UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| 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:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 and post 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.
| Large Accelerated Filer ☐ | 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 $ par value common stock outstanding as of July 31, 2025 was .
TABLE OF CONTENTS
| 2 |
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
| JUNE 30, | JUNE 30, | |||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Restructuring charges | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| Other expense: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic (in dollars per share) | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average number of common shares outstanding - basic (in shares) | ||||||||||||||||
| Diluted (in dollars per share) | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average number of common shares outstanding - diluted (in shares) | ||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Foreign currency translation | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss), net of tax | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 3 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2025 AND DECEMBER 31, 2024
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 2025 | DECEMBER 31, 2024 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, less allowances of $ | ||||||||
| Inventories, net | ||||||||
| Contract assets | ||||||||
| Assets held for sale | ||||||||
| Prepaid assets and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets, net | ||||||||
| Deferred tax assets | ||||||||
| Other intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and commissions | ||||||||
| Customer deposits | ||||||||
| Current portion of operating lease obligations | ||||||||
| Current portion of finance lease obligations | ||||||||
| Notes payable | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term line of credit | ||||||||
| Long-term operating lease obligations, net of current portion | ||||||||
| Long-term finance lease obligations, net of current portion | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 4 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
| SIX MONTHS ENDED | ||||||||
| JUNE 30, | ||||||||
| 2025 | 2024 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Compensation on stock-based awards | ||||||||
| Deferred taxes | ( | ) | ||||||
| Change in accounts receivable allowance | ( | ) | ||||||
| Change in inventory reserves | ||||||||
| Other, net | ( | ) | ||||||
| Changes in current operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued payroll and commissions | ( | ) | ( | ) | ||||
| Customer deposits | ||||||||
| Other accrued liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of property and equipment | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit | ||||||||
| Payments to line of credit | ( | ) | ( | ) | ||||
| Principal payments on financing leases | ( | ) | ( | ) | ||||
| Stock option exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| 5 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
| SIX MONTHS ENDED | ||||||||
| JUNE 30, | ||||||||
| 2025 | 2024 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental noncash investing and financing activities: | ||||||||
| Property and equipment purchases in accounts payable | $ | $ | ||||||
| Conversion of notes payable to finance leases | $ | $ | ||||||
| Operating lease assets acquired under operating leases | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 6 |
NORTECH
SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | |||||||||||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Compensation on stock-based awards | - | |||||||||||||||||||||||||||||||
| Issuance for stock-based awards | - | 7 | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance as of March 31, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Stock option exercises | - | 19 | ||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Issuance for stock-based awards | - | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Stock option exercises | - | |||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 7 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2024, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All dollar amounts are stated in thousands of U.S. dollars.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements. Estimates also affect the reported amounts of net sales and expenses during each reporting period. Significant items subject to estimates and assumptions include the net realizable value reserves for inventories, accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.
Recently Issued New Accounting Standards
In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure. The ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The Company adopted this ASU in the fourth quarter of 2024 and has included related interim reporting disclosures in Note 9 – Segment Information to these condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements disclosures.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires disaggregated expense information in the notes to the financial statements related to purchases of inventory, employee compensation, depreciation, intangible asset amortization and selling expenses for each statement of earnings line item that contains those expenses. ASU No. 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. The guidance is to be applied on a prospective basis with the option to apply the standard retrospectively; this ASU allows for early adoption. The Company is currently evaluating the impact of this ASU on its consolidated financial statements disclosures.
In July 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted. The OBBBA makes permanent key elements of the Tax Cuts and Jobs Act of 2017, including 100% bonus depreciation, domestic research cost expensing and the business interest expense limitation, among other tax changes. The new legislation has multiple effective dates, with certain provisions effective in 2025 and others in the future. The Company is currently evaluating the provisions of the new law and the potential effects on the Company’s financial position, results of operations, and cash flows.
