nsys20230630

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

nsys20230630_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended June 30, 2023

☐

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

For the transition period from to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

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

Telephone number: (952) 345-2244

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐		Accelerated Filer ☐
Non-accelerated Filer ☒		Smaller Reporting Company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of $.01 par value common stock outstanding at August 4, 2023 was 2,737,178.

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	8-21

Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations	21-28

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	29

Item 4 - Controls and Procedures	29

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	30

Item 1A. - Risk Factors	30

Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds	30

Item 3 - Defaults on Senior Securities	30

Item 4 - Mine Safety Disclosures	30

Item 5 - Other Information	30

Item 6 - Exhibits	31

SIGNATURES	32

PART

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2023			2022			2023			2022

Net Sales	$	35,021		$	32,518		$	69,909		$	63,229

Cost of Goods Sold		29,547			27,514			58,951			54,181

Gross Profit		5,474			5,004			10,958			9,048

Operating Expenses
Selling Expenses		953			960			1,843			1,793
General and Administrative Expenses		3,105			2,668			6,370			5,397
Research and Development Expenses		317			351			593			679
Gain on Sale of Assets		-			-			-			(15	)

Total Operating Expenses		4,375			3,979			8,806			7,854

Income From Operations		1,099			1,025			2,152			1,194

Other Expense
Interest Expense		(125	)		(117	)		(235	)		(215	)

Income Before Income Taxes		974			908			1,917			979

Income Tax Expense		340			189			602			122

Net Income	$	634		$	719		$	1,315		$	857

Net Income Per Common Share:

Basic (in dollars per share)	$	0.23		$	0.27		$	0.49		$	0.32
Weighted Average Number of Common Shares Outstanding - Basic (in shares)		2,718,066			2,683,131			2,705,121			2,681,931

Diluted (in dollars per share)	$	0.22		$	0.25		$	0.46		$	0.30
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)		2,870,848			2,886,755			2,887,313			2,879,216

Other comprehensive income
Foreign currency translation		(281	)		(244	)		(241	)		(239	)
Comprehensive income, net of tax	$	353		$	475		$	1,074		$	618

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

	JUNE 30,			DECEMBER 31,
	2023			2022(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	781		$	1,027
Restricted Cash		1,134			1,454
Accounts Receivable, less allowances of $303 and $334		17,404			15,975
Employee Retention Credit Receivable		-			2,650
Inventories, Net		21,078			22,438
Contract Assets, less allowances of $22 and $0		11,587			9,982
Prepaid Expenses		2,370			1,334
Total Current Assets		54,354			54,860

Property and Equipment, Net		6,485			6,408
Operating Lease Assets		7,253			7,850
Other Intangible Assets, Net		342			422
Total Assets	$	68,434		$	69,540

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Finance Lease Obligations	$	397		$	390
Current Portion of Operating Lease Obligations		1,056			1,155
Accounts Payable		15,343			14,792
Accrued Payroll and Commissions		3,004			4,803
Income Taxes Payable		347			733
Customer Deposits		3,321			3,515
Other Accrued Liabilities		931			1,010
Total Current Liabilities		24,399			26,398

Long-Term Liabilities
Long Term Line of Credit		7,019			6,853
Long Term Finance Lease Obligations, Net		363			565
Long-Term Operating Lease Obligations, Net		7,069			7,549
Other Long-Term Liabilities		95			95
Total Long-Term Liabilities		14,546			15,062
Total Liabilities		38,945			41,460

Commitments and Contingencies

Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding		250			250
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,737,178 and 2,690,633 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		16,712			16,347
Accumulated Other Comprehensive Loss		(611	)		(370	)
Retained Earnings		13,111			11,826
Total Shareholders' Equity		29,489			28,080
Total Liabilities and Shareholders' Equity	$	68,434		$	69,540

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

⁽¹⁾ The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

	SIX MONTHS ENDED
	JUNE 30,
	2023			2022
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net Income	$	1,315		$	857
Adjustments to Reconcile Net Income to Net Cash Provided By (Used In) Operating Activities:
Depreciation and Amortization		1,027			967
Compensation on Stock-Based Awards		192			141
Change in Inventory Reserves		(53	)		(103	)
Other, Net		(147	)		(46	)
Changes in Current Operating Items
Accounts Receivable		(1,580	)		(1,986	)
Employee Retention Credit Receivable		2,650			-
Inventories		1,350			(3,540	)
Contract Assets		(1,620	)		(372	)
Prepaid Expenses		(1,042	)		89
Income Taxes		(364	)		(63	)
Accounts Payable		586			1,346
Accrued Payroll and Commissions		(1,788	)		(84	)
Customer Deposits		(195	)		48
Other Accrued Liabilities		(50	)		806
Net Cash Provided By (Used In) Operating Activities		281			(1,940	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Property and Equipment		-			15
Purchase of Intangible Asset		-			(41	)
Purchases of Property and Equipment		(956	)		(1,182	)
Net Cash Used In Investing Activities		(956	)		(1,208	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line of Credit		65,886			58,440
Payments to Line of Credit		(65,726	)		(56,046	)
Principal Payments on Financing Leases		(189	)		(329	)
Stock Option Excercises		173			33
Net Cash Provided By Financing Activities		144			2,098

