[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section presents Nortech Systems' unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1 - Financial Statements](index=4&type=section&id=Item%201%20-%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and shareholders' equity, along with detailed notes on significant accounting policies, credit risk, revenue recognition, financing, leases, income taxes, employee retention credit, and related party transactions for Nortech Systems Incorporated and its subsidiaries [Condensed Consolidated Statements of Operations and Comprehensive Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) This statement details the company's financial performance, including net sales, gross profit, income from operations, net income, and comprehensive income for the three and six months ended June 30, 2023 and 2022 **Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands, except share data):** | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Sales | $35,021 | $32,518 | $69,909 | $63,229 | | Gross Profit | $5,474 | $5,004 | $10,958 | $9,048 | | Income From Operations | $1,099 | $1,025 | $2,152 | $1,194 | | Net Income | $634 | $719 | $1,315 | $857 | | Basic Net Income Per Common Share | $0.23 | $0.27 | $0.49 | $0.32 | | Diluted Net Income Per Common Share| $0.22 | $0.25 | $0.46 | $0.30 | | Comprehensive income, net of tax | $353 | $475 | $1,074 | $618 | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's assets, liabilities, and shareholders' equity as of June 30, 2023, and December 31, 2022 **Condensed Consolidated Balance Sheets (in thousands):** | Metric | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | **ASSETS** | | | | Cash | $781 | $1,027 | | Restricted Cash | $1,134 | $1,454 | | Accounts Receivable, Net | $17,404 | $15,975 | | Inventories, Net | $21,078 | $22,438 | | Total Current Assets | $54,354 | $54,860 | | Total Assets | $68,434 | $69,540 | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Total Current Liabilities | $24,399 | $26,398 | | Total Long-Term Liabilities | $14,546 | $15,062 | | Total Liabilities | $38,945 | $41,460 | | Total Shareholders' Equity | $29,489 | $28,080 | | Total Liabilities and Shareholders' Equity | $68,434 | $69,540 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 **Condensed Consolidated Statements of Cash Flows (in thousands):** | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided By (Used In) Operating Activities | $281 | $(1,940) | | Net Cash Used In Investing Activities | $(956) | $(1,208) | | Net Cash Provided By Financing Activities | $144 | $2,098 | | Net Change in Cash and Restricted Cash | $(566) | $(1,050) | | Cash and Restricted Cash - End of Period | $1,915 | $1,175 | - Cash paid for interest increased from **$198 thousand** in 2022 to **$248 thousand** in 2023 for the six months ended June 30[14](index=14&type=chunk) - Cash paid for income taxes significantly increased from **$20 thousand** in 2022 to **$1,036 thousand** in 2023 for the six months ended June 30[14](index=14&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) This statement details changes in shareholders' equity, including net income, foreign currency translation adjustments, and stock-based compensation, from December 31, 2022, to June 30, 2023 **Changes in Shareholders' Equity (in thousands):** | Metric | Balance December 31, 2022 | Net Income | Foreign Currency Translation Adjustment | Stock Option Exercises | Compensation on Stock-Based Awards | Cumulative Adjustment Related to the Adoption of ASC 326 | Balance June 30, 2023 | | :----------------------------------------- | :------------------------ | :--------- | :-------------------------------------- | :--------------------- | :--------------------------------- | :------------------------------------------------------- | :-------------------- | | Preferred Stock | $250 | - | - | - | - | - | $250 | | Common Stock | $27 | - | - | - | - | - | $27 | | Additional Paid-In Capital | $16,347 | - | - | $173 | $192 | - | $16,712 | | Accumulated Other Comprehensive Loss | $(370) | - | $(241) | - | - | - | $(611) | | Retained Earnings | $11,826 | $1,315 | - | - | - | $(30) | $13,111 | | Total Shareholders' Equity | $28,080 | $1,315 | $(241) | $173 | $192 | $(30) | $29,489 | [Condensed Notes to Consolidated Financial Statements](index=9&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering significant accounting policies and specific financial items [NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=9&type=section&id=NOTE%201.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the basis of presentation for the unaudited interim financial statements, principles of consolidation, and key accounting policies including revenue recognition, stock-based awards, net income per common share, restricted cash, accounts receivable, allowance for credit losses, inventories, and other intangible assets. It also details the adoption of the CECL accounting standard and the revision of previously issued financial statements regarding cash flow classification - The company adopted ASU 2016-13 (CECL) on January 1, 2023, recognizing a **$30 thousand decrease in retained earnings** due to increased estimated credit losses[46](index=46&type=chunk)[47](index=47&type=chunk) - Comparative information for 2022 is not restated[47](index=47&type=chunk) - An immaterial error in the June 30, 2022 condensed consolidated cash flow statement was corrected to show line of credit borrowings and payments on a gross basis instead of net, with no impact on total operating, investing, or financing cash flows, income statement, or balance sheet[48](index=48&type=chunk)[49](index=49&type=chunk) **Stock Options Status as of June 30, 2023 (in thousands, except share data):** | Metric | Shares | Weighted Average Exercise Price Per Share | | :----------------------------------------- | :-------- | :---------------------------------------- | | Outstanding - January 1, 2023 | 452,700 | $5.97 | | Granted | 29,000 | $9.37 | | Exercised | (36,044) | $4.12 | | Cancelled | (43,956) | $7.50 | | Outstanding - June 30, 2023 | 401,700 | $6.21 | | Exercisable - June 30, 2023 | 244,400 | $4.43 | - Unrecognized compensation related to stock options: **$632 thousand**, vesting over 3.7 years[24](index=24&type=chunk)[25](index=25&type=chunk) - Total compensation expense for stock options: **$55 thousand** (3 months ended June 30, 2023), **$123 thousand** (6 months ended June 30, 2023)[25](index=25&type=chunk) **Restricted Stock Units (RSUs) Status as of June 30, 2023 (in thousands, except share data):** | Metric | Shares | Weighted Average Grant Date Fair Value | | :----------------------------------------- | :-------- | :------------------------------------- | | Outstanding - January 1, 2023 | 21,000 | $12.00 | | Granted | 18,000 | $9.37 | | Vested | (10,500) | $12.00 | | Forfeited | (6,000) | $10.93 | | Outstanding - June 30, 2023 | 22,500 | $10.18 | - Unrecognized compensation related to RSUs: **$195 thousand**, vesting over 1.4 years[26](index=26&type=chunk)[29](index=29&type=chunk) - Total compensation expense for RSUs: **$38 thousand** (3 months ended June 30, 2023), **$69 thousand** (6 months ended June 30, 2023)[29](index=29&type=chunk) **Inventories (in thousands):** | Category | June 30, 2023 | December 31, 2022 | | :-------------- | :------------ | :---------------- | | Raw Materials | $20,461 | $21,673 | | Work in Process | $960 | $1,238 | | Finished Goods | $744 | $671 | | Reserves | $(1,087) | $(1,144) | | Total | $21,078 | $22,438 | **Other Intangible Assets (in thousands):** | Category | June 30, 2023 | December 31, 2022 | | :------------------ | :------------ | :---------------- | | Customer Relationships | $144 | $216 | | Patents | $198 | $206 | | Total | $342 | $422 | - Weighted-average remaining amortization period: **1.4 years**[41](index=41&type=chunk)[42](index=42&type=chunk) - Amortization expense for finite life intangible assets: **$40 thousand** (3 months ended June 30, 2023), **$80 thousand** (6 months ended June 30, 2023)[42](index=42&type=chunk) [NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS](index=15&type=section&id=NOTE%202.%20CONCENTRATION%20OF%20CREDIT%20RISK%20AND%20MAJOR%20CUSTOMERS) This note details the company's concentration of credit risk, particularly regarding cash balances held in China and Mexico, and identifies major customers that account for significant portions of net sales and accounts receivable. It also provides figures for export sales - Two customers accounted for **39% of net sales** for both the three and six months ended June 30, 2023[52](index=52&type=chunk) - One customer accounted for **28% and 26% of net sales** for the three and six months ended June 30, 2022, respectively[52](index=52&type=chunk) - At June 30, 2023, two customers represented approximately **38% of gross accounts receivable**, compared to one customer representing **21%** at December 31, 2022[53](index=53&type=chunk) - Export sales represented approximately **3% of total net sales** for both the three and six months ended June 30, 2023, a decrease from **4%** in the prior year periods[54](index=54&type=chunk) [NOTE 3. REVENUE](index=16&type=section&id=NOTE%203.%20REVENUE) This note describes the company's revenue recognition policies for products, engineering, and repair services, emphasizing that most revenue from contract manufacturing is recognized over time. It also provides a breakdown of contract assets and net sales by market segment and timing of transfer - The majority of revenue (approximately **73-74%**) is derived from contract manufacturing agreements, recognized over time based on costs incurred[58](index=58&type=chunk) **Net Sales by Market and Timing of Transfer (Three Months Ended June 30, 2023, in thousands):** | Market | Product/Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | | :-------------------- | :------------------------------------ | :----------------------------------- | :-------------------- | :------------------------ | | Medical | $14,570 | $5,318 | $719 | $20,607 | | Industrial | $6,593 | $2,125 | $341 | $9,059 | | Aerospace and Defense | $4,499 | $674 | $182 | $5,355 | | Total Net Sales | $25,662 | $8,117 | $1,242 | $35,021 | **Net Sales by Market and Timing of Transfer (Six Months Ended June 30, 2023, in thousands):** | Market | Product/Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | | :-------------------- | :------------------------------------ | :----------------------------------- | :-------------------- | :------------------------ | | Medical | $30,295 | $10,379 | $1,305 | $41,979 | | Industrial | $13,183 | $4,533 | $815 | $18,531 | | Aerospace and Defense | $7,914 | $1,224 | $261 | $9,399 | | Total Net Sales | $51,392 | $16,136 | $2,381 | $69,909 | - Contract assets increased from **$9,982 thousand** at December 31, 2022, to **$11,587 thousand** at June 30, 2023, with substantially all remaining performance obligations expected to be transferred to receivables within 90 days[62](index=62&type=chunk) [NOTE 4. FINANCING ARRANGEMENTS](index=18&type=section&id=NOTE%204.%20FINANCING%20ARRANGEMENTS) This note details the company's credit agreement with Bank of America, including the line of credit amount, expiration date, interest rates, outstanding borrowings, and compliance with financial covenants. It also specifies the unused availability under the line of credit - The company has a **$16 million line of credit** with Bank of America, expiring June 15, 2026[65](index=65&type=chunk) - Weighted-average interest rate on the line of credit increased from **5.2%** at December 31, 2022, to **7.9%** at June 30, 2023[66](index=66&type=chunk) **Line of Credit Borrowings (in thousands):** | Metric | June 30, 2023 | December 31, 2022 | | :----------------- | :------------ | :---------------- | | Outstanding Borrowings | $7,056 | $6,897 | | Unused Availability| $5,292 | N/A | - The company met all covenants for the period ended June 30, 2023[68](index=68&type=chunk) [NOTE 5. LEASES](index=19&type=section&id=NOTE%205.%20LEASES) This note provides information on the company's operating and finance leases for manufacturing sites, office space, and equipment. It details lease costs, balance sheet and cash flow impacts, and the maturity schedule of lease liabilities **Total Lease Cost (in thousands):** | Lease Cost Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $592 | $578 | $1,159 | $1,159 | | Finance lease interest cost | $11 | $17 | $23 | $36 | | Finance lease amortization expense | $182 | $183 | $364 | $365 | | Total lease cost | $785 | $778 | $1,546 | $1,560 | **Lease Assets (in thousands):** | Asset Type | June 30, 2023 | December 31, 2022 | | :------------------ | :------------ | :---------------- | | Operating lease assets | $7,253 | $7,850 | | Finance lease assets | $998 | $1,363 | | Total leased assets | $8,251 | $9,213 | - Cash paid for amounts included in the measurement of operating lease liabilities increased from **$862 thousand** for the six months ended June 30, 2022, to **$934 thousand** for the same period in 2023[73](index=73&type=chunk) **Maturities of Lease Liabilities (in thousands):** | Year | Operating Leases | Finance Leases | Total Lease Payments | | :---------------- | :--------------- | :------------- | :------------------- | | Remainder of 2023 | $882 | $216 | $1,098 | | 2024 | $1,514 | $379 | $1,893 | | 2025 | $1,265 | $103 | $1,368 | | 2026 | $1,227 | $107 | $1,334 | | 2027 | $1,256 | - | $1,256 | | Thereafter | $5,818 | - | $5,818 | | Total Lease Payments | $11,962 | $805 | $12,767 | | Less: Interest | $(3,837) | $(45) | $(3,882) | | Present value of lease liabilities | $8,125 | $760 | $8,885 | [NOTE 6. INCOME TAXES](index=21&type=section&id=NOTE%206.