 | 19.6 | ||||||||||||||
|
Industrial |
10.9 | 9.4 | 16.0 | 29.0 | 25.8 | 12.4 | ||||||||||||||||||
|
Aerospace and Defense |
3.9 | 3.1 | 25.8 | 15.2 | 10.5 | 44.8 | ||||||||||||||||||
|
Total Net Sales |
$ | 35.3 | $ | 29.5 | 19.7 | $ | 98.5 | $ | 81.7 | 20.6 | ||||||||||||||
Backlog
Our 90-day order backlog as of September 30, 2022 was $36.9 million, a 2.8% increase from the beginning of the quarter and a 5.1% decrease from September 30, 2021. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.
Our 90-day order backlog by market has remained relatively constant when compared to the prior quarter end and the same period of the prior year. 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next.
90-day shipment backlog by our major industry markets are as follows (in millions):
|
90 Day Backlog as of the Period Ended |
||||||||||||
|
September 30 |
June 30 |
September 30 |
||||||||||
|
2022 |
2022 |
2021 |
||||||||||
|
Medical |
$ | 22.8 | $ | 20.9 | $ | 19.7 | ||||||
|
Industrial |
8.3 | 9.8 | 10.6 | |||||||||
|
Aerospace and Defense |
5.8 | 5.2 | 8.6 | |||||||||
|
Total 90-Day Backlog |
$ | 36.9 | $ | 35.9 | $ | 38.9 | ||||||
Our total order backlog as of September 30, 2022 was $103.3 million, a 2.7% decrease from the beginning of the quarter and a 31.4% increase from September 30, 2021. Our total backlog remains strong as our biggest customers are placing orders into the future to secure supply of critical components, in particular for those with long lead times.
Total order backlog by our major industry markets are as follows (in millions):
|
Total Backlog as of the Period Ended |
||||||||||||
|
September 30 |
June 30 |
September 30 |
||||||||||
|
2022 |
2022 |
2021 |
||||||||||
|
Medical |
$ | 58.4 | $ | 63.7 | $ | 37.3 | ||||||
|
Industrial |
22.8 | 22.6 | 17.8 | |||||||||
|
Aerospace and Defense |
22.1 | 19.9 | 23.5 | |||||||||
|
Total Backlog |
$ | 103.3 | $ | 106.2 | $ | 78.6 | ||||||
The 90-day and total backlog at September 30, 2022 contain the contract asset value of $9.9 million which has been recognized as revenue.
Gross Profit
Gross profit as a percent of net sales was 17.9% and 27.3% for the three months ended September 30, 2022 and 2021, respectively. Gross profit as a percent of net sales was 15.6% and 16.1% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in gross profit as a percent of net sales for the three and nine months ended September 30, 2022 compared to the same periods in 2021 is primarily due to the $4.7 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.
Selling Expense
Selling expenses for the three months ended September 30, 2022 and 2021 were $1.0 million or 2.7% of sales and $0.4 million or 1.5% of sales, respectively. Selling expenses for the nine months ended September 30, 2022 and 2021 were $2.8 million or 2.8% of sales and $1.7 million or 2.1% of sales, respectively. Selling expense for the three and nine months ended September 30, 2021 includes a $0.1 million reduction in payroll and medical expenses related to the ERC. The increase in selling expense for the three and nine months ended September 30, 2022 compared to the same periods of the prior year relates to an increase in sales engineering expenses to support the increased sales.
General and Administrative Expense
General and administrative expenses for the three months ended September 30, 2022 and 2021 were $2.9 million or 8.4% of sales and $2.0 million or 6.9% of sales, respectively. General and administrative expenses for the nine months ended September 30, 2022 and 2021 were $8.3 million or 8.5% of sales and $7.2 million or 8.9% of sales, respectively. General and administrative expenses for the three and nine months ended September 30, 2021 includes a $0.4 million reduction in payroll and medical expenses related to the ERC. General and administrative expenses for the three and nine months ended September 30, 2022 were otherwise held relatively flat compared to the same periods of the prior year, and are generally fixed in nature.
Restructuring Charges
Restructuring charges for the three and nine months ended September 30, 2021 were $23 thousand and $0.3 million, respectively. There were no restructuring charges for the three and nine months ended September 30, 2022. The restructuring charges relate to the closure of the Merrifield facility during 2021.
Research and Development Expense
Research and development expenses were $0.5 million or 1.3% of net sales for the three months ended September 30, 2022 and $1.2 million or 1.2% of net sales for the nine months ended September 30, 2022. Research and development expenses for the three and nine months ended September 30, 2021 were $0.1 and $0.3 million, respectively.
Income From Operations
Income from operations for the three months ended September 30, 2022 was $1.9 million compared to $4.9 million for the three months ended September 30, 2021. Income from operations for both the nine months ended September 30, 2022 and 2021 was $3.1 million. The decrease in income from operations for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the $5.2 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by the increased gross profit in 2022.
