Document and Entity Information
Document and Entity Information - USD ($) | 12 Months Ended | ||
Dec. 31, 2017 | Mar. 23, 2018 | Jun. 30, 2017 | |
Document and Entity Information | |||
Entity Registrant Name | NORTECH SYSTEMS INC | ||
Entity Central Index Key | 722,313 | ||
Document Type | 10-K | ||
Document Period End Date | Dec. 31, 2017 | ||
Amendment Flag | false | ||
Current Fiscal Year End Date | --12-31 | ||
Entity Well-known Seasoned Issuer | No | ||
Entity Voluntary Filers | No | ||
Entity Current Reporting Status | Yes | ||
Entity Filer Category | Smaller Reporting Company | ||
Entity Public Float | $ 3,862,952 | ||
Entity Common Stock, Shares Outstanding | 2,704,823 | ||
Document Fiscal Year Focus | 2,017 | ||
Document Fiscal Period Focus | FY |
CONSOLIDATED STATEMENTS OF OPER
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | ||
Net Sales | $ 112,334,749 | $ 116,621,719 |
Cost of Goods Sold | 100,216,948 | 102,781,469 |
Gross Profit | 12,117,801 | 13,840,250 |
Operating Expenses: | ||
Selling Expenses | 4,747,339 | 4,947,853 |
General and Administrative Expenses | 8,086,184 | 8,260,861 |
Impairment of Goodwill | 908,000 | 0 |
(Gain) Loss on Sale of Property and Equipment | (355,336) | 2,473 |
Total Operating Expenses | 13,386,187 | 13,211,187 |
Income (Loss) From Operations | (1,268,386) | 629,063 |
Other Expense | ||
Loss on Extinguishment of Debt | (174,834) | |
Interest Expense | (627,555) | (550,289) |
Income (Loss) Before Income Taxes | (2,070,775) | 78,774 |
Income Tax Expense | 375,000 | 35,000 |
Net Income (Loss) | $ (2,445,775) | $ 43,774 |
Earnings (Loss) Per Common Share: | ||
Basic (in dollars per share) | $ (0.89) | $ 0.02 |
Weighted Average Number of Common Shares Outstanding - Basic (in shares) | 2,745,602 | 2,747,424 |
Diluted (in dollars per share) | $ (0.89) | $ 0.02 |
Weighted Average Number of Common Shares Outstanding - Dilutive (in shares) | 2,745,602 | 2,749,545 |
Other comprehensive income (loss) | ||
Foreign currency translation | $ (56,340) | $ 18,491 |
Comprehensive income (loss), net of tax | $ (2,502,115) | $ 62,265 |
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Current Assets | ||
Cash | $ 472,886 | $ 268,204 |
Restricted Cash | 305,683 | 0 |
Accounts Receivable, less allowances of $209,000 and $883,000 | 17,417,481 | 17,320,784 |
Inventories | 18,526,722 | 20,653,841 |
Prepaid Expenses | 815,045 | 1,048,373 |
Income Taxes Receivable | 229,604 | 198,535 |
Total Current Assets | 37,767,421 | 39,489,737 |
Property and Equipment, Net | 10,175,533 | 10,330,834 |
Goodwill | 2,375,454 | 3,283,454 |
Other Intangible Assets, Net | 1,738,621 | 1,861,764 |
Deferred Taxes | 20,720 | 543,000 |
Other Non Current Assets | 7,726 | 7,726 |
Total Assets | 52,085,475 | 55,516,515 |
Current Liabilities | ||
Current Maturities of Long-Term Debt | 1,002,586 | 1,565,347 |
Current Portion of Capital Lease Obligation | 295,372 | |
Accounts Payable | 11,699,220 | 13,825,530 |
Accrued Payroll and Commissions | 2,900,361 | 3,311,693 |
Other Accrued Liabilities | 2,107,916 | 1,603,069 |
Income Taxes Payable | 39,511 | |
Total Current Liabilities | 18,044,966 | 20,305,639 |
Long-Term Liabilities | ||
Long-term Line of Credit | 8,502,853 | 7,315,262 |
Long-Term Debt, Net of Current Maturities | 4,353,042 | 4,891,631 |
Long-Term Capital Lease Obligation, Net of Current Portion | 1,221,534 | |
Other Long-Term Liabilities | 137,547 | 689,195 |
Total Long-Term Liabilities | 14,214,976 | 12,896,088 |
Total Liabilities | 32,259,942 | 33,201,727 |
Commitments and Contingencies | ||
Shareholders' Equity | ||
Preferred Stock, $1 par value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding | 250,000 | 250,000 |
Common Stock - $0.01 par value; 9,000,000 Shares Authorized; 2,739,250 and 2,747,831 Shares Issued and Outstanding, respectively | 27,393 | 27,478 |
Additional Paid-In Capital | 15,759,610 | 15,746,665 |
Accumulated Other Comprehensive Loss | (100,785) | (44,445) |
Retained Earnings | 3,889,315 | 6,335,090 |
Total Shareholders' Equity | 19,825,533 | 22,314,788 |
Total Liabilities and Shareholders' Equity | $ 52,085,475 | $ 55,516,515 |
CONSOLIDATED BALANCE SHEETS (Pa
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
CONSOLIDATED BALANCE SHEETS | ||
Accounts Receivable Allowances | $ 209,000 | $ 883,000 |
Preferred Stock, par value (in dollars per share) | $ 1 | $ 1 |
Preferred Stock, Shares Authorized | 1,000,000 | 1,000,000 |
Preferred Stock, Shares Issued | 250,000 | 250,000 |
Preferred Stock, Shares Outstanding | 250,000 | 250,000 |
Common Stock - par value (in dollars per share) | $ 0.01 | $ 0.01 |
Common Stock - Shares Authorized | 9,000,000 | 9,000,000 |
Common Stock - Shares Issued | 2,739,250 | 2,747,831 |
Common Stock - Shares Outstanding | 2,739,250 | 2,747,831 |
CONSOLIDATED STATEMENTS OF CASH
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
CASH FLOWS FROM OPERATING ACTIVITIES | ||
Net Income (Loss) | $ (2,445,775) | $ 43,774 |
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: | ||
Depreciation | 2,185,700 | 2,104,983 |
Amortization | 314,701 | 190,654 |
Compensation on Stock-Based Awards | 43,200 | 994 |
Loss on Extinguishment of Debt | 16,756 | |
Compensation on Equity Appreciation Rights | (22,192) | (36,773) |
Deferred Taxes | 439,577 | (202,000) |
Change in Contingent Consideration | (486,044) | (295,000) |
Change in Accounts Receivable Allowance | (674,355) | 563,277 |
Change in Inventory Reserves | 170,774 | (76,199) |
Impairment of Goodwill | 908,000 | 0 |
(Gain) Loss on Disposal of Property and Equipment | (355,336) | 2,473 |
Changes in Current Operating Items | ||
Accounts Receivable | 577,658 | 504,474 |
Inventories | 1,956,345 | (412,885) |
Prepaid Expenses | 233,328 | 400,877 |
Income Taxes Receivable | (31,069) | 96,088 |
Income Taxes Payable | 39,511 | |
Accounts Payable | (2,114,637) | 817,227 |
Accrued Payroll and Commissions | (411,332) | 175,343 |
Other Accrued Liabilities | 461,435 | (343,182) |
Net Cash Provided by Operating Activities | 806,245 | 3,534,125 |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Proceeds from Sale of Property and Equipment | 668,786 | 3,000 |
Purchase of Intangible Asset | (113,819) | |
Purchases of Property and Equipment | (813,318) | (1,956,208) |
Net Cash Used in Investing Activities | (258,351) | (1,953,208) |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Net Change in Line of Credit | 1,187,591 | (375,975) |
Proceeds from Long-Term Debt | 5,123,000 | 466,000 |
Principal Payments on Long-Term Debt | (5,893,348) | (1,459,203) |
Loss on Extinguishment of Debt | (158,078) | |
Debt Issuance Costs | (267,419) | |
Share Repurchases | (30,340) | |
Proceeds from Issuance of Common Stock | 4,822 | |
Excess Tax Benefits from Stock-Based Awards | (25,149) | |
Net Cash used in Financing Activities | (38,594) | (1,389,505) |
Effect of Exchange Rate Changes on Cash | 1,065 | 75,905 |