%20INCOME%20TAXES) This note outlines the company's quarterly estimation process for its effective tax rate and provides the effective tax rates for the current and prior periods, highlighting the primary drivers of change **Effective Tax Rate:** | Period | 2023 | 2022 | | :--------------------------------- | :--- | :--- | | Three Months Ended June 30 | 35% | 21% | | Six Months Ended June 30 | 31% | 12% | - Primary drivers of change: increase in projected pre-tax book income and an increase in the valuation allowance due to Section 174[76](index=76&type=chunk) [NOTE 7. EMPLOYEE RETENTION CREDIT](index=21&type=section&id=NOTE%207.%20EMPLOYEE%20RETENTION%20CREDIT) This note provides an update on the Employee Retention Credit (ERC) benefits, confirming that all payments have been received as of June 30, 2023 - All Employee Retention Credit (ERC) payments have been received as of June 30, 2023[78](index=78&type=chunk) - At December 31, 2022, the company had **$2,650 thousand** in ERC benefits recorded as Employee Retention Credits Receivable[78](index=78&type=chunk) [NOTE 8. RELATED PARTY TRANSACTIONS](index=22&type=section&id=NOTE%208.%20RELATED%20PARTY%20TRANSACTIONS) This note discloses transactions with related parties, specifically Abilitech Medical, Inc. and Marpe Technologies, LTD, both of which have connections to the company's Chairman. It details the nature of services provided, payments received, and future agreements - No payments were received from Abilitech Medical, Inc. for the three and six months ended June 30, 2023, compared to **$163 thousand** and **$217 thousand**, respectively, in 2022[80](index=80&type=chunk) - The company has recorded a full reserve against outstanding accounts receivable and inventory related to Abilitech[80](index=80&type=chunk) - The company recognized revenue of **$163 thousand** and **$113 thousand** from Marpe Technologies, LTD for the six months ended June 30, 2023 and 2022, respectively[81](index=81&type=chunk) - The company is involved in a **$1 million conditional grant** with Marpe Technologies, providing services at cost or no cost for its **$500 thousand** contribution, and will receive a 10-year exclusive manufacturing right[81](index=81&type=chunk) [Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations](index=23&type=section&id=Item%202%20-%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20And%20Results%20of%20Operations) This section provides an overview of Nortech Systems' business as a global EMS contract manufacturer and a detailed analysis of its financial performance for the three and six months ended June 30, 2023, compared to the prior year. It covers net sales, gross profit, operating expenses, net income, liquidity, capital resources, and forward-looking statements [Overview](index=23&type=section&id=Overview) This section introduces Nortech Systems as a global EMS contract manufacturer specializing in complex electromedical and electromechanical products across various markets - Nortech Systems Incorporated is a Minnesota-based global EMS contract manufacturer serving Medical, Aerospace & Defense, and Industrial markets[83](index=83&type=chunk) - It offers engineering, technical, and manufacturing services for complex electromedical and electromechanical products[83](index=83&type=chunk) - The company operates facilities in Minnesota, Mexico, and China, all certified to relevant ISO/AS standards[83](index=83&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including net sales, gross profit, and operating expenses, for the three and six months ended June 30, 2023 [Net Sales](index=24&type=section&id=Net%20Sales) Net sales increased for both the three and six months ended June 30, 2023, driven by higher production volume and price increases. The Medical market showed significant growth, while Industrial remained stable and Aerospace and Defense experienced a decline for the six-month period **Net Sales Performance (in millions):** | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | % Change | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | % Change | | :------------ | :------------------------------- | :------------------------------- | :------- | :----------------------------- | :----------------------------- | :------- | | Total Net Sales | $35.0 | $32.5 | 7.7% | $69.9 | $63.2 | 10.6% | | Medical | $20.6 | $18.6 | 10.8% | $42.0 | $33.8 | 24.3% | | Industrial | $9.0 | $9.4 | (4.3)% | $18.5 | $18.1 | 2.2% | | Aerospace and Defense | $5.4 | $4.5 | 20.0% | $9.4 | $11.3 | (16.8)% | - The increase in net sales was primarily driven by higher production volume and price increases implemented to offset rising material and labor costs[85](index=85&type=chunk) [Backlog](index=25&type=section&id=Backlog) The 90-day shipment backlog showed a slight increase from the prior quarter but a decrease year-over-year. Total order backlog increased quarter-over-quarter but decreased year-over-year, with medical customers returning to pre-pandemic ordering practices **90-Day Shipment Backlog (in millions):** | Market | June 30, 2023 | March 31, 2023 | June 30, 2022 | | :-------------------- | :------------ | :------------- | :------------ | | Medical | $18.3 | $20.6 | $20.9 | | Industrial | $9.7 | $7.8 | $9.8 | | Aerospace and Defense | $6.3 | $5.4 | $5.2 | | Total 90-Day Backlog | $34.3 | $33.8 | $35.9 | - **1% increase** from prior quarter, **4% decrease** from June 30, 2022[89](index=89&type=chunk)[91](index=91&type=chunk) **Total Order Backlog (in millions):** | Market | June 30, 2023 | March 31, 2023 | June 30, 2022 | | :-------------------- | :------------ | :------------- | :------------ | | Medical | $51.9 | $49.8 | $63.7 | | Industrial | $21.0 | $20.5 | $22.6 | | Aerospace and Defense | $28.1 | $28.5 | $19.9 | | Total Order Backlog | $101.0 | $98.8 | $106.2 | - **2% increase** from prior quarter, **5% decrease** from June 30, 2022[91](index=91&type=chunk)[93](index=93&type=chunk) - The decrease in total backlog year-over-year is attributed to medical customers