Interest Expense
Interest expense was $0.1 million for both the three months ended September 30, 2022 and 2021. Interest expense was $0.3 million for both the nine months ended September 30, 2022 and 2021.
Income Taxes
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.
Our effective tax rate for the three and nine months ended September 30, 2022 was 16% and 15%, respectively. The effective tax rate for the three and nine months ended September 30, 2021 was 26% and 23%, respectively. The primary drivers of the change in effective tax rate are a release in valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.
Net Income
Net income for the three months ended September 30, 2022 was $1.5 million or $0.57 per basic common share and $0.53 per diluted common share. Net income for the three months ended September 30, 2021 was $3.6 million or $1.33 per basic common share and $1.24 per diluted common share. The decrease in net income for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the $5.2 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by the increased gross profit in 2022. Net income for the nine months ended September 30, 2022 was $2.4 million or $0.89 per basic common share and $0.83 per diluted common share. Net income for the nine months ended September 30, 2021 was $2.2 million or $0.82 per basic common share and $0.78 per diluted common share.
Liquidity and Capital Resources
We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC 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 have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2026.
Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 4.1% and 3.5% as of September 30, 2022 and December 31, 2021, respectively. We had borrowings on our line of credit of $9.9 million and $9.0 million outstanding as of September 30, 2022 and December 31, 2021, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $48 thousand and $58 thousand on the consolidated balance sheet for the periods ended September 30, 2022 and December 31, 2021, respectively.
The line of credit with Bank of America contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.
The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0 for the twelve months ended at each Fiscal Quarter end subject only during a trigger period commencing when our availability under our line is less than $2.0 million until availability is above that amount for 30 days. As of September 30, 2022 the Company was in compliance with its covenants.
At September 30, 2022, we had unused availability under our line of credit of $5.8 million supported by our borrowing base. The line is secured by substantially all of our assets. In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improved our unused availability. In the third quarter of 2022, we amended our credit agreement to extend the inclusion of the Employee Retention Credit Receivable through December 31, 2022.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.
Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
|
♦ |
Volatility in the marketplace which may affect market supply, demand of our products, labor rates 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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included or incorporated into this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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.
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, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of September 30, 2022, our share repurchase program has expired, and no additional amounts are available for repurchase.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
|
31.1* |
|
31.2* |
|
32* |
|
101* |
Financial statements from the quarterly report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline 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). |
|
105* |
*Filed herewith
Signatures
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Nortech Systems Incorporated and Subsidiaries
------------------------------------------------------------
|
Date: November 9, 2022 |
by: |
/s/ Jay D. Miller |
|
|
|
Jay D. Miller |
|
|
|
Chief Executive Officer and President |
| Nortech Systems Incorporated |
|
Date: November 9, 2022 |
by: |
/s/ Christopher D. Jones |
|
|
|
Christopher D. Jones |
|
|
|
Vice President and Chief Financial Officer |
| Nortech Systems Incorporated |
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Jay D. Miller, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: November 9, 2022 |
By: |
/s/ Jay D. Miller |
|
Jay D. Miller |
||
|
Chief Executive Officer and President |
||
|
Nortech Systems Incorporated |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Christopher D. Jones, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: November 9, 2022 |
By: |
/s/ Christopher D. Jones |
|
Christopher D. Jones |
||
|
Vice President and Chief Financial Officer |
||
|
Nortech Systems Incorporated |
Exhibit 32
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Jay D. Miller, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 9, 2022
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By: |
/s/ Jay D. Miller |
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Jay D. Miller |
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Chief Executive Officer and President |
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Nortech Systems Incorporated |
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Christopher D. Jones, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 9, 2022
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By: |
/s/ Christopher D. Jones |
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Christopher D. Jones |
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Vice President and Chief Financial Officer |
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Nortech Systems Incorporated |
Exhibit 105
EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”) is made and entered into effective as of September 1, 2022, by and between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (“Borrower”), and BANK OF AMERICA, N.A., a national banking association (together with its successors and assigns, the “Lender”).
RECITALS:
A. Borrower and Lender are parties to a certain Loan and Security Agreement dated as of June 15, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”). Capitalized terms not otherwise defined in this Amendment shall have the meanings assigned to them in the Loan Agreement.
B. Borrower has requested that Lender amend and modify certain terms and provisions of the Loan Agreement.
C. Lender has agreed to so amend the Loan Agreement upon the terms and subject to the conditions set forth in this Amendment.
AGREEMENTS:
NOW, THEREFORE, in consideration of the premises herein set forth and for other good and valuable consideration, the nature, receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Recitals. Borrower and Lender agree that the Recitals set forth above are true and correct.