| 8 |
Inventories
Inventories are as follows:
| June 30, | December 31, | |||||||
| 2025 | 2024 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Reserves | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
Other Intangible Assets
Other intangible assets as of June 30, 2025 and December 31, 2024 are as follows:
| Patents | ||||
| Balances as of December 31, 2024 | $ | |||
| Amortization | ( | ) | ||
| Balances as of June 30, 2025 | $ | |||
Intangible
assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of
our intangible assets is
Amortization
expense of finite life intangible assets for the three months ended June 30, 2025 and 2024 was $
As of June 30, 2025, estimated future annual amortization expense (except projects in process) related to these assets is as follows:
| Year | Amount | |||
| Remainder of 2025 | $ | | ||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
Property and Equipment
As
of June 30, 2025, the Company classified its Blue Earth manufacturing facility and related land as held for sale as the criteria for
classification as held for sale were met. The sale of the Blue Earth facility was completed in July 2025 for $
During the second quarter of 2025, in light of our sustained low stock price, we performed a Step 1 recoverability test in accordance with U.S. GAAP for our long-lived assets. Based on our assessment of undiscounted future cash flows, we concluded that the carrying amounts of our asset group is recoverable, and therefore, no impairment was recognized at this stage. However, as a result of the sale of our Blue Earth facility in July 2025, we are now closer to meeting the criteria for a Step 2 impairment analysis, which involves estimating the fair value of the asset group. If future developments, including changes in market conditions or operational forecasts, result in a decline in fair value below carrying amounts, this may lead to the recognition of an impairment loss in subsequent periods.
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial
instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract
assets. We maintain our excess cash balances in checking accounts primarily at
We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances or contract asset balances individually represented 10% or more of gross accounts receivable.
Customers who represent 10% or more of net sales for the three and six months ended June 30, 2025 and 2024 are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
| Total | % | % | % | % | ||||||||||||
| 9 |
Customers who represent 10% or more of accounts receivable and contract assets for the period ended June 30, 2025 and December 31, 2024 are as follows:
| Accounts Receivable | ||||||||
June 30, 2025 | December 31, 2024 | |||||||
| Customer A | % | | % | |||||
| Customer C | % | % | ||||||
| Total | % | % | ||||||
| Contract Assets | ||||||||
June 30, 2025 | December 31, 2024 | |||||||
| Customer A | % | | % | |||||
| Customer D | % | % | ||||||
| Total | % | % | ||||||
Export
sales from the U.S. represented approximately
NOTE 3. NET SALES
Revenue Recognition
Revenue
under contract manufacturing agreements that was recognized over time, excluding noncash consideration, accounted for
The following tables summarize our net sales by market for the three and six months ended June 30, 2025 and 2024, respectively:
| Three Months Ended June 30, 2025 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | $ | $ | | $ | |||||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Three Months Ended June 30, 2024 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device(2) | $ | $ | $ | | $ | |||||||||||
| Medical Imaging(2) | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Six Months Ended June 30, 2025 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | $ | $ | | $ | |||||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Six Months Ended June 30, 2024 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device(2) | $ | $ | $ | | $ | |||||||||||
| Medical Imaging(2) | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| 1 | |
| 2 |
| 10 |
Contract Assets
Contract assets, recorded 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 six months ended June 30, 2025 were as follows:
| Balance as of December 31, 2024 | $ | |||
| Increase (decrease) attributed to: | ||||
| Amounts transferred over time to contract assets | ||||
| Allowance for current expected credit losses | ( | ) | ||
| Amounts invoiced during the period | ( | ) | ||
| Balance outstanding as of June 30, 2025 | $ |
We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2025 to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.
NOTE 4. FINANCING ARRANGEMENTS
On
February 29, 2024, we entered into a $
The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Provisions of the First Amendment relating to the Company’s compliance with these ratios were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”) at specified levels were replaced with provisions of the Second Amendment (described below). The First Amendment also requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. The First Amendment increases the borrowing rate for revolving loans by 100 basis points.
On
May 14, 2025, we further amended (the “Second Amendment”) the Revolver, which amended the First Amendment in part, to
defer the Company’s compliance with the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which
time the Company must maintain
On
July 29, 2025, we amended the Revolver (the “Third Amendment”) to extend the expiration of the Revolver to August 31, 2026.