returning to pre-pandemic ordering practices as global supply chain conditions improve[91](index=91&type=chunk) [Gross Profit](index=26&type=section&id=Gross%20Profit) Gross profit as a percentage of net sales improved for both the three and six months ended June 30, 2023, primarily due to price increases and higher plant utilization **Gross Profit as a Percentage of Net Sales:** | Period | 2023 | 2022 | | :--------------------------------- | :---- | :---- | | Three Months Ended June 30 | 15.6% | 15.4% | | Six Months Ended June 30 | 15.7% | 14.3% | - Improvement driven by price increases in response to material and labor cost inflation, and higher production volume leading to increased plant utilization[94](index=94&type=chunk) [Selling Expense](index=26&type=section&id=Selling%20Expense) Selling expenses remained relatively stable in absolute terms but decreased slightly as a percentage of sales for both the three and six months ended June 30, 2023 **Selling Expenses (in millions and as % of sales):** | Period | 2023 ($) | 2023 (%) | 2022 ($) | 2022 (%) | | :--------------------------------- | :------- | :------- | :------- | :------- | | Three Months Ended June 30 | $1.0 | 2.7% | $1.0 | 2.9% | | Six Months Ended June 30 | $1.8 | 2.6% | $1.8 | 2.8% | [General and Administrative Expense](index=26&type=section&id=General%20and%20Administrative%20Expense) General and administrative expenses increased in both absolute terms and as a percentage of sales for the three and six months ended June 30, 2023, primarily due to higher professional fees and labor costs **General and Administrative Expenses (in millions and as % of sales):** | Period | 2023 ($) | 2023 (%) | 2022 ($) | 2022 (%) | | :--------------------------------- | :------- | :------- | :------- | :------- | | Three Months Ended June 30 | $3.1 | 8.9% | $2.7 | 8.2% | | Six Months Ended June 30 | $6.4 | 9.1% | $5.4 | 8.5% | - Increase mainly due to higher professional fees and increased labor costs[96](index=96&type=chunk) [Research and Development Expense](index=26&type=section&id=Research%20and%20Development%20Expense) Research and development expenses decreased in absolute terms and as a percentage of net sales for both the three and six months ended June 30, 2023 **Research and Development Expenses (in millions and as % of sales):** | Period | 2023 ($) | 2023 (%) | 2022 ($) | 2022 (%) | | :--------------------------------- | :------- | :------- | :------- | :------- | | Three Months Ended June 30 | $0.3 | 0.9% | $0.4 | 1.1% | | Six Months Ended June 30 | $0.6 | 0.8% | $0.7 | 1.1% | [Income From Operations](index=26&type=section&id=Income%20From%20Operations) Income from operations increased for both the three and six months ended June 30, 2023, driven by higher sales and improved gross margin percentage **Income From Operations (in millions):** | Period | 2023 ($) | 2022 ($) | | :--------------------------------- | :------- | :------- | | Three Months Ended June 30 | $1.1 | $1.0 | | Six Months Ended June 30 | $2.2 | $1.2 | - Increase driven by higher sales and improved gross margin percentage, primarily due to price increases and higher plant utilization[98](index=98&type=chunk) [Interest Expense](index=27&type=section&id=Interest%20Expense) Interest expense remained consistent for both the three and six months ended June 30, 2023, compared to the prior year **Interest Expense (in millions):** | Period | 2023 ($) | 2022 ($) | | :--------------------------------- | :------- | :------- | | Three Months Ended June 30 | $0.1 | $0.1 | | Six Months Ended June 30 | $0.2 | $0.2 | [Income Taxes](index=27&type=section&id=Income%20Taxes) The effective tax rate significantly increased for both the three and six months ended June 30, 2023, primarily due to higher projected pre-tax income and an increased valuation allowance related to Section 174 **Effective Tax Rate:** | Period | 2023 | 2022 | | :--------------------------------- | :--- | :--- | | Three Months Ended June 30 | 35% | 21% | | Six Months Ended June 30 | 31% | 12% | - Primary drivers of change: increase in projected pre-tax book income and an increase in the valuation allowance due to Section 174[102](index=102&type=chunk) [Net Income](index=27&type=section&id=Net%20Income) Net income for the three months ended June 30, 2023, decreased slightly, while net income for the six months ended June 30, 2023, increased significantly, driven by higher sales and improved gross margins **Net Income and EPS (in millions, except per share data):** | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $0.6 | $0.7 | $1.3 | $0.9 | | Basic EPS | $0.23 | $0.27 | $0.49 | $0.32 | | Diluted EPS | $0.22 | $0.25 | $0.46 | $0.30 | - Increase in net income for the six-month period was driven by higher sales and improved gross margin percentage, primarily due to price increases and higher plant utilization[103](index=103&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) The company believes its current financing arrangements, anticipated cash flows, and cash on hand are sufficient to meet working capital, capital expenditure, and debt repayment needs for the next twelve months. It details its credit facility, compliance with covenants, and unused availability - Management believes existing financing, anticipated cash flows from operations, expected Employee Retention Credit (ERC) funds, and cash on hand will be sufficient to cover working capital, capital expenditures, and debt repayments for the next twelve months[104](index=104&type=chunk) [Credit Facility](index=28&type=section&id=Credit%20Facility) The company's $16 million credit facility with Bank of America, expiring in 2026, had outstanding borrowings of $7.0 million at June 30, 2023, with an increased weighted-average interest rate of 7.9%. The company remains compliant with all covenants and has $5.3 million in unused availability - The company's **$16 million line of credit** with Bank of America expires on June 15, 2026[105](index=105&type=chunk) - The weighted-average interest rate on the line of credit increased to **7.9%** as of June 30, 2023, from **5.2%** at December 31, 2022[106](index=106&type=chunk) **Credit Facility Status (in millions):** | Metric | June 30, 2023 | December 31, 2022 | | :----------------- | :------------ | :---------------- | | Outstanding Borrowings | $7.0 | $6.9 | | Unused Availability| $5.3 | N/A | - The company met all financial covenants for the period ended June 30, 2023[108](index=108&type=chunk) [Off-Balance Sheet Arrangements](index=28&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has not engaged in any