2. Definition of “Eligible ERC Amount”. Section 1.1 of the Loan Agreement is hereby amended by amending and restating the definition of “Eligible ERC Amount” in its entirety as follows:
Eligible ERC Amount: at any date of determination (a) prior to December 31, 2022, the sum of (i) the aggregate amount of Employee Retention Credits minus (ii) all payments of Employee Retention Credits received by Borrower prior to such date and (b) on or after December 31, 2022, $0.
3. Conditions Precedent. This Amendment shall become effective upon delivery to Lender of the following, each in form and substance acceptable to Lender:
a. this Amendment, duly executed by Borrower and Lender; and
b. such other documents, instruments and agreements as Lender may reasonably require.
4. Representations; No Default. Borrower represents and warrants that: (a) Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized the execution and delivery of this Amendment and other agreements and documents executed and delivered by Borrower in connection herewith, (b) neither this Amendment nor the agreements contained herein contravene or constitute a Default or Event of Default under the Loan Agreement or a default under any other agreement, instrument or indenture to which Borrower is a party or a signatory, or any provision of Borrower’s Articles of Incorporation or By-Laws or, to the best of Borrower’s knowledge, any other agreement or requirement of law, or result in the imposition of any lien or other encumbrance on any of its property under any agreement binding on or applicable to Borrower or any of its property except, if any, in favor of Lender, (c) no consent, approval or authorization of or registration or declaration with any party, including but not limited to any governmental authority, is required in connection with the execution and delivery by Borrower of this Amendment or other agreements and documents executed and delivered by Borrower in connection herewith or the performance of obligations of Borrower herein described, except for those which Borrower has obtained or provided and as to which Borrower has delivered certified copies of documents evidencing each such action to Lender, (d) no events have taken place and no circumstances exist at the date hereof which would give Borrower grounds to assert a defense, offset or counterclaim to the obligations of Borrower under the Loan Agreement or any of the other Loan Documents, (e) there are no known claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including attorneys’ fees) of any kind, character or nature whatsoever, fixed or contingent, which Borrower may have or claim to have against Lender, which might arise out of or be connected with any act of commission or omission of Lender existing or occurring on or prior to the date of this Amendment, including, without limitation, any claims, liabilities or obligations arising with respect to the indebtedness evidenced by any promissory note executed by Borrower in favor of Lender, (f) the representations and warranties of Borrower contained in the Loan Agreement are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, (g) no Default or Event of Default has occurred and is continuing under the Loan Agreement, and (h) to the Borrower’s knowledge, all Employee Retention Credits are without offset or dispute.
5. Affirmation, Further References. Lender and Borrower each acknowledge and affirm that the Loan Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Loan Agreement (except as amended by this Amendment) and of each of the other Loan Documents shall remain unmodified and in full force and effect. All references in any document or instrument to the Loan Agreement are hereby amended and shall refer to the Loan Agreement as amended by this Amendment.
6. Severability. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction.
7. Successors. This Amendment shall be binding upon Borrower and Lender and their respective successors and assigns, and shall inure to the benefit of Borrower and Lender and to the respective successors and assigns of Lender.
8. Costs and Expenses. Borrower agrees to reimburse Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys’ fees and legal expenses of counsel for Lender) incurred in connection with the Loan Agreement, including in connection with the negotiation, preparation and execution of this Amendment and all other documents negotiated, prepared and executed in connection with this Amendment, and in enforcing the obligations of Borrower under this Amendment, and to pay and save Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment.
9. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment.
10. Counterparts; Digital Copies. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and any party to this Amendment may execute any such agreement by executing a counterpart of such agreement. A facsimile or digital copy (pdf) of this signed Amendment shall be deemed to be an original thereof.
11. Governing Law. This Amendment shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof.
12. Release of Rights and Claims. Borrower, for itself and its successors and assigns, hereby releases, acquits, and forever discharges Lender and its successors and assigns for any and all manner of actions, suits, claims, charges, judgments, levies and executions occurring or arising from the transactions entered into with Lender prior to entering into this Amendment whether known or unknown, liquidated or unliquidated, fixed or contingent, direct or indirect which Borrower may have against Lender.
13. No Waiver. Nothing contained in this Amendment (or in any other agreement or understanding between the parties) shall constitute a waiver of, or shall otherwise diminish or impair, Lender’s rights or remedies under the Loan Agreement or any of the other Loan Documents, or under applicable law.
[Remainder of Page Intentionally Blank]
IN WITNESS WHEREOF, the parties hereto have entered into this Amendment as of the date first above written.
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BORROWER: |
NORTECH SYSTEMS INCORPORATED |
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| By: | /s/ Alan K. Nordstrom | |||
| Name: | Alan K. Nordstrom | |||
| Title: | Corporate Controller | |||
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LENDER: |
BANK OF AMERICA, N.A. |
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| By: | /s/ Matthew J. Zeratsky | |||
| Name: | Matthew J. Zeratsky | |||
| Title: | Senior Vice President | |||
Eighth Amendment to Loan and Security Agreement