We have recorded the outstanding Revolver amount of $
The
Revolver, as amended, bears interest at a weighted-average interest rate of
The Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when the equipment was received and operational. The equipment was received and the lease agreements were finalized during the three months ended June 30, 2025. As of June 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment.
| 11 |
NOTE 5. LEASES
We
have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal
terms that can extend the lease term from one to
The components of lease expense were as follows:
| Three Months Ended June 30, | ||||||||
| Lease Cost | 2025 | 2024 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease interest cost | ||||||||
| Finance lease amortization expense | ||||||||
| Total lease cost | $ | $ | ||||||
| Six Months Ended June 30, | ||||||||
| Lease Cost | 2025 | 2024 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease interest cost | ||||||||
| Finance lease amortization expense | ||||||||
| Total lease cost | $ | $ | ||||||
Supplemental condensed consolidated balance sheet information related to leases was as follows:
| Balance Sheet Location | June 30, 2025 | December 31, 2024 | ||||||||
| Assets | ||||||||||
| Finance lease assets | Property and equipment, net | $ | $ | |||||||
| Operating lease assets | Operating lease assets, net | |||||||||
| Total leased assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Current operating lease liabilities | Current portion of operating lease obligations | $ | $ | |||||||
| Current finance lease liabilities | Current portion of finance lease obligations | |||||||||
| Noncurrent | ||||||||||
| Long-term operating lease liabilities | Long-term operating lease obligations, net of current portion | |||||||||
| Long-term finance lease liabilities | Long-term finance lease obligations, net of current portion | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| 12 |
Supplemental condensed consolidated statements of cash flows information for the six months ended June 30, 2025 and 2024 related to leases was as follows:
| June 30, | June 30, | |||||||
| 2025 | 2024 | |||||||
| Operating Leases | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Conversion of notes payable to finance leases | $ | $ | ||||||
Future annual payments of lease liabilities as of June 30, 2025 were as follows:
Operating Leases | Finance Leases | Total | ||||||||||
| Remainder of 2025 | $ | $ | $ | |||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| 2029 | ||||||||||||
| Thereafter | ||||||||||||
| Total lease payments | $ | $ | $ | |||||||||
| Less: imputed interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
The lease term and discount rate as of June 30, 2025 and 2024 were as follows:
| June 30, 2025 | June 30, 2024 | |||||||
| Weighted-average remaining lease term (years) | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted-average discount rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
| 13 |
Stock-based compensation expense of $ and $ for the three months ended June 30, 2025 and 2024, respectively, and $ and $ for the six months ended June 30, 2025 and 2024, respectively, was reported in the condensed consolidated statements of operations within general and administrative expenses.
Stock Options
Under the 2017 Stock Incentive Plan (“2017 Plan”), as amended, there are an aggregate of shares authorized for issuance.
| 2025 | 2024 | |||||||
| Stock option fair value assumptions: | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected life (years) | ||||||||
| Dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Weighted average grant date fair value of stock options granted | $ | $ | ||||||
Total compensation expense related to stock options was $ and $ for the three and six months ended June 30, 2025, respectively. Total compensation expense related to stock options was $ and $ for the three and six months ended June 30, 2024, respectively. As of June 30, 2025, there was $ of unrecognized compensation related to stock options which will be recognized over a weighted average period of years.
| Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – June 30, 2024 | $ | $ | ||||||||||||||
| Outstanding – December 31, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – June 30, 2025 | $ | $ | ||||||||||||||
| Exercisable on June 30, 2025 | $ | $ | ||||||||||||||
Restricted Stock Units
Total compensation expense related to restricted stock units (“RSUs”) was $ and $ for the three and six months ended June 30, 2025, respectively. Total compensation expense related to RSUs was $ and $ for the three and six months ended June 30, 2024, respectively. During the three- and six-month periods ended June 30, 2025 and 2024, we granted and RSUs, respectively, at an average grant price per share of $ and $, respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. As of June 30, 2025, total unrecognized compensation expense related to the RSUs was $, which will vest over a weighted average period of years.
| Shares | Weighted- Average Remaining Vesting Term | Aggregate Intrinsic Value | ||||||||||
| Outstanding – December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ) | |||||||||||
| Outstanding – June 30, 2024 | $ | |||||||||||
| Outstanding – December 31, 2024 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ||||||||||||
| Outstanding – June 30, 2025 | $ | |||||||||||
| 14 |
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net income (loss) per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding using the treasury stock method, unless their effect is anti-dilutive. Basic and diluted weighted average shares outstanding were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Dilutive effect of outstanding stock options and non-vested restricted stock units1 | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
| 1 |
| a. | For the three and six months ended June 30, 2025, restricted stock units and stock options totaling and , respectively. | |
| b. | For the three and six months ended June 30, 2024, restricted stock units and stock options totaling and , respectively. |
NOTE 8. INCOME TAXES
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events.