off-balance sheet arrangements as defined by SEC regulations - The company has not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K[110](index=110&type=chunk) [Critical Accounting Policies and Estimates](index=28&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies and estimates are consistent with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022, involving significant judgment and potential for actual results to differ from estimates - Significant accounting policies and estimates are summarized in the Annual Report on Form 10-K for the year ended December 31, 2022, and involve significant judgment and inherent uncertainty[111](index=111&type=chunk) [Forward-Looking Statements](index=29&type=section&id=Forward-Looking%20Statements) This section reiterates that statements not based on historical facts are forward-looking and subject to various risks, as detailed in the company's Annual Report on Form 10-K. The company does not undertake to update these statements publicly - Forward-looking statements are subject to various factors that could cause actual results to differ materially, as detailed in the 'Risk Factors' section of the Annual Report on Form 10-K[113](index=113&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk) - The company does not undertake any obligation to publicly update forward-looking statements[114](index=114&type=chunk) [Item 3 - Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203%20-%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there are no applicable quantitative and qualitative disclosures about market risk for the reporting period - This item is not applicable[117](index=117&type=chunk) [Item 4 - Controls and Procedures](index=30&type=section&id=Item%204%20-%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023, and concluded they were effective. There were no material changes in internal control over financial reporting during the quarter - Management, with the participation of the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023[118](index=118&type=chunk) - There were no material changes in internal control over financial reporting during the most recently completed fiscal quarter[119](index=119&type=chunk) [PART II - OTHER INFORMATION](index=31&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers various other information, including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits [Item 1 - Legal Proceedings](index=31&type=section&id=Item%201%20-%20Legal%20Proceedings) The company is subject to various legal proceedings and claims that arise in the ordinary course of business - The company is subject to various legal proceedings and claims that arise in the ordinary course of business[121](index=121&type=chunk) [Item 1A. - Risk Factors](index=31&type=section&id=Item%201A.%20-%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[122](index=122&type=chunk) [Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds](index=31&type=section&id=Item%202%20-%20Unregistered%20Sales%20of%20Equity%20Securities,%20Use%20of%20Proceeds) The company's share repurchase program has expired, and no additional amounts are available for repurchase - The share repurchase program has expired, and no additional amounts are available for repurchase[123](index=123&type=chunk) [Item 3 - Defaults on Senior Securities](index=31&type=section&id=Item%203%20-%20Defaults%20on%20Senior%20Securities) The company reported no defaults on senior securities for the period - None[124](index=124&type=chunk) [Item 4 - Mine Safety Disclosures](index=31&type=section&id=Item%204%20-%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[125](index=125&type=chunk) [Item 5 - Other Information](index=31&type=section&id=Item%205%20-%20Other%20Information) The company reported no other information for the period - None[126](index=126&type=chunk) [Item 6 - Exhibits](index=32&type=section&id=Item%206%20-%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and financial statements formatted in iXBRL - Key exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32) and financial statements formatted in iXBRL (101, 104)[128](index=128&type=chunk) [SIGNATURES](index=33&type=section&id=SIGNATURES) The report was duly signed on August 9, 2023, by Jay D. Miller, Chief Executive Officer and President, and Alan K. Nordstrom, Acting Chief Financial Officer and Corporate Controller - The report was signed on August 9, 2023, by Jay D. Miller (CEO and President) and Alan K. Nordstrom (Acting CFO and Corporate Controller)[130](index=130&type=chunk)

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Nortech Systems reported **$34.9 million** net sales and **$681 thousand** net income for Q1 2023, with assets at **$70.1 million** [Condensed Consolidated Statements of Operations and Comprehensive Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) The company reported a significant increase in net sales and net income for Q1 2023 compared to the prior year Q1 2023 vs Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | **Net Sales** | **$34,888** | **$30,711** | | Gross Profit | $5,484 | $4,044 | | Income From Operations | $1,053 | $169 | | **Net Income** | **$681** | **$138** | | Basic EPS | $0.25 | $0.05 | | Diluted EPS | $0.23 | $0.05 | - Net sales increased by **13.7%** year-over-year, from **$30.7 million** to **$34.9 million**[8](index=8&type=chunk) - Net income significantly increased to **$681 thousand** in Q1 2023, compared to **$138 thousand** in Q1 2022[8](index=8&type=chunk) [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$70.1 million**, inventories decreased, and shareholders' equity grew to **$28.9 million** Balance Sheet Highlights (in thousands) | Metric | March 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | **$55,569** | **$54,860** | | Inventories, Net | $21,344 | $22,438 | | **Total Assets** | **$70,055** | **$69,540** | | Total Current Liabilities | $27,449 | $26,398 | | **Total Liabilities** | **$41,150** | **$41,460** | | **Total Shareholders' Equity** | **$28,905** | **$28,080** | - Inventories decreased from **$22.4 million** at year-end 2022 to **$21.3 million** as of March 31, 2023[10](index=10&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow remained positive, contributing to a net increase in cash and cash equivalents for the quarter Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $1,718 | $1,491 | | Net Cash Used In Investing Activities | ($496) | ($514) | | Net Cash Used In Financing Activities | ($1,073) | ($1,585) | | **Net Change in Cash and Cash Equivalents** | **$152** | **($608)** | - Cash and cash equivalents