Net Change in Cash | 510,365 | 267,317 |
Cash - Beginning of Year | 268,204 | 887 |
Cash - End of Year | 778,569 | 268,204 |
Reconciliation of cash and restricted cash reported within the consolidated balance sheets | ||
Cash | 472,886 | 268,204 |
Restricted Cash | 305,683 | 0 |
Total Cash and restricted cash reported in the consolidated statements of cash flows | 778,569 | 268,204 |
Supplemental Disclosure of Cash Flow Information: | ||
Cash Paid for Interest | 538,402 | 499,111 |
Cash Paid for Income Taxes | 20,232 | 110,590 |
Supplemental Noncash Investing and Financing Activities: | ||
Property and Equipment Purchases in Accounts Payable | 29,297 | $ 40,970 |
Equipment Acquired under Capital Lease | $ 1,516,906 |
CONSOLIDATED STATEMENTS OF SHAR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($) | Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total |
Balance at Dec. 31, 2015 | $ 250,000 | $ 27,463 | $ 15,766,013 | $ (62,936) | $ 6,291,316 | $ 22,271,856 |
Increase (Decrease) in Stockholders' Equity | ||||||
Net (loss) Income | 43,774 | 43,774 | ||||
Foreign currency translation adjustment | 18,491 | 18,491 | ||||
Compensation on stock-based awards | 994 | 994 | ||||
Issuance of common stock | 15 | 4,807 | 4,822 | |||
Excess tax benefit from stock-based awards | (25,149) | (25,149) | ||||
Balance at Dec. 31, 2016 | 250,000 | 27,478 | 15,746,665 | (44,445) | 6,335,090 | 22,314,788 |
Increase (Decrease) in Stockholders' Equity | ||||||
Net (loss) Income | (2,445,775) | (2,445,775) | ||||
Foreign currency translation adjustment | (56,340) | (56,340) | ||||
Compensation on stock-based awards | 43,200 | 43,200 | ||||
Share repurchases | (85) | (30,255) | (30,340) | |||
Balance at Dec. 31, 2017 | $ 250,000 | $ 27,393 | $ 15,759,610 | $ (100,785) | $ 3,889,315 | $ 19,825,533 |
SUMMARY OF SIGNIFICANT ACCOUNTI
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Dec. 31, 2017 | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Our manufacturing services include complete medical devices, printed circuit board assemblies, wire and cable assemblies, and complex higher level electromechanical assemblies for a wide range of medical, industrial and defense and aerospace industries. We provide a full “turn-key” contract manufacturing service to our customers. All products are built to the customer’s design specifications. We also provide engineering services and repair services. Our manufacturing facilities are located in Bemidji, Blue Earth, Merrifield, Milaca and Mankato, Minnesota as well as, Monterrey, Mexico and Suzhou, China. Products are sold to customers both domestically and internationally. Principles of Consolidation The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited and its subsidiary, Nortech Systems Suzhou Company, Limited. All significant intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain reclassifications have been made to the prior year Consolidated Statement of Operations for the year ended December 31, 2016 to conform to the current year presentation. In the current year we revised our prior year presentation of (Gain) Loss on Sale of Property and Equipment. There was no change in Net Income (Loss) for the year ended December 31, 2016. Additionally, certain reclassifications have been made to the prior year Consolidated Statement of Cash Flows for the year ended December 31, 2016 to conform to the current year presentation. In the current year we revised our prior year presentation of non-cash changes in the contingent consideration, accounts receivable allowance, and inventory reserves. There was no change in total net cash provided by operating activities for the year ended December 31, 2016. These changes have no impact on the Consolidated Balance Sheets. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, allowance for doubtful accounts, accrued warranties, realizability of deferred tax assets, goodwill impairment and long-lived asset impairment testing. Actual results could differ from those estimates. Restricted Cash Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The December 31, 2017 balance included cash collateral required to be held against our corporate employee purchasing card program and 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. As of December 31, 2017, we had no outstanding letters of credit. We held no restricted cash as of December 31, 2016. Accounts Receivable and Allowance for Doubtful Accounts We grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts was $209,000 and $883,000 at December 31, 2017 and 2016, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value). Costs include material, labor, and overhead required in the production of our products. Inventory reserves are maintained for inventories that may have a lower value than stated or quantities in excess of future production needs. Inventories are as follows: 2017 2016 Raw materials $ $ Work in process Finished goods Reserves ) ) Total $ $ Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows: Buildings 39 Years Leasehold improvements 3-15 Years Manufacturing equipment 3-7 Years Office and other equipment 3-7 Years Property and equipment at December 31, 2017 and 2016: 2017 2016 Land $ $ Building and Leasehold Improvements Manufacturing Equipment Office and Other Equipment Accumulated Depreciation ) ) Total Property and Equipment, net $ $ Other Intangible Assets Finite life intangible assets at December 31, 2017 and 2016 are as follows: December 31, 2017 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Customer Relationships 9 Intellectual Property 3 Trade Names 20 Other 7 — Totals $ $ $ December 31, 2016 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Bond Issue Costs 15 $ $ $ Customer Relationships 9 Trade Names 20 Totals $ $ $ Amortization of finite life intangible assets was $236,962 and $190,654 for the years ended December 31, 2017 and 2016, respectively. Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows: Year Amount 2018 $ 2019 2020 2021 2022 Thereafter $ Goodwill and Other Intangible Assets In accordance with ASC 350, Goodwill and Other Intangible Assets , goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1 st . In testing goodwill for impairment we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than its carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary. Based upon our annual goodwill impairment test we concluded that goodwill was impaired due to a significant reduction of results from operations during the fourth quarter of 2017. We adopted Accounting Standards Update No, 2017-04, Simplifying the Test for Goodwill Impairment , and performed a single step in performing our impairment analysis, which is to determine the estimated fair value of our reporting unit and compare it to the carrying value of the reporting unit, including goodwill. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. Our annual impairment test as of October 1, 2017, resulted in $0.9 million of impairment charges related to our goodwill. The impairment charge was based on a combined approach using both the income approach which is based on discounted cash flows and the market approach which is based on the guideline public company method. Discounted cash flow models include assumptions related to our product revenue, gross margins, operating margins and other assumptions. There was no impairment of goodwill recorded in 2016. We recognize the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. We assess the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. On July 1, 2015, we completed the acquisition of substantially all of the assets of Devicix, LLC upon the terms and conditions contained in an Asset Purchase Agreement entered into on June 17, 2015. The Devicix acquisition resulted in $3.2 million of goodwill, which is deductible for tax purposes. We recorded an impairment charge of $908,000 on the goodwill related to the Devicix, LLC purchase as of December 31, 2017. Long-Lived Asset Impairment We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, 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 or asset group. 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. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose. We determined there was a triggering event during the fourth quarter of 2017 and determined the undiscounted cash flows exceed the carrying amounts of long-lived assets. Preferred Stock Preferred stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of 12% when and if declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. No preferred stock dividends were declared or paid during the years ended December 31, 2017 and 2016. Revenue Recognition We recognize manufacturing revenue when we ship goods or the goods are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled. We also provide engineering services separate from the manufacturing of a product. Revenue for engineering services is generally recognized on a time and materials basis or upon completion of the engineering process. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer. 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 consolidated statement of income. 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. Product Warranties We provide limited warranty for the replacement or repair of defective product within a specified time period after the sale at no cost to our customers. We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including, without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred under our limited warranty and provide a reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claim costs are not material given the nature of our products and services. Advertising Advertising costs are charged to operations as incurred. The total amount charged to expense was $68,000 and $131,000 for the years ended December 31, 2017 and 2016, respectively. Income Taxes We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The company recognizes interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. Incentive Compensation We use a Black-Scholes option-pricing model to determine the grant date fair value of our incentive awards and recognize the expense on a straight-line basis over the vesting period less awards expected to be forfeited using estimated forfeiture rates. See Note 6 for additional information. Net Income (Loss) Per Common Share 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, unless their effect is antidilutive. A reconciliation of basic and diluted share amounts for the years ended December 31, 2017 and 2016 is as follows: 2017 2016 Basic weighted average common shares outstanding Weighted average common stock equivalents from assumed exercise of stock options — Diluted weighted average common shares outstanding Due to the loss in 2017, basic and diluted shares are the same. Any outstanding shares would result in anti-dilution. Outstanding stock options totaling 23,250 for the year ended December 31, 2016, were excluded from the net income per share calculation because the shares would be anti-dilutive. Fair Value of Financial Instruments The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt and line of credit approximates its fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability, reflecting the reporting entity’s own assumptions about the assumptions that market participants would use in pricing Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. We endeavor to use the best available information in measuring fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Acquisition-Related Contingent Consideration The Company acquired Devicix on July 1, 2015. The aggregate consideration paid to Devicix shareholders includes up to $2,500,000 of contingent consideration to be paid based on the achievement of certain performance-based milestones. The fair value of the contingent consideration was measured using an expected present value approach to estimate an expected value. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of contingent consideration is measured using projected payment dates, discount rates and probabilities of payment. Projected contingent payment are discounted back to the current period using a discounted cash flow model. Changes in projected probabilities of payment, discount rates, or projected payment dates may result in higher or lower fair value measurements. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs: December 31, 2017 December 31, 2016 Discount Rate % % Probability of payment % % Projected fiscal years of payment(s) 2018 - 2019 2017 - 2019 The following table summarizes the contingent consideration balance and activity for the years ended December 31, 2017 and 2016: Beginning fair value of contingent liability, December 31, 2015 $ Period change in valuation ) Payments ) Contingent liability balance, December 31, 2016 Period change in valuation ) Payments ) Contingent liability balance, December 31, 2017 $ Balance Sheet Classification 2017 2016 Other Accrued Liabilities $ $ Other Long-Term Liabilities Contingent liability balance $ $ Goodwill The changes in the carrying amount of goodwill for the years presented are as follows: Carrying amount at December 31, 2015 $ Changes to the carrying amount — Carrying amount at December 31, 2016 Impairment of goodwill ) Carrying amount at December 31,2017 $ In determining the nonrecurring fair value measurements of impairment of goodwill we utilized a blend of the market value and discounted cash flow approach. Based on the blend of market value and discounted cash flow approach, we determined fair values for the identified assets and recorded an impairment charge of goodwill during the year ended December 31, 2017, set forth in the table below: Fair value as Quoted prices Significant Significant Impairment Goodwill $ — — $ $ Enterprise-Wide Disclosures Our results of operations for the years ended December 31, 2017 and 2016 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources. Export sales from our domestic operations represent approximately 4.5% and 8.0% of consolidated net sales for the years ended December 31, 2017 and 2016, respectively. Net sales by our major EMS industry markets for the years ended December 31, 2017 and 2016 are as follows: 2017 2016 Aerospace and Defense $ $ Medical Industrial Total Net Sales $ $ Noncurrent assets, excluding deferred taxes, by country are as follows: United States Mexico China Total December 31, 2017 Property and equipment, net $ $ $ $ Other assets — December 31, 2016 Property and equipment, net $ $ $ $ Other assets — Foreign Currency Transactions The functional currency for our Mexico subsidiary is the US dollar. Foreign exchange transaction gains and losses attributable to exchange rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income (expense). The functional currency for our China subsidiary is the Renminbi (RMB). Assets and liabilities of the China operation are translated from RMB into U.S. dollars at period-end rates, while income and expense are translated at the weighted-average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within shareholders’ equity. The total foreign currency translation adjustment decreased shareholders’ equity by $56,340, from an accumulated foreign currency translation loss of $44,445 as of December 31, 2016 to an accumulated foreign currency translation loss of $100,785 as of December 31, 2017. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated statements of income. Net foreign currency transaction losses included in the determination of net earnings was $192,187 and $82,000 for the years ended December 31, 2017 and 2016, respectively. Recent Accounting Pronouncements In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is to be applied on a prospective basis effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. We adopted ASU 2017-04 in 2017. In November 2016, the FASB issued ASU 2016-18, Restricted Cash in the Statement of Cash Flows (Topic 230), which prescribes that restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, although early adoption is permitted, including adoption in an interim period. We adopted this guidance in 2017. See Note 1, “Summary of Significant Accounting Policies,” of Condensed Notes to the Consolidated Financial Statements for further description of our restricted cash. During February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of, and obtain the benefits from, the goods or services. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. We will adopt the new guidance beginning January 1, 2018. We have engaged the services of a third-party service provider and have performed a review of the requirements of the new guidance and have initially identified which of our revenue streams will be within the scope of ASU 2014-09. We are continuing to work through an adoption plan which includes a review of customer contracts, applying the five-step model of the new standard to each revenue stream and comparing the results to our current accounting; an evaluation of the method of adoption; and assessing changes that might be necessary to our processes, internal controls and changes in financial reporting. Based on our assessment to date, we believe certain revenue will be recognized over time rather than the current method of at a point in time. In addition, our customer supplied material arrangements are being evaluated for the applicability of the provision of non-cash consideration whereby the fair value of the materials would be included in the sales price and related cost of sales. The Company is finalizing its review and evaluation of the impact of the accounting and disclosure changes on its business processes and controls for adoption in 2018. |
CONCENTRATION OF CREDIT RISK AN
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS | 12 Months Ended |
Dec. 31, 2017 | |
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS | |
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS | 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 two high-credit quality financial institutions. These accounts may at times exceed federally insured limits. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable. Our largest customer has two divisions that together accounted for 10% or more of our net sales during the year ended December 31, 2017 and 2016. One division accounted for approximately 23.5% and 20.0% of net sales for the years ended December 31, 2017 and 2016, respectively. The second division accounted for approximately 1.4% and 3.8% of net sales for the years ended December 31, 2017 and 2016, respectively. Together they accounted for approximately for 24.9% and 23.8% of net sales for the years ended December 31, 2017 and 2016, respectively. Accounts receivable from the customer at December 31, 2017 and 2016 represented 16.4% and 13.6% of our total accounts receivable, respectively. |
FINANCING ARRANGEMENTS
FINANCING ARRANGEMENTS | 12 Months Ended |
Dec. 31, 2017 | |
FINANCING ARRANGEMENTS | |
FINANCING ARRANGEMENTS | NOTE 3. 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 million that expires on June 15, 2022. The credit arrangement also has a $5 million real estate term note outstanding with a maturity date of June 15, 2022. The Bank of America credit agreement replaces our previous credit agreement with Wells Fargo Bank which terminated on June 20, 2017 and resulted in a loss on the extinguishment of debt of $174,834 primarily related to legal and terminations fees. Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at the combined weighted-average interest rate of 3.74% as of December 31, 2017. We had borrowings on our line of credit of $8,502,853 and $7,315,262 outstanding as of December 31, 2017 and 2016, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit and real estate term notes with Bank of America contain 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 availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets. The Bank of America credit agreement provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At December 31, 2017 and 2016, we had unused availability under our line of credit of $4,231,000 and $5,710,602, respectively, supported by our borrowing base. The line is secured by substantially all of our assets. Our credit agreement with Wells Fargo Bank, which terminated on June 20, 2017, as amended, provided for a line of credit arrangement of $15.0 million through May 31, 2018, of which $7,315,262 was outstanding at December 31, 2016. The credit arrangement also had a $3.5 million of real estate term notes with a maturity in 2027, an equipment loan for $2.7 million and a term loan facility of up to $1.0 million for capital