| 15 |
Our
effective tax rate for the three and six months ended June 30, 2025 was
NOTE 9. SEGMENT INFORMATION
Our results of operations for the six months ended June 30, 2025 and 2024 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. The Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets with over 50% of its net sales coming from the medical-related markets. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Our chief operating decision maker (the “CODM”) is the Company’s President and Chief Executive Officer. The CODM regularly evaluates financial information prepared in accordance with U.S. GAAP on a consolidated basis to assess performance and allocate resources.
The Company’s net sales were located as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2025 | 2024 | 2025 | 2024 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Mexico | ||||||||||||||||
| China | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
The Company’s long-lived tangible assets, including the Company’s operating lease assets recognized on the condensed consolidated balance sheets were located as follows:
June 30, 2025 | December 31, 2024 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| China | ||||||||
| Total long-lived tangible assets | $ | $ | ||||||
NOTE 10. RESTRUCTURING CHARGES
During
2024, we recorded restructuring charges of $
The following table summarizes the related activity for the six months ended June 30, 2025:
| Facility Consolidation | Workforce Reductions | Total | ||||||||||
| December 31, 2024 | $ | | $ | $ | ||||||||
| Charges | ||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ||||||
| June 30, 2025 | $ | $ | $ | |||||||||
| 16 |
The following table summarizes the related activity for the six months ended June 30, 2024:
| Facility Consolidation | ||||
| December 31, 2023 | $ | |||
| Charges | ||||
| Cash payments | ||||
| June 30, 2024 | $ | |||
NOTE 11. RELATED PARTY TRANSACTIONS
David
Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We had accounts receivable related to Abilitech of $
David
Kunin, our Chairman, is a minority owner (less than
NOTE 12. SUBSEQUENT EVENTS
On
July 24, 2025, the Company closed on the sale of the Blue Earth facility for $
On July 29, 2025, the Company amended its Revolver line of credit agreement as discussed in Note 4 – “Financing Arrangements.”
| 17 |
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 Device, Medical Imaging, Aerospace and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. As of December 31, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility on July 24, 2025. We also have facilities in Monterrey, Mexico and Suzhou, China.
Our net sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support. Quality, on-time delivery, and reliability are of utmost importance. Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.
Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.
All dollar amounts are stated in thousands of U.S. dollars.
Restructuring Activities
In fiscal year 2024, the Company initiated a restructuring plan related to the closure of its Blue Earth, MN facility. During the three and six months ended June 30, 2025, the Company incurred restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The costs of these restructuring programs totaled $837, of which $266 was recorded in the six months ended June 30, 2025 and $571 was recorded in the prior fiscal year. We did not record any amounts related to restructuring in the three months ended June 30, 2025. These costs are included in restructuring charges on the condensed consolidated statements of operations. These charges relate to employee severance and facility closure costs. We do not expect significant additional expenses related to this plan.