Effect of Exchange Rate Changes on Cash		(35	)		-

Net Change in Cash and Restricted Cash		(566	)		(1,050	)
Cash and Restricted Cash - Beginning of Year		2,481			2,225
Cash and Cash Restricted Cash - End of Period	$	1,915		$	1,175

Reconciliation of cash and restricted cash reported within the consolidated balance sheets
Cash	$	781		$	944
Restricted Cash		1,134			231
Total Cash and restricted cash reported in the consolidated statements of cash flows	$	1,915		$	1,175

	SIX MONTHS ENDED
	JUNE 30,
	2023		2022
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	248	$	198
Cash Paid During the Period for Income Taxes		1,036		20

Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		49		52

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)

							Accumulated
					Additional		Other						Total
	Preferred		Common		Paid-In		Comprehensive			Retained			Shareholders'
	Stock		Stock		Capital		Loss			Earnings			Equity

BALANCE MARCH 31, 2022	$	250	$	27	$	16,043	$	61		$	9,954		$	26,335
Net Income		-		-		-		-			719			719
Foreign Currency Translation Adjustment		-		-		-		(244	)		-			(244	)
Compensation on Stock-Based Awards		-		-		93		-			-			93

BALANCE JUNE 30, 2022	$	250	$	27	$	16,136	$	(183	)	$	10,673		$	26,903

BALANCE DECEMBER 31, 2021	$	250	$	27	$	15,962	$	56		$	9,816		$	26,111
Net Income		-		-		-		-			857			857
Foreign Currency Translation Adjustment		-		-		-		(239	)		-			(239	)
Compensation on Stock-Based Awards		-		-		33		-			-			33
Stock Option Exercises		-		-		141		-			-			141

BALANCE JUNE 30, 2022	$	250	$	27	$	16,136	$	(183	)	$	10,673		$	26,903

BALANCE MARCH 31, 2023	$	250	$	27	$	16,481	$	(330	)	$	12,477		$	28,905
Net Income		-		-		-		-			634			634
Foreign Currency Translation Adjustment		-		-		-		(281	)		-			(281	)
Stock Option Exercises		-		-		138		-			-			138
Compensation on Stock-Based Awards		-		-		93		-			-			93

BALANCE JUNE 30, 2023	$	250	$	27	$	16,712	$	(611	)	$	13,111		$	29,489

BALANCE DECEMBER 31, 2022	$	250	$	27	$	16,347	$	(370	)	$	11,826		$	28,080
Net Income		-		-		-		-			1,315			1,315
Foreign Currency Translation Adjustment		-		-		-		(241	)		-			(241	)
Stock Option Exercises		-		-		173		-			-			173
Compensation on Stock-Based Awards		-		-		192		-			-			192
Cumulative Adjustment Related to the Adoption of ASC 326		-		-		-		-			(30	)		(30	)

BALANCE JUNE 30, 2023	$	250	$	27	$	16,712	$	(611	)	$	13,111		$	29,489

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

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

Revenue Recognition

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

Stock-Based Awards

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. Subsequent to this approval, an additional 325,000 shares have been authorized by the shareholders.

We granted 29,000 service-based stock options during the three and six months ended June 30, 2023. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2023 was $5.66. There were no market-based stock options granted during the three and six months ended June 30, 2023.

We granted 0 and 21,000 market-based stock options during the three and six months ended June 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 13,000 and 66,000 service-based options during the three and six months ended June 30, 2022, respectively. Total option grants for the three and six months ended June 30, 2022 were 13,000 and 108,000, respectively.

Total compensation expense related to stock options was $55 and $123 for the three and six months ended June 30, 2023, respectively. Total compensation expense related to stock options was $64 and $106 for the three and six months ended June 30, 2022, respectively. As of June 30, 2023, there was $632 of unrecognized compensation which will vest over a weighted average period of 3.7 years.

Following is the status of all stock options as of June 30, 2023:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding - January 1, 2023		452,700		$	5.97
Granted		29,000			9.37
Exercised		(36,044	)		4.12
Cancelled		(43,956	)		7.50
Outstanding - June 30, 2023		401,700		$	6.21		6.52	$	1,510
Exercisable - June 30, 2023		244,400		$	4.43		5.41	$	1,311

Restricted Stock Units

During the three months and six months ended June 30, 2023, we granted 18,000 restricted stock units (“RSUs”) under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. The RSUs granted in the three and six months ended June 30, 2023 had an average grant price of $9.37 per share. Total compensation expense related to the RSUs was $38 and $69 for the three and six months ended June 30, 2023, respectively. Total unrecognized compensation expense related to the RSUs was $195, which will vest over a weighted average period of 1.4 years.

During the three months and six months ended June 30, 2022, we granted 3,000 and 18,000 restricted stock units, respectively to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $29 and $35 for the three and six months ended June 30, 2022, respectively.

Following is a status of all RSUs as of June 30, 2023:

Weighted-

Average Grant

Date Fair

Value

Weighted-

Average

Remaining

Contractual

Term

(in years)

SEC Form 10-Q filed by Nortech Systems Incorporated