expenditures, both with maturity dates of May 31, 2018. As of December 31, 2016, there was $684,000 outstanding against the $1.0 million capital term note. Under the credit agreement, both the line of credit and real estate term notes were subject to variations in the LIBOR rate, of which interest rates were 3.25%-3.75% at December 31, 2016. The line of credit required a lock box arrangement; however there were no subjective acceleration clauses that would accelerate the maturity of our outstanding borrowings. As amended, the Wells Fargo credit agreement contained certain covenants which, among other things, required us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, limit the amount of annual capital expenditures and fixed charge coverage ratio requirement. The availability under the Wells Fargo Bank line was subject to borrowing base requirements. At December 31, 2016, we have net unused availability under our line of credit of approximately $5.7 million. The line was secured by substantially all of our assets. As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1.0 million and $1.3 million. The $1.0 million promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $22,579 and is subject to offsets if certain revenue levels are not met. The $1.3 million promissory note has a four-year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29,353 and is not subject to offset. Long-term debt balances at December 31, 2017 and 2016 consisted of the following: December 31, December 31, 2017 2016 Term note payable - Bank of America Real estate term note bearing interest at one-month LIBOR + 2.25% (4.5% as of December 31, 2017) maturing June 15, 2022 with monthly payments of approximately $41,000 plus interest secured by substantially all assets. $ $ — Term notes payable - Wells Fargo Bank, N.A. Real estate term notes bearing interest at three month LIBOR + 2.75% paid in full in 2017 via refinancing with Bank of America — Equipment notes bearing interest at three month LIBOR + 2.75% paid in full in 2017 via refinancing with Bank of America — Industrial revenue bond payable to the City of Blue Earth, Minnesota which bears a variable interest rate had a maturity date on June 1, 2021, with principal of $80,000 payable annually on June 1. Bond redeemed on August 15, 2017. — Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019. Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019. Discount on Devicix Notes Payable ) ) Debt issuance Costs ) ) Total long-term debt Current maturities of long-term debt ) ) Long-term debt - net of current maturities $ $ Future maturity requirements for long-term debt outstanding as of December 31, 2017, are as follows: Years Ending December 31, Amount 2018 $ 2019 2020 2021 2022 Future $ During the third quarter of fiscal year 2017, the Company entered into a five-year lease of equipment used in the normal course of business with a principal borrowing amount of $1,095,768. The lease qualifies as a capital lease and is accounted for accordingly, based on an effective interest rate of 4.97%. As of December 31, 2017, the property held under the capital lease was $1,102,607 and as of December 31, 2016, the Company held no capital leases. The Company entered into a second lease in September 2017, with a four year, six-month term used in the normal course of business with a principal borrowing amount of $502,023. The lease qualifies as a capital lease and is accounted for accordingly, based on an effective interest rate of 6.22%. As of December 31, 2017, the property held under the capital lease was $421,138 and as of December 31, 2016, the Company held no capital leases. As of December 31, 2017, the Company had no depreciation expense related to the leased assets as it was not in operational use and related implementation costs were not complete. At December 31, 2017, the current maturities of capital leases are $295,372. For the year ended December 31, 2017 the Company had $9,370 interest expense related to the leased assets. Approximate future minimum lease payments under non-cancelable capital leases subsequent to December 31, 2017 are as follows: Years Ending December 31, Amount 2018 $ 2019 2020 2021 2022 Total noncancelable future lease commitments $ Less: interest ) Present value of obligations under capital leases $ Depreciation on capital leases is recorded as depreciation expense in our results of operations. The above table includes the future minimum lease payments related to a portion of the second lease listed above in the amount of $80,885, that has not been received as of December 31, 2017, that is expected to be received in 2018. |
INCOME TAXES
INCOME TAXES | 12 Months Ended |
Dec. 31, 2017 | |
INCOME TAXES | |
INCOME TAXES | NOTE 4. INCOME TAXES The income tax expense for the years ended December 31, 2017 and 2016 consists of the following: 2017 2016 Current taxes - Federal $ ) $ Current taxes - State Current taxes - Foreign ) Deferred taxes - Federal ) Deferred taxes - State Deferred taxes - Foreign ) Income tax expense $ $ The statutory rate reconciliation for the years ended December 31, 2017 and 2016 is as follows: 2017 2016 Statutory federal tax provision (benefit) $ ) $ State income tax benefit ) ) Effect of foreign operations ) Uncertain tax positions — Income tax credits ) ) Valuation allowance Permanent differences Loss of Section 199 due to carryback claim — Effects of tax reform — Other — Income tax expense $ $ Income (loss) from operations before income taxes was derived from the following sources: 2017 2016 Domestic $ ) $ Foreign ) Total $ ) $ Deferred tax assets (liabilities) at December 31, 2017 and 2016, consist of the following: 2017 2016 Deferred Tax Allowance for uncollectable accounts $ $ Inventories reserve Accrued vacation Amortization Stock-based compensation and equity appreciation rights Net operating loss carryforwards Tax credit carryforwards Other Valuation allowance ) ) Deferred tax assets Prepaid expenses ) ) Property and equipment ) ) Deferred tax liabilities ) ) Net deferred tax assets $ $ We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal and state net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our financial statements become deductible for income tax purposes, or when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. We have concluded that a valuation allowance is needed for all of our United States based deferred tax assets due to the cumulative net losses we have sustained in the past three years and our near term financial outlook. In analyzing the need for a valuation allowance, we considered our history of operating results for income tax purposes over the past three years in each of the tax jurisdictions where we operate, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook and timing regarding when we might return to profitability. After considering all available evidence both positive and