increased by **$152 thousand** during Q1 2023, ending the period at **$2.63 million**[12](index=12&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) Shareholders' equity increased to **$28.91 million**, primarily driven by the net income reported for the quarter - Total shareholders' equity increased from **$28.08 million** at the end of 2022 to **$28.91 million** as of March 31, 2023[15](index=15&type=chunk) - The increase in shareholders' equity was primarily driven by net income of **$681 thousand** for the quarter[15](index=15&type=chunk) [Condensed Notes to Consolidated Financial Statements](index=9&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) Key notes include revenue recognition, customer concentration, CECL adoption, and line of credit details - The majority of revenue (**74%** in Q1 2023) is recognized over time from contract manufacturing agreements with enforceable payment rights[52](index=52&type=chunk) - One major customer accounted for **29%** of net sales for the three months ended March 31, 2023, and **24%** of gross accounts receivable[47](index=47&type=chunk) - The company adopted the new Current Expected Credit Losses (CECL) standard on January 1, 2023, resulting in a **$30 thousand** decrease to retained earnings[39](index=39&type=chunk)[42](index=42&type=chunk) - As of March 31, 2023, the company had **$5.9 million** in borrowings on its line of credit and **$5.9 million** of unused availability[59](index=59&type=chunk)[62](index=62&type=chunk)[97](index=97&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20And%20Results%20of%20Operations) Management attributes Q1 2023 net sales growth to higher production and price increases, improving gross margin, with backlog decreasing [Results of Operations](index=21&type=section&id=Results%20of%20Operations) Net sales increased **13.7%** due to higher production and price adjustments, improving gross profit margin and significantly raising net income - Net sales increased **13.7%** to **$34.9 million** in Q1 2023, driven by higher production volume and price increases to counteract higher material and labor costs[77](index=77&type=chunk) Net Sales by Market (in millions) | Market | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Medical | $21.4 | $15.2 | 40.8% | | Industrial | $9.5 | $8.7 | 9.2% | | Aerospace and Defense | $4.0 | $6.8 | (41.2)% | | **Total Net Sales** | **$34.9** | **$30.7** | **13.7%** | - Gross profit as a percent of net sales improved to **15.7%** in Q1 2023 from **13.2%** in Q1 2022, primarily due to price increases and higher production volume[82](index=82&type=chunk) - Net income for Q1 2023 was **$681 thousand** (**$0.23** per diluted share), a significant increase from **$138 thousand** (**$0.05** per diluted share) in Q1 2022[90](index=90&type=chunk) [Backlog](index=23&type=section&id=Backlog) Total order backlog decreased to **$98.8 million** as customers returned to pre-pandemic ordering practices - The 90-day shipment backlog was **$33.8 million** as of March 31, 2023, a **4.5%** decrease from March 31, 2022[79](index=79&type=chunk) - Total order backlog as of March 31, 2023, was **$98.8 million**, a **5.1%** decrease from the end of 2022, reflecting a return to pre-pandemic ordering practices[80](index=80&type=chunk) Total Order Backlog by Market (in millions) | Market | Mar 31, 2023 | Dec 31, 2022 | Mar 31, 2022 | | :--- | :--- | :--- | :--- | | Medical | $49.8 | $57.1 | $58.5 | | Industrial | $20.5 | $22.5 | $19.1 | | Aerospace and Defense | $28.5 | $24.5 | $20.0 | | **Total Backlog** | **$98.8** | **$104.1** | **$97.6** | [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) Existing financing, operating cash flows, and ERC funds are expected to cover working capital needs for the next twelve months - The company believes existing financing, cash flows from operations, and expected ERC funds will be sufficient to satisfy working capital needs for the next twelve months[91](index=91&type=chunk) - The company has a **$16 million** line of credit with Bank of America expiring in June 2026, with **$5.9 million** borrowed and **$5.9 million** unused availability as of March 31, 2023[93](index=93&type=chunk)[94](index=94&type=chunk)[97](index=97&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company has indicated that this item is not applicable - Not applicable[105](index=105&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective, with no material changes in internal control over financial reporting - Based on an evaluation as of March 31, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[106](index=106&type=chunk) - No changes occurred in the company's internal control over financial reporting during the first quarter that have materially affected, or are reasonably likely to materially affect, these controls[107](index=107&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=28&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various legal proceedings and claims arising in the ordinary course of business - The company is subject to various legal proceedings and claims that arise in the ordinary course of business[109](index=109&type=chunk) [Item 1A. Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes in the risk factors from those disclosed in the prior Annual Report on Form 10-K - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[110](index=110&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=28&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company's share repurchase program expired as of March 31, 2023, with no additional amounts available for repurchase - The company's share repurchase program has expired as of March 31, 2023[111](index=111&type=chunk) [Other Items (3, 4, 5)](index=28&type=section&id=Other%20Items%20(3,%204,%205)) No defaults on senior securities, mine safety disclosures, or other material information to report for the period - Item 3, Defaults on Senior Securities: None[112](index=112&type=chunk) - Item 4, Mine Safety Disclosures: Not applicable[113](index=113&type=chunk) - Item 5, Other Information: None[114](index=114&type=chunk) [Item 6. Exhibits](index=29&type=section&id=Item%206.%20Exhibits) The report includes CEO and CFO certifications and financial statements in XBRL format as required exhibits - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act[116](index=116&type=chunk) - Financial statements for the quarter ended March 31, 2023, are provided in XBRL format[116](index=116&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2022 OR ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ Indicate by check ma ...