Results of Operations
Net Sales. Net sales for the three months ended June 30, 2025 and 2024 were $30,675 and $33,891, respectively, a comparative period decrease of $3,216 or 9.5%. Net sales for the six months ended June 30, 2025 and 2024 were $57,570 and $68,106, respectively, a comparative period decrease of $10,536 or 15.5%. Net sales in the three and six months ended June 30, 2025 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. The following is a summary of net sales by our major industry markets:
| Three Months Ended June 30, | ||||||||||||||||
| 2025 | 2024 | Increase (Decrease) | ||||||||||||||
| Medical Device | $ | 7,550 | $ | 9,689 | $ | (2,139 | ) | (22.1 | )% | |||||||
| Medical Imaging | 9,664 | 8,182 | 1,482 | 18.1 | % | |||||||||||
| Industrial | 8,516 | 9,385 | (869 | ) | (9.3 | )% | ||||||||||
| Aerospace and Defense | 4,945 | 6,635 | (1,690 | ) | (25.5 | )% | ||||||||||
| Total net sales | $ | 30,675 | $ | 33,891 | $ | (3,216 | ) | (9.5 | )% | |||||||
| 18 |
| Six Months Ended June 30, | ||||||||||||||||
| 2025 | 2024 | Increase (Decrease) | ||||||||||||||
| Medical Device | $ | 15,620 | $ | 19,893 | $ | (4,273 | ) | (21.5 | )% | |||||||
| Medical Imaging | 18,252 | 17,083 | 1,169 | 6.8 | % | |||||||||||
| Industrial | 15,461 | 18,977 | (3,516 | ) | (18.5 | )% | ||||||||||
| Aerospace and Defense | 8,237 | 12,153 | (3,916 | ) | (32.2 | )% | ||||||||||
| Total net sales | $ | 57,570 | $ | 68,106 | $ | (10,536 | ) | (15.5 | )% | |||||||
| ● | Medical Device: Net sales to our medical customers decreased $2,139, or 22.1%, in the three months ended June 30, 2025 as compared with the same period in 2024 and $4,273, or 21.5%, in the six months ended June 30, 2025 as compared with the same period in 2024. The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower productivity as we managed our facility consolidation. | |
| ● | Medical Imaging: Net sales to our Medical Imaging customers increased $1,482, or 18.1%, in the three months ended June 30, 2025 as compared with the same period in 2024 and $1,169, or 6.8%, in the six months ended June 30, 2025 as compared with the same period in 2024. The increase was primarily due to higher sales to existing customers. | |
| ● | Industrial: Net sales to our industrial customers decreased $869, or 9.3%, in the three months ended June 30, 2025 as compared with the same period in 2024 and $3,516, or 18.5%, in the six months ended June 30, 2025 as compared with the same period in 2024. The decrease in net sales was primarily due to customer order delays and part shortages. | |
| ● | Aerospace and Defense: Net sales to our aerospace and defense customers decreased $1,690, or 25.5%, in the three months ended June 30, 2025 as compared with the same period in 2024 and $3,916, or 32.2%, in the six months ended June 30, 2025 as compared with the same period in 2024. The decrease in net sales relates to delays in customer approvals as we have consolidated this business into our Bemidji facility. |
Backlog. Our 90-day shipment backlog as of June 30, 2025 was $26,592, a decrease of 0.6% from $26,742 at the beginning of the quarter, and an 11.6% decrease from June 30, 2024. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.
Our total order backlog as of June 30, 2025, was $78,351, representing a 14.7% increase from $68,332 at the beginning of the quarter and a 6.9% increase compared to the same period in the prior year; this growth was primarily driven by large medical device orders.
90-day shipment and total backlog by our major industry markets are as follows:
| June 30, 2025 | March 31, 2025 | June 30, 2024 | ||||||||||||||||||||||
| 90 Day | Total | 90 Day | Total | 90 Day | Total | |||||||||||||||||||
| Medical Device | $ | 7,897 | $ | 32,222 | $ | 5,735 | $ | 19,925 | $ | 8,130 | $ | 23,497 | ||||||||||||
| Medical Imaging | 5,101 | 7,584 | 7,526 | 10,020 | 7,776 | 10,953 | ||||||||||||||||||
| Industrial | 6,010 | 9,349 | 5,999 | 10,005 | 6,398 | 11,423 | ||||||||||||||||||
| Aerospace and Defense | 7,584 | 29,196 | 7,482 | 28,382 | 7,791 | 27,423 | ||||||||||||||||||
| Total backlog | $ | 26,592 | $ | 78,351 | $ | 26,742 | $ | 68,332 | $ | 30,095 | $ | 73,296 | ||||||||||||
| 19 |
The 90-day and total backlog as of June 30, 2025 includes orders already recognized in net sales and included in the contract asset value of $14,984.
Operating Costs and Expenses.