negative, we concluded that the valuation allowance is needed for all of our U.S. based deferred tax assets, no valuation allowance was placed on the foreign assets. At December 31, 2017, we had federal general business tax credit carryforwards of $404,000 that will begin to expire in 2028 and a federal net operating loss (“NOL”) carry forward of $948,000 that will expire begin to expire in 2037, if unused. For U.S. state tax purposes we have Minnesota R&D credit carryforwards of $330,000 and various state net operating loss carryforwards of $357,000 for Iowa, $21,000 for Montana, $1,144,000 for Minnesota, $669,000 for Wisconsin. The state credits and NOLs expire at various years starting in 2024. The tax effects from an uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2017 and 2016: Balance as of December 31, 2015 $ Tax positions related to 2016: Additions based on tax positions related to the current year Additions based on tax positions related to the prior year Reductions based on tax positions related to a prior year ) Statute of limitations ) Balance as of December 31, 2016 $ Tax positions related to current year: Additions based on tax positions related to the current year Statute of limitations ) Balance as of December 31, 2017 $ The $52,000 of unrecognized tax benefits as of December 31, 2017 includes amounts which, if ultimately recognized, will reduce our annual effective tax rate. In prior years, it was included in other long-term liabilities on the accompanying consolidated balance sheets. In 2017, the amount has been netted against the applicable deferred tax asset as any adjustment would reduce the recorded asset. Our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December 31, 2017 and 2016 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns. We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2017, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax year 2011. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated an estimate of the impact of the Tax Act in its year-end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing and as a result has recorded approximately $280,000 as additional income tax expense in the fourth fiscal quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was approximately $223,000. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was approximately $57,000. The SEC recently issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company has determined that the $57,000 of deferred tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. As further guidance is issued by Treasury, additional work may be necessary to ensure earnings as required by the calculations are properly determined. Additionally, as a result of the Tax Act, the Company has not completed its evaluation of its indefinite reinvestment assertion with regard to foreign earnings under ASC 740-30-25-17 [formerly known as APB 23]. As a result, deferred tax liabilities may be increased or decreased during the period allowed under SAB 118. Lastly, the Company is required to recognize 8% of the transition tax into current tax, however the Company has not recorded this amount and believes this amount would be immaterial and offset by tax credits available. |
401(K) RETIREMENT PLAN
401(K) RETIREMENT PLAN | 12 Months Ended |
Dec. 31, 2017 | |
401(K) RETIREMENT PLAN | |
401(K) RETIREMENT PLAN | NOTE 5. 401(K) RETIREMENT PLAN We have a 401(k) profit sharing plan (the 401(k) Plan) for our employees. The 401(k) Plan is a defined contribution plan covering substantially all of our U.S. employees. Employees are eligible to participate in the Plan after completing three months of service and attaining the age of 18. Employees are allowed to contribute up to 60% of their wages to the 401(k) Plan. Historically we have matched 25% of the employees’ contributions up to 6% of covered compensation. We made contributions of approximately $287,051 and $270,028 during the years ended December 31, 2017 and 2016, respectively. |
INCENTIVE PLANS
INCENTIVE PLANS | 12 Months Ended |
Dec. 31, 2017 | |
INCENTIVE PLANS | |
INCENTIVE PLANS | NOTE 6. INCENTIVE PLANS Stock Options On May 3, 2005, the shareholders approved the 2005 Incentive Compensation Plan (the 2005 Plan) and eliminated the remaining 172,500 option shares available for grant under the prior 2003 Plan effective February 23, 2005. The total number of shares of common stock that may be granted under the 2005 Plan is 200,000. The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. The 2005 Plan provides that option shares granted come from our authorized but unissued common stock. The price of the option shares granted under the plan will not be less than 100% of the fair market value of the common shares on the date of grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. Under the 2005 Incentive Compensation Plan, there were no stock options granted during the years ended December 31, 2017 and 2016. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 150,000 options granted during the year ended December 31, 2017. We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the consolidated statements of operations over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, our expected stock price, volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data. A summary of option activity as of and for the year-ended December 31, 2017 is as follows: Shares Weighted- Weighted- Aggregate Outstanding — January 1, 2017 $ 4.75 Granted Exercised — — Cancelled — — Outstanding — December 31, 2017 $ 3.70 $ Exercisable on December 31, 2017 $ 4.75 $ There were no options exercises during the year ended December 31, 2017. The total intrinsic value of options exercised during the years ended December 31, 2016 was $964 and cash received from option exercises during the year ended December 31, 2016 was $4,822. Total compensation expense related to stock options for the years ended December 31, 2017 and 2016 was $43,200 and $994, respectively. As of December 31, 2017, there was $164,160 of unrecognized compensation which will vest over the next 2.37 years. Equity Appreciation Rights Plan In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the 2010 Plan). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015 and approved by the shareholders on May 6, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to each reporting period based on the expected appreciation of the Units as defined in the Plan. During the year ended December 31, 2016, we granted 31,666 Units with a base date of January 1, 2016 and a vesting date of January 1, 2019. During the year-ended December 31, 2017, we granted a total of 100,000 Units and a vesting date of December 31, 2019. Total compensation (income) expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately ($22,000) and $37,000 for the years ended December 31, 2017 and 2016, respectively. The (income) expense for the years ended December 31, 2017 and 2016 was the result of a change in the estimate of the appreciation of book value per share of common stock. A summary of the liability as of December 31 and changes during the years then ended, is as follows: 2017 2016 Beginning Balance $ $ Reductions ) ) Payments ) ) Ending Balance $ — $ As of December 31, 2016, approximately $23,000 of this balance was included in other accrued liabilities and the remaining $22,000 balance was included in other long-term liabilities. |