Nortech Systems Incorporated (NASDAQ:NSYS) Q4 2022 Earnings Conference Call March 17, 2023 9:00 AM ET Company Participants Chris Jones - Chief Financial Officer Jay Miller - President and Chief Executive Officer Conference Call Participants Paul Luther - Private Investor Operator Greetings and welcome to Nortech???s Fourth Quarter 2022 Earnings Call. [Operator Instructions] I will now turn the conference over to your host, Mr. Chris Jones. Please go ahead. Chris Jones Good morning and thanks operator and Ha ...

Financial Data and Key Metrics Changes - In Q3 2022, revenue totaled $35.3 million, representing a 19.8% increase from $29.5 million in Q3 2021 and over 8% growth from the previous quarter [19] - Year-to-date revenue for the first nine months of 2022 reached $98.5 million, a nearly 21% increase from $81.7 million in the same period of 2021 [19] - Adjusted EBITDA in Q3 was $2.4 million compared to $735,000 in Q3 2021, with year-to-date adjusted EBITDA at $4.7 million versus $149,000 last year [23] Business Line Data and Key Metrics Changes - Medical market revenue increased by $3.5 million or 21% year-over-year [20] - Industrial market revenue rose by $1.5 million or 16% compared to the prior year [20] - Aerospace and Defense markets saw a 26% increase, totaling $3.9 million [20] Market Data and Key Metrics Changes - The backlog was up more than 30% from prior year levels to $103 million, although it saw a slight sequential decline from $106 million at the end of Q2 2022 [18] - The largest customer in the Medical segment reported quarterly revenue growth in the mid-single digits, indicating solid spending trends on healthcare equipment, particularly in Europe and Asia [11] Company Strategy and Development Direction - The company is focused on strategic planning that emphasizes stakeholder value, including employee care and supplier partnerships [29] - Ongoing supply chain optimization activities are aimed at improving customer on-time delivery and product quality [30] - The company aims to leverage its unique capabilities and strategic fulfillment solutions to differentiate itself in the marketplace [12] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about finishing strong in 2022 and carrying momentum into 2023, with a healthy backlog and improved supply chain conditions [15] - The company is actively monitoring macroeconomic conditions and is encouraged by reports of fewer supply chain disruptions from customers [18] Other Important Information - Operating cash flow for the year-to-date was a $1 million source of cash, compared to a cash use of $2.9 million last year [24] - The company anticipates receiving $5.2 million in employee retention credit (ERC) funds, which will be used to reduce line of credit balance [26] Q&A Session Summary Question: Continued sequential revenue and margin growth into Q4 - Management expects solid Q4 performance and momentum to carry into 2023, while carefully monitoring macroeconomic conditions [34] Question: Initiatives for shareholder value recognition - Management acknowledges the importance of communicating results and plans to increase press releases and analyst coverage to enhance visibility [36] Question: Labor situation and staffing levels - The company is reasonably well-staffed, with some overtime but not to the point of burnout, while parts availability remains the primary bottleneck [38][40]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to NORTECH SYSTEMS INCORPORATED Commission file number 0-13257 State of Incorporation: Minnesota Indicate by check mark whether the registrant has submit ...

Nortech Systems Incorporated (NASDAQ:NSYS) Q2 2022 Earnings Conference Call August 10, 2022 5:00 PM ET Company Participants Jay Miller - President and Chief Executive Officer Chris Jones - Chief Financial Officer Conference Call Participants Paul Cooper - Private Investor Operator Good day, ladies and gentlemen, and welcome to Nortech???s Second Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your hosts, Jay Miller, President and Chief Executive Officer an ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to NORTECH SYSTEMS INCORPORATED Commission file number 0-13257 State of Incorporation: Minnesota IRS Employer Identification No. 41-1681094 Executive Offices: ...

Nortech Systems Incorporated (NASDAQ:NSYS) Q1 2022 Results Conference Call May 11, 2022 5:00 PM ET Company Participants Chris Jones - CFO Jay Miller - CEO Conference Call Participants Operator Good afternoon, ladies and gentlemen, and welcome to the Nortech First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chris J ...

