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, 2021. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold. Customer deposits represent cash received in advance of revenue earned.
Stock-Based Awards
Stock Options
In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. An additional 50,000 and 175,000 shares were authorized by the shareholders in March 2020 and May 2022, respectively.
We granted 0 and 21,000 market condition options to our Chief Executive Officer during the three and nine months ended September 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 3,000 and 69,000 service-based options during the three and nine months ended September 30, 2022, respectively. Total option grants for the three and nine months ended September 30, 2022 were 3,000 and 90,000, respectively. There were 27,000 stock options granted during the nine months ended September 30, 2021.
Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. Total compensation expense related to stock options was $28 and $74 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $810 of unrecognized compensation which will vest over the next 3.86 years.
Following is the status of all stock options as of September 30, 2022:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding - January 1, 2022
|
|
|
387,500 |
|
|
$ |
4.57 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
90,000 |
|
|
|
11.13 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(19,800 |
) |
|
|
3.40 |
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,000 |
) |
|
|
3.38 |
|
|
|
|
|
|
|
|
|
Outstanding - September 30, 2022
|
|
|
449,700 |
|
|
$ |
5.93 |
|
|
|
7.10 |
|
|
$ |
2,137 |
|
Exercisable - September 30, 2022
|
|
|
213,500 |
|
|
$ |
3.95 |
|
|
|
5.90 |
|
|
$ |
1,407 |
|
Restricted Stock Units
During the three and nine months ended September 30, 2022, we granted 0 and 21,000 restricted stock units (“RSUs”), respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. There were no RSUs outstanding prior to the nine months ended September 30, 2022. Total compensation expense related to the RSUs were $31 and $66 for the three and nine months ended September 30, 2022, respectively. There was no compensation expense related to RSUs for the three and nine months ended September 30, 2021. Total unrecognized compensation expense related to the RSUs was $186, which will vest over the next 1.49 years. The RSUs granted in the nine months ended September 30, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.48 years. No RSUs vested during the nine months ended September 30, 2022.
Equity Appreciation Rights Plan
In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. There were no units granted during the nine months ended September 30, 2022 or September 30, 2021.
The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. There are no units outstanding as of September 30, 2022. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $13 and $127 for the three and nine months ended September 30, 2021, respectively.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding, unless their effect is antidilutive. All stock options and restricted stock units, while outstanding, are considered common stock equivalents.
For the three and nine months ended September 30, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per common share as their impact were dilutive. For the three and nine months ended September 30, 2021, stock options of 214,391 and 144,892, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.
We had outstanding stock options totaling 34,211 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended September 30, 2022. We had average outstanding stock options totaling 44,070 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2022. Outstanding stock options totaling 0 and 221 are not considered in the computation of diluted net income per share for the three and nine months ended September 30, 2021, respectively.
Restricted Cash
Cash and cash equivalents classified as restricted cash on our consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. As of September 30, 2022, we had outstanding letters of credit for $400. Restricted cash as of September 30, 2022 was $792, which includes lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable have been reduced by an allowance for doubtful accounts of $257 at September 30, 2022 and $328 at December 31, 2021.
Inventories
Inventories are stated at the lower of average cost (which approximates first-in, first out) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.
Inventories are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Raw Materials
|
|
$ |
22,520 |
|
|
$ |
18,492 |
|
Work in Process
|
|
|
1,719 |
|
|
|
1,678 |
|
Finished Goods
|
|
|
615 |
|
|
|
562 |
|
Reserves
|
|
|
(1,244 |
) |
|
|
(1,298 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
23,610 |
|
|
$ |
19,434 |
|
Other Intangible Assets
Other intangible assets at September 30, 2022 and December 31, 2021 are as follows:
|
|
Customer
Relationships
|
|
|
Trade
Names
|
|
|
Patents
|
|
|
Total
|
|
Balance at January 1, 2021
|
|
$ |
507 |
|
|
$ |
589 |
|
|
$ |
77 |
|
|
$ |
1,173 |
|
Additions
|
|
|
- |
|
|
|
- |
|
|
|
64 |
|
|
|
64 |
|
Amortization
|
|
|
147 |
|
|
|
29 |
|
|
|
- |
|
|
|
176 |
|
Abandonment Loss
|
|
|
- |
|
|
|
560 |
|
|
|
- |
|
|
|
560 |
|
Balance at December 31, 2021
|
|
|
360 |
|
|
|
- |
|
|
|
141 |
|
|
|
501 |
|
Additions
|
|
|
- |
|
|
|
- |
|
|
|
43 |
|
|
|
43 |
|
Amortization
|
|
|
108 |
|
|
|
- |
|
|
|
3 |
|
|
|
111 |
|
Balance at September 30, 2022
|
|
$ |
252 |
|
|
$ |
- |
|
|
$ |
181 |
|
|
$ |
433 |
|
Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted-average remaining amortization period of our in-use intangible asset is 2.1 years. In-process patents are not amortized until the patent is received. At September 30, 2022, patents totaling $96 had been received while $85 of patents were in-process.
Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively. Amortization expense for the three and nine months ended September 30, 2021 was $45 and $139, respectively.
Estimated future annual amortization expense (not including patents in process) related to these assets is approximately as follows:
Year
|
|
Amount
|
|
Remainder of 2022
|
|
$ |
40 |
|
2023
|
|
|
159 |
|
2024
|
|
|
86 |
|
2025
|
|
|
14 |
|
Thereafter
|
|
|
49 |
|
Total
|
|
$ |
348 |
|
Accounting Pronouncements Issued But Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The ASU also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements. The new guidance is effective for public business entities that meet the definition of a Smaller Reporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.
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 two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $2,092 in cash and restricted cash at September 30, 2022, approximately $561 and $11 was held at banks located in China and Mexico, respectively. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.
We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of total accounts receivable. One customer accounted for 28% and 26% of net sales for the three and nine months ended September 30, 2022, respectively. For the three months ended September 30, 2021, two customers accounted for 36% of net sales. For the nine months ended September 30, 2021, one customer accounted for 26% of net sales.
At September 30, 2022, two customers represented approximately 43% of our total accounts receivable. At December 31, 2021, one customer represented approximately 19% of our total accounts receivable.
Export sales represented approximately 4% of net sales for both the three and nine months ended September 30, 2022. Export sales represented approximately 3% of net sales for the three and nine months ended September 30, 2021 respectively.
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 74% of our revenue for both the three and nine months ended September 30, 2022 and 82% and 80% of our revenue for the three and nine months ended September 30, 2021, respectively. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.
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):
Balance outstanding at December 31, 2021
|
|
$ |
8,698 |
|
Increase (decrease) attributed to:
|
|
|
|
|
Amounts transferred over time to contract assets
|
|
|
72,536 |
|
Amounts invoiced during the period
|
|
|
(71,348 |
) |
Balance outstanding at September 30, 2022
|
|
$ |
9,886 |
|
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 180 days. We bill our customers upon shipment with payment terms of up to 120 days.
The following tables summarize our net sales by timing of transfer of goods and services by market:
|
|
Three Months Ended September 30, 2022
|
|
|
|
Product/ Service
Transferred Over
Time
|
|
|
Product
Transferred at
Point in Time
|
|
|
Noncash
Consideration
|
|
|
Total Net Sales by
Market
|
|
Medical
|
|
$ |
14,753 |
|
|
$ |
5,366 |
|
|
$ |
420 |
|
|
$ |
20,539 |
|
Industrial
|
|
|
8,104 |
|
|
|
2,314 |
|
|
|
420 |
|
|
|
10,838 |
|
Aerospace and Defense
|
|
|
3,202 |
|
|
|
493 |
|
|
|
204 |
|
|
|
3,899 |
|
Total net sales
|
|
$ |
26,059 |
|
|
$ |
8,173 |
|
|
$ |
1,044 |
|
|
$ |
35,276 |
|
|
|
Nine Months Ended September 30, 2022
|
|
|
|
Product/ Service
Transferred Over
Time
|
|
|
Product
Transferred at
Point in Time
|
|
|
Noncash
Consideration
|
|
|
Total Net Sales by
Market
|
|
Medical
|
|
$ |
37,725 |
|
|
$ |
15,044 |
|
|
$ |
1,574 |
|
|
$ |
54,343 |
|
Industrial
|
|
|
21,563 |
|
|
|
6,301 |
|
|
|
1,095 |
|
|
|
28,959 |
|
Aerospace and Defense
|
|
|
13,248 |
|
|
|
1,254 |
|
|
|
701 |
|
|
|
15,203 |
|
Total net sales
|
|
$ |
72,536 |
|
|
$ |
22,599 |
|
|
$ |
3,370 |
|
|
$ |
98,505 |
|
|
|
Three Months Ended September 30, 2021
|
|
|
|
Product/ Service
Transferred Over
Time
|
|
|
Product
Transferred at
Point in Time
|
|
|
Noncash
Consideration
|
|
|
Total Net Sales by
Market
|
|
Medical
|
|
$ |
13,762 |
|
|
$ |
2,933 |
|
|
$ |
282 |
|
|
$ |
16,977 |
|
Industrial
|
|
|
7,468 |
|
|
|
1,757 |
|
|
|
158 |
|
|
|
9,383 |
|
Aerospace and Defense
|
|
|
2,883 |
|
|
|
144 |
|
|
|
65 |
|
|
|
3,092 |
|
Total net sales
|
|
$ |
24,113 |
|
|
$ |
4,834 |
|
|
$ |
505 |
|
|
$ |
29,452 |
|
|
|
Nine Months Ended September 30, 2021
|
|
|
|
Product/ Service
Transferred Over
Time
|
|
|
Product
Transferred at
Point in Time
|
|
|
Noncash
Consideration
|
|
|
Total Net Sales by
Market
|
|
|
Medical
|
|
$ |
35,497 |
|
|
$ |
8,876 |
|
|
$ |
1,017 |
|
|
$ |
45,390 |
|
Industrial
|
|
|
20,385 |
|
|
|
4,832 |
|
|
|
560 |
|
|
|
25,777 |
|
Aerospace and Defense
|
|
|
9,685 |
|
|
|
527 |
|
|
|
327 |
|
|
|
10,539 |
|
Total net sales
|
|
$ |
65,567 |
|
|
$ |
14,235 |
|
|
$ |
1,904 |
|
|
$ |
81,706 |
|
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 $16,000 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 $9,873 and $9,016 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 and $58 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 $2,000 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 $5,827 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.