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES | 12 Months Ended |
Dec. 31, 2017 | |
COMMITMENTS AND CONTINGENCIES | |
COMMITMENTS AND CONTINGENCIES | NOTE 7. COMMITMENTS AND CONTINGENCIES Operating Leases We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on various dates through 2022. Rent expense for the years ended December 31, 2017 and 2016 amounted to approximately $1,271,000 and $1,153,000 respectively. Approximate future minimum lease payments under non-cancelable leases are as follows: Years Ending Amount 2018 $ 2019 2020 2021 2022 Total $ The above table does not reflect the subsequent lease agreement noted in Note 10. Litigation We are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with respect to these actions will not materially affect our consolidated financial statements or results of operations. Executive Life Insurance Plan During 2002, we set up an Executive Bonus Life Insurance Plan (the Plan) for our key employees (participants). Pursuant to the Plan, we will pay a bonus to officer participants of 15% and a bonus to all other participants of 10% of the participants’ base annual salary, as well as an additional bonus to cover federal and state taxes incurred by the participants. The participants are required to purchase life insurance and retain ownership of the life insurance policy once it is purchased. The Plan provides a five-year graded vesting schedule in which the participants vest at a rate of 20% each year. Should a participant terminate employment prior to the fifth year of vesting, that participant may be required to reimburse us for any unvested amounts, under certain circumstances. Expenses under the Plan were $207,000 and $327,000 for the years ended December 31, 2017 and 2016, respectively. On December 13, 2017, the Plan was terminated. Change of Control Agreements Since 2002, we entered into Change of Control Agreements (the Agreement(s)) with certain key executives (the Executive(s)). The Agreements provide an inducement for each Executive to remain as an employee in the event of any proposed or anticipated change of control in the organization, including facilitating an orderly transition, and to provide economic security for the Executive after a change in control has occurred. In the event of an involuntarily termination in connection with a change of control as defined in the agreements, each Executive would receive their base salary, annual bonus at time of termination, and continued participation in health, disability and life insurance plans for a period of three years for officers and two years for all other participants. Participants would also receive professional outplacement services up to $10,000, if applicable. Each Agreement remains in full force until the Executive terminates employment or we terminate the employment of the Executive. Stock Repurchase Plan As of December 31, 2017, we had a $250,000 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 8,581 shares in open market transactions totaling $30,340, during the year ended December 31, 2017. As of December 31, 2017, we had a $219,659 authorized balance remaining under this share repurchase program. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital. |
PLANT CLOSURE
PLANT CLOSURE | 12 Months Ended |
Dec. 31, 2017 | |
PLANT CLOSURE | |
PLANT CLOSURE | NOTE 8. PLANT CLOSURE On January 31, 2017, the Company closed its manufacturing operations in Augusta, Wisconsin. The Company has operated a facility in Augusta since 1992, serving mainly an industrial customer base and defense overflow production that aligned with their custom cable capabilities. The Company consolidated its Augusta operations with its other facilities, continuing to serve customers without interruption. This consolidation increased the Company’s overall asset utilization and cost leveraging. On March 31, 2017, the Company closed on the sale of the Augusta building and building improvements for $715,000. The Augusta building and building improvements had a net book value of $314,000, recognizing a gain on the sale, net of related expenses, of $354,000, and applied the net proceeds of $668,000 towards the outstanding real estate term note. |
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS | 12 Months Ended |
Dec. 31, 2017 | |
RELATED PARTY TRANSACTIONS | |
RELATED PARTY TRANSACTIONS | NOTE 9. RELATED PARTY TRANSACTIONS During 2016, the Company entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became the Chief Operating Officer of the Company on May 20, 2017. For the years ended December 31, 2017 and 2016, expenses were incurred in the amounts of $97,203, and $71,657, respectively. |
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS | 12 Months Ended |
Dec. 31, 2017 | |
SUBSEQUENT EVENTS | |
SUBSEQUENT EVENTS | NOTE 10. SUBSEQUENT EVENTS On February 21, 2018, we entered into a ten-year lease agreement for a 77,000 square foot manufacturing facility in Nuevo Leon, Mexico which will commence on or about September 15, 2018. The Lease Agreement provides for monthly rent payments of approximately $43,000. This facility will replace the Monterrey, Mexico facility lease which expires December 31, 2019. On February 22, 2018, the Company entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, an independent director of the Company. The term of the Consulting Agreement is three months. Under the Consulting Agreement, Mr. Murray will receive $250 per hour for performing consulting services with a maximum daily fee of $2,000. |
SUMMARY OF SIGNIFICANT ACCOUN17
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) | 12 Months Ended |
Dec. 31, 2017 | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Principles of Consolidation | Principles of Consolidation The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited and its subsidiary, Nortech Systems Suzhou Company, Limited. All significant intercompany accounts and transactions have been eliminated in consolidation. |