PART I - FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201%20-%20Financial%20Statements) The company's Q1 2022 financials show a strong turnaround with a 38.9% sales increase and a return to profitability [Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) Net sales grew 38.9% to $30.7 million, driving a return to net income of $138 thousand from a prior-year loss Consolidated Statements of Operations (Unaudited, In Thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (%) | | :--- | :--- | :--- | :--- | | **Net Sales** | $30,711 | $22,072 | 39.1% | | **Gross Profit** | $4,044 | $1,561 | 159.1% | | **Income (Loss) From Operations** | $169 | $(2,175) | N/A | | **Net Income (Loss)** | $138 | $(1,554) | N/A | | **Diluted EPS** | $0.05 | $(0.58) | N/A | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets grew slightly to $67.9 million, driven by an increase in inventories and shareholders' equity Consolidated Balance Sheet Highlights (In Thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $52,818 | $51,774 | | Inventories, Net | $21,187 | $19,434 | | **Total Assets** | **$67,911** | **$67,091** | | **Total Current Liabilities** | $24,713 | $22,306 | | **Total Liabilities** | **$41,576** | **$40,980** | | **Total Shareholders' Equity** | **$26,335** | **$26,111** | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating activities generated $1.5 million in cash, a significant reversal from the prior year's use of cash Consolidated Cash Flow Summary (Unaudited, In Thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net Cash Provided By (Used In) Operating Activities | $1,491 | $(896) | | Net Cash Used In Investing Activities | $(514) | $(272) | | Net Cash Used In Financing Activities | $(1,585) | $(1,415) | | **Net Change in Cash and Cash Equivalents** | **$(608)** | **$(2,582)** | [Condensed Notes to Consolidated Financial Statements](index=9&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) Notes detail revenue recognition, significant customer concentration, a $5.2 million ERC receivable, and available credit - Revenue from contract manufacturing agreements recognized over time accounted for approximately **73% of total revenue** for the three months ended March 31, 2022[45](index=45&type=chunk) - One customer accounted for **23% of net sales** for Q1 2022; two customers represented approximately **35% of total accounts receivable** at March 31, 2022[41](index=41&type=chunk) - The company has a **$5.2 million receivable** for the Employee Retention Credit (ERC) as of March 31, 2022[64](index=64&type=chunk) - The company has a **$16 million line of credit** with Bank of America, with **$7.6 million outstanding** and **$8.0 million of unused availability** as of March 31, 2022[51](index=51&type=chunk)[52](index=52&type=chunk)[55](index=55&type=chunk) - In Q1 2022, the company granted **74,000 stock options** and **21,000 restricted stock units (RSUs)**[22](index=22&type=chunk)[25](index=25&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202%20-%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20And%20Results%20of%20Operations) Sales growth of 38.9% was driven by higher volume and pricing, with improved margins and a strong backlog [Results of Operations](index=21&type=section&id=Results%20of%20Operations) Q1 2022 net sales rose 38.9% to $30.7 million, with gross margin expanding to 13.2% and a return to operating income Net Sales by Market (in millions) | Market | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Medical | $15.2 | $12.3 | 23.6% | | Industrial | $8.7 | $6.2 | 40.3% | | Aerospace and Defense | $6.8 | $3.6 | 88.9% | | **Total Net Sales** | **$30.7** | **$22.1** | **38.9%** | - Gross profit as a percent of net sales **improved to 13.2%** in Q1 2022 from 7.1% in Q1 2021, driven by higher production volume and price increases[76](index=76&type=chunk) - The 90-day shipment backlog was **$35.4 million** as of March 31, 2022, a **13.8% increase** from March 31, 2021; the total shipment backlog was **$97.6 million**[74](index=74&type=chunk)[75](index=75&type=chunk) - The company reported **income from operations of $169 thousand** in Q1 2022, compared to a loss from operations of $2.3 million in Q1 2021[82](index=82&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) Management confirms sufficient liquidity for the next twelve months, supported by cash flows and an $8.0 million available credit line - Management believes existing financing arrangements, cash flows from operations, and expected ERC funds will be **sufficient to satisfy working capital needs** for the next twelve months[86](index=86&type=chunk) - As of March 31, 2022, the company had **$8.0 million of unused availability** under its line of credit[92](index=92&type=chunk) - In Q1 2022, the credit agreement was amended to include the Employee Retention Credit Receivable as security, **improving unused availability**[92](index=92&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203%20-%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not applicable for the reporting period - **Not applicable**[100](index=100&type=chunk) [Controls and Procedures](index=27&type=section&id=Item%204%20-%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2022[101](index=101&type=chunk) - There were **no changes in internal control over financial reporting** during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[102](index=102&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=28&type=section&id=Item%201%20-%20Legal%20Proceedings) The company is subject to various legal proceedings and claims that arise in the ordinary course of business - The company is subject to various legal proceedings and claims that arise in the **ordinary course of business**[104](index=104&type=chunk) [Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) No material changes to previously disclosed risks, which include supply chain, competition, and raw material costs - There have been **no material changes** in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[105](index=105&type=chunk) - Key risks include: **supply chain disruption**, lack of sufficient human resources, increased competition, raw material cost instability, and outbreaks of contagious diseases[99](index=99&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=28&type=section&id=Item%202%20-%20Unregistered%20Sales%20of%20Equity%20Securities%2C%20Use%20of%20Proceeds) The company's share repurchase program has expired with no remaining authorized amount for repurchases - The company's **share repurchase program has expired** as of March 31, 2022[106](index=106&type=chunk) [Exhibits](index=29&type=section&id=Item%206%20-%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications and Inline XBRL data - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act, as well as **Inline XBRL financial data**[111](index=111&type=chunk)