Net sales, cost of goods sold, gross profit, and operating costs were as follows:
| Three Months Ended June 30, | ||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | ||||||||||||||
| Net sales | $ | 30,675 | $ | 33,891 | $ | (3,216 | ) | (9.5 | )% | |||||||
| Cost of goods sold (3) | 25,838 | 29,274 | (3,436 | ) | (11.7 | )% | ||||||||||
| Gross profit | 4,837 | 4,617 | 220 | 4.8 | % | |||||||||||
| Gross margin percentage (1) | 15.8 | % | 13.6 | % | 220 | bpc(2) | ||||||||||
| Selling (3) | 1,204 | 909 | 295 | 32.5 | % | |||||||||||
| % of Net sales | 3.9 | % | 2.7 | % | ||||||||||||
| General and administrative | 2,589 | 2,982 | (393 | ) | (13.2 | )% | ||||||||||
| % of Net sales | 8.4 | % | 8.8 | % | ||||||||||||
| Research and development | 302 | 291 | 11 | 3.8 | % | |||||||||||
| % of Net sales | 1.0 | % | 0.9 | % | ||||||||||||
| Restructuring charges | - | 91 | (91 | ) | (100 | )% | ||||||||||
| % of Net sales | - | % | 0.2 | % | ||||||||||||
| Operating income | 742 | 344 | 398 |
115.7 | % | |||||||||||
| % of Net sales | 2.4 | % | 1.0 | % | ||||||||||||
| (1) | Gross margin percentage is defined as gross profit as a percentage of net sales. | |
| (2) | Basis points change in gross margin percentage. | |
| (3) | During the first quarter of 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing managers. As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported as selling expenses to better reflect the nature of the activities performed. |
| Six Months Ended June 30, | ||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | ||||||||||||||
| Net sales | $ | 57,570 | $ | 68,106 | $ | (10,536 | ) | (15.5 | )% | |||||||
| Cost of goods sold (3) | 49,655 | 58,041 | (8,386 | ) | (14.4 | )% | ||||||||||
| Gross profit | 7,915 | 10,065 | (2,150 | ) | (21.4 | )% | ||||||||||
| Gross margin percentage (1) | 13.7 | % | 14.8 | % | (110 | )bpc(2) | ||||||||||
| Selling (3) | 2,388 | 1,714 | 674 | 39.3 | % | |||||||||||
| % of Net sales | 4.1 | % | 2.5 | % | ||||||||||||
| General and administrative | 5,504 | 6,152 | (648 | ) | (10.5 | )% | ||||||||||
| % of Net sales | 9.6 | % | 9.0 | % | ||||||||||||
| Research and development | 628 | 609 | 19 | 3.1 | % | |||||||||||
| % of Net sales | 1.1 | % | 0.9 | % | ||||||||||||
| Restructuring charges | 266 | 91 | 175 | 192.3 | % | |||||||||||
| % of Net sales | 0.5 | % | 0.2 | % | ||||||||||||
| Operating (loss) income | (871 | ) | 1,499 | (2,370 | ) | (158.1 | )% | |||||||||
| % of Net sales | (1.5 | )% | 2.3 | % | ||||||||||||
| (1) | Gross margin percentage is defined as gross profit as a percentage of net sales. | |
| (2) | Basis points change in gross margin percentage. | |
| (3) | During the first quarter of 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing managers. As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported as selling expenses to better reflect the nature of the activities performed. |
Gross profit and gross margins. Gross profit as a percent of net sales was 15.8% and 13.6% for the three months ended June 30, 2025, and 2024, respectively. Gross profit as a percent of net sales was 13.7% and 14.8% for the six months ended June 30, 2025, and 2024, respectively. The increase in gross profit as a percentage of net sales in the quarterly comparison period was the result of improved plant utilization and favorable sales mix. The decrease in gross profit as a percentage of net sales in the year-to-date comparison period was the result of lower net sales and reduced facility utilization in the first three months of this year as well as reduced manufacturing efficiencies due to customer program movements between facilities.
| 20 |
Selling expenses. Selling expenses, as measured as a percent of net sales, was 3.9% and 2.7% for the three months ended June 30, 2025, and 2024, respectively. Selling expenses, as measured as a percent of net sales, was 4.1% and 2.5% for the six months ended June 30, 2025, and 2024, respectively. In 2025, we realigned the reporting structure of our customer facing managers from operations to business development. As a result, this increase is a result of the realignment as well as the impact of fixed costs on a lower revenue base.
General and administrative expenses. General and administrative expenses, as measured as a percent of net sales, was 8.4% and 8.8% for the three months ended June 30, 2025 and 2024, respectively, and 9.6% and 9.0% for the six months ended June 30, 2025 and 2024, respectively. General and administrative expenses decreased in the quarterly and year to date 2025 periods by $393 and $648, respectively, as compared with the 2024 periods primarily as the result of lower incentive compensation accruals in the current year.