NOTE 5. LEASES
We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. 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,
|
|
Lease Cost
|
|
2022
|
|
|
2021
|
|
Operating lease cost
|
|
$ |
572 |
|
|
$ |
576 |
|
|
|
|
|
|
|
|
|
|
Finance lease interest cost
|
|
|
14 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
Finance lease amortization expense
|
|
|
182 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$ |
768 |
|
|
$ |
757 |
|
|
|
Nine Months Ended
September 30,
|
|
|
Nine Months ended
September 30,
|
|
Lease Cost
|
|
2022
|
|
|
2021
|
|
Operating lease cost
|
|
$ |
1,731 |
|
|
$ |
1,696 |
|
|
|
|
|
|
|
|
|
|
Finance lease interest cost
|
|
|
50 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
Finance lease amortization expense
|
|
|
547 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$ |
2,328 |
|
|
$ |
2,246 |
|
Supplemental balance sheet information related to leases was as follows:
|
Balance Sheet Location
|
|
September 30, 2022
|
|
|
December 31, 2021
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
Operating lease assets
|
|
$ |
8,079 |
|
|
$ |
8,983 |
|
Finance lease assets
|
Property, plant and equipment
|
|
|
1,505 |
|
|
|
2,052 |
|
|
|
|
|
|
|
|
|
|
Total leased assets
|
|
$ |
9,584 |
|
|
$ |
11,035 |
|
Supplemental cash flow information related to leases was as follows:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2022
|
|
|
2021
|
|
Operating leases
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$ |
1,279 |
|
|
$ |
861 |
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$ |
- |
|
|
$ |
858 |
|
Maturities of lease liabilities were as follows:
|
|
Operating
Leases
|
|
|
Finance Leases
|
|
|
Total
|
|
Remaining 2022
|
|
$ |
430 |
|
|
$ |
126 |
|
|
$ |
556 |
|
2023
|
|
|
1,765 |
|
|
|
409 |
|
|
|
2,175 |
|
2024
|
|
|
1,505 |
|
|
|
357 |
|
|
|
1,861 |
|
2025
|
|
|
1,255 |
|
|
|
103 |
|
|
|
1,358 |
|
2026
|
|
|
1,217 |
|
|
|
108 |
|
|
|
1,332 |
|
Thereafter
|
|
|
7,066 |
|
|
|
- |
|
|
|
7,066 |
|
Total lease payments
|
|
$ |
13,238 |
|
|
$ |
1,103 |
|
|
$ |
14,341 |
|
Less: Interest
|
|
|
(4,328 |
)
|
|
|
(74 |
) |
|
|
(4,402 |
)
|
Present value of lease liabilities
|
|
$ |
8,910 |
|
|
$ |
1,029 |
|
|
$ |
9,939 |
|
The lease term and discount rate at September 30, 2022 were as follows:
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
9.1 |
|
Finance leases
|
|
|
2.8 |
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
|
7.7 |
%
|
Finance leases
|
|
|
5.2 |
%
|
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 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 due to a change in the federal valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.
NOTE 7. RESTRUCTURING CHARGES
During the first nine months of 2021, we recorded restructuring charges of $319 related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility. We recognized a gain on the sale of assets related to the restructure of $93 and $176 for the three and nine months ended September 30, 2021, respectively. There were no restructuring charges or amounts accrued in the nine months ended September 30, 2022.
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 $5,209 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.
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 $0 and $217, respectively, for delivery of medical products. In the three and nine months ended September 30, 2021, Abilitech paid the Company $316 and $1,056, respectively for the delivery of medical products. The Company believes that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.
David Kunin, our Chairman, is a minority owner (less than 10%) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company 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 $1,000 conditional grant. Under the terms of the BIRD Foundation grant, the Company and Marpe Technologies are to receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company will meet its obligation by providing certain services at cost or no cost to Marpe Technologies. The total value of the contribution will not exceed $500; the Company has contributed $226 as of September 30, 2022. The Company will receive a 10-year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recoup the value of services provided to Marpe for which is not fully paid. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the three and nine months ended September 30, 2022, we recognized revenue of $66 and $182. During both the three and nine months ended September 30, 2021, we recognized revenue of $78. The Company believes that transactions with Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.