Restructuring charges. Restructuring charges were $0 and $266 in the three and six months ended June 30, 2025, respectively. During the first quarter of 2025, we incurred $235 of severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales and $31 of expenses related to our closed Blue Earth facility. Restructuring charges were $91 in the three and six months ended June 30, 2024 for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility.
Operating (loss) income. Operating income was $742 for the three months ended June 30, 2025 or 2.4% of net sales and was $344 or 1.0% of net sales for the three months ended June 30, 2024. This increase was driven by the improved gross margin and lower incentive compensation expense. Operating loss was ($871) or (1.5)% of net sales for the six months ended June 30, 2025 and operating income was $1,499 or 2.3% of net sales for the six months ended June 30, 2024. The decrease was driven by the decrease in net sales and resulting gross margin.
Interest expense. Interest expense was $257 and $165 for the three months ended June 30, 2025 and 2024, respectively. Interest expense was $471 and $332 for the six months ended June 30, 2025 and 2024, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Income taxes. Our effective tax rate for the three and six months ended June 30, 2025 was 35% and 25%. Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%. The primary drivers of the increase in effective tax rate were changes in pretax (loss) income and taxes on foreign entities.
In July 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted. The OBBBA makes permanent key elements of the Tax Cuts and Jobs Act of 2017, including 100% bonus depreciation, domestic research cost expensing and the business interest expense limitation, among other tax changes. The new legislation has multiple effective dates, with certain provisions effective in 2025 and others in the future. The Company is currently evaluating the provisions of the new law and the potential effects on the Company’s financial position, results of operations, and cash flows.
Cash Flow Operating Results
The following is a summary of cash flow results:
| Six Months Ended June 30, | ||||||||
| 2025 | 2024 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (2,773 | ) | $ | (1,458 | ) | ||
| Investing activities | (358 | ) | (1,011 | ) | ||||
| Financing activities | 2,858 | 2,343 | ||||||
| Effect of exchange rates on changes in cash and cash equivalents | 9 | (7 | ) | |||||
| Net change in cash and cash equivalents | $ | (264 | ) | $ | (133 | ) | ||
Operating Activities. Cash used in operating activities was $2,773 in the first six months of 2025, compared with $1,458 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
| ● | Cash used by accounts receivable and contract assets was $4,034 in the six months ended June 30, 2025 as compared with cash provided of $1,214 in the same prior-year period. The use of cash in the six months ended June 30, 2025 is largely due to timing of customer shipments and cash collections. The cash provided in the prior year was due an expected increase in cash collections due to higher sales and the timing of customer payments. | |
| ● | Cash provided by inventory was $2,714 in the six months ended June 30, 2025 as compared with cash used of $1,288 in the prior-year period. The decrease in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of product shipments as well as the results of our plan to reduce inventory balances in 2025. |
| 21 |
Investing Activities. Cash used in investing activities was $358 in the first six months of 2025, compared with cash used of $1,011 in the same prior-year period, both primarily for capital expenditures.
Financing Activities. Cash provided by financing activities was $2,858 in the first six months of 2025 and $2,343 in the same prior-year period. The cash provided by financing activities in both periods resulted from the line of credit advances for working capital and operations.
Liquidity and Capital Resources
We believe that our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months.
On February 29, 2024, we entered into a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.
The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Provisions of the First Amendment relating to the Company’s compliance with these ratios were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”) at specified levels were replaced with provisions of the Second Amendment (described below). The First Amendment also requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. The First Amendment increases the borrowing rate for revolving loans by 100 basis points.
On May 14, 2025, we further amended (the “Second Amendment”) the Revolver, which amended the First Amendment in part, to defer the Company’s compliance with the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 2.5 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter; and (b) a minimum fixed charge coverage ratio to 1.25 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter. The Company must also maintain adjusted EBITDA (earnings before interest, taxes depreciation and amortization), as defined in the Revolver, as of the end of the second quarter of 2025 of at least $1,000, the third quarter of 2025 of at least $1,300 and the fourth quarter of 2025 and each quarter thereafter of at least $1,600. In addition, the Second Amendment requires the Company to always maintain Liquidity of at least $2,500. The Second Amendment shortened the duration of the Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points.
| 22 |
On July 29, 2025, we amended the Revolver (the “Third Amendment”) to extend the expiration of the Revolver to August 31, 2026. We have recorded the outstanding Revolver amount of $11,615 as long term on the condensed consolidated balance sheets based on extension in the signed Third Amendment.
The Revolver, as amended, bears interest at a weighted-average interest rate of 7.8% and 7.7% as of June 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $11,615 and $8,695 outstanding as of June 30, 2025 and December 31, 2024, respectively. As of June 30, 2025, we had unused availability on the line of credit of $3,385, which is subject to a month end cap based on the previously noted minimum Liquidity.
The Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when the equipment was received and operational. The equipment was received and the lease agreements were finalized during the three months ended June 30, 2025. As of June 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment.
Net sales in the first two quarters of 2025 and fourth quarter of 2024 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. We expect these matters to be resolved over the next two quarters. The Company has implemented plant optimization activities and cost cutting initiatives in the first two quarters of 2025 to address losses. These actions plus continued efforts to improve manufacturing efficiencies in the remainder of 2025 and the planned reduction in inventory levels are intended to drive reduced borrowings during the remainder of 2025. The Company believes it has sufficient capital and liquidity to operate its business for at least twelve months from the filing of this Form 10-Q.
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.
Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
| ♦ | Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; | |
| ♦ | Whether our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months; | |
| ♦ | 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; and |
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| ♦ | 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. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligation to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024, except as set forth below.
If we fail to comply with the covenants contained in our credit agreement, we may be unable to secure additional financing and repayment obligations on our outstanding indebtedness may be accelerated.
Our credit agreement contains financial and operating covenants with which we must comply. Effective as of February 29, 2024, we entered into a new credit agreement with Bank of America (the “Revolver”.) Our Revolver contains financial and operating covenants with which we must comply. Our compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We received a waiver of the Mexican operating expenses event of default from the bank in August 2024.
On March 27, 2025, we signed the First Amendment to the Revolver to waive the leverage ratio and minimum charge coverage ratio events of default as of December 31, 2024 and March 31, 2025 and to further defer the Company’s compliance with these ratios until the third quarter of 2025, and reset compliance thresholds for our covenant ratios for 2025. The First Amendment also set minimum EBITDA levels for the second, third and fourth quarters and increased the borrowing rate by 100 basis points. On May 14, 2025, we signed the Second Amendment to the Revolver to defer the Company’s compliance with the leverage ratio and minimum charge coverage ratio until the fourth quarter. The Second Amendment also modified downward the minimum EBITDA levels for the second, third and fourth quarters and shortened the duration of the Revolver to June 30, 2026 and further increased the borrowing rate by 25 basis points. On July 29, 2025, we signed the Third Amendment to the Revolver delaying expiration of the Revolver to August 31, 2026.
We have included the Amendment No. 1 to Credit Agreement, Waiver, and Consent, Amendment No. 2 to Credit Agreement and Amendment No. 3 to Credit Agreement as exhibits to this filing and any description of that document contained in this risk factor is only a summary and is qualified by its entirety by the filed documents. If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be unable to borrow funds and any outstanding indebtedness could become immediately due and payable, which could materially harm our business.
Impairment of Our Long-Lived Assets Could Adversely Affect Our Results of Operations and Financial Condition.
We evaluate long-lived assets, primarily property and equipment, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.
As of June 30, 2025, the Company’s common stock was trading at a value less than the Company’s net equity value. As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was required as of June 30, 2025. If the fair value of our other long-lived assets is less than their carrying value, we may be required to record a non-cash impairment charge, which could be material. Such charges could negatively impact our results of operations, potentially affect our compliance with debt covenants, and reduce the perceived value of our Company. There can be no assurance that future reviews of long-lived assets will not result in impairment charges, particularly in periods of market or economic volatility.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibits | ||
| 31.1* | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. | |
| 31.2* | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. | |
| 32* | Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101* | Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 2025, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Nortech Systems Incorporated and Subsidiaries | ||
| Date: August 7, 2025 | by | /s/ Jay D. Miller |
| Jay D. Miller | ||
| Chief Executive Officer and President | ||
| Nortech Systems Incorporated | ||
| Date: August 7, 2025 | by | /s/ Andrew D. C. LaFrence |
| Andrew D. C. LaFrence | ||
| Chief Financial Officer and Senior Vice President of Finance | ||
| Nortech Systems Incorporated | ||
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