Reclassifications | Reclassifications Certain reclassifications have been made to the prior year Consolidated Statement of Operations for the year ended December 31, 2016 to conform to the current year presentation. In the current year we revised our prior year presentation of (Gain) Loss on Sale of Property and Equipment. There was no change in Net Income (Loss) for the year ended December 31, 2016. Additionally, certain reclassifications have been made to the prior year Consolidated Statement of Cash Flows for the year ended December 31, 2016 to conform to the current year presentation. In the current year we revised our prior year presentation of non-cash changes in the contingent consideration, accounts receivable allowance, and inventory reserves. There was no change in total net cash provided by operating activities for the year ended December 31, 2016. These changes have no impact on the Consolidated Balance Sheets. |
Use of Estimates | Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, allowance for doubtful accounts, accrued warranties, realizability of deferred tax assets, goodwill impairment and long-lived asset impairment testing. Actual results could differ from those estimates. |
Restricted cash | Restricted Cash Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The December 31, 2017 balance included cash collateral required to be held against our corporate employee purchasing card program and 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. As of December 31, 2017, we had no outstanding letters of credit. We held no restricted cash as of December 31, 2016. |
Accounts Receivable and Allowance for Doubtful Accounts | Accounts Receivable and Allowance for Doubtful Accounts We grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts was $209,000 and $883,000 at December 31, 2017 and 2016, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. |
Inventories | Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value). Costs include material, labor, and overhead required in the production of our products. Inventory reserves are maintained for inventories that may have a lower value than stated or quantities in excess of future production needs. Inventories are as follows: 2017 2016 Raw materials $ $ Work in process Finished goods Reserves ) ) Total $ $ |
Property and Equipment | Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows: Buildings 39 Years Leasehold improvements 3-15 Years Manufacturing equipment 3-7 Years Office and other equipment 3-7 Years Property and equipment at December 31, 2017 and 2016: 2017 2016 Land $ $ Building and Leasehold Improvements Manufacturing Equipment Office and Other Equipment Accumulated Depreciation ) ) Total Property and Equipment, net $ $ |
Other Intangible Assets | Other Intangible Assets Finite life intangible assets at December 31, 2017 and 2016 are as follows: December 31, 2017 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Customer Relationships 9 Intellectual Property 3 Trade Names 20 Other 7 — Totals $ $ $ December 31, 2016 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Bond Issue Costs 15 $ $ $ Customer Relationships 9 Trade Names 20 Totals $ $ $ Amortization of finite life intangible assets was $236,962 and $190,654 for the years ended December 31, 2017 and 2016, respectively. Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows: Year Amount 2018 $ 2019 2020 2021 2022 Thereafter $ |
Goodwill and Other Intangible Assets | Goodwill and Other Intangible Assets In accordance with ASC 350, Goodwill and Other Intangible Assets , goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1 st . In testing goodwill for impairment we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than its carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary. Based upon our annual goodwill impairment test we concluded that goodwill was impaired due to a significant reduction of results from operations during the fourth quarter of 2017. We adopted Accounting Standards Update No, 2017-04, Simplifying the Test for Goodwill Impairment , and performed a single step in performing our impairment analysis, which is to determine the estimated fair value of our reporting unit and compare it to the carrying value of the reporting unit, including goodwill. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. Our annual impairment test as of October 1, 2017, resulted in $0.9 million of impairment charges related to our goodwill. The impairment charge was based on a combined approach using both the income approach which is based on discounted cash flows and the market approach which is based on the guideline public company method. Discounted cash flow models include assumptions related to our product revenue, gross margins, operating margins and other assumptions. There was no impairment of goodwill recorded in 2016. We recognize the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. We assess the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. On July 1, 2015, we completed the acquisition of substantially all of the assets of Devicix, LLC upon the terms and conditions contained in an Asset Purchase Agreement entered into on June 17, 2015. The Devicix acquisition resulted in $3.2 million of goodwill, which is deductible for tax purposes. We recorded an impairment charge of $908,000 on the goodwill related to the Devicix, LLC purchase as of December 31, 2017. |
Long-Lived Asset Impairment | Long-Lived Asset Impairment We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, 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 or asset group. 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. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose. We determined there was a triggering event during the fourth quarter of 2017 and determined the undiscounted cash flows exceed the carrying amounts of long-lived assets. |
Preferred Stock | Preferred Stock Preferred stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of 12% when and if declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. No preferred stock dividends were declared or paid during the years ended December 31, 2017 and 2016. |
Revenue Recognition | Revenue Recognition We recognize manufacturing revenue when we ship goods or the goods are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled. We also provide engineering services separate from the manufacturing of a product. Revenue for engineering services is generally recognized on a time and materials basis or upon completion of the engineering process. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer. 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 consolidated statement of income. 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. |
Product Warranties | Product Warranties We provide limited warranty for the replacement or repair of defective product within a specified time period after the sale at no cost to our customers. We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including, without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred under our limited warranty and provide a reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claim costs are not material given the nature of our products and services. |
Advertising | Advertising Advertising costs are charged to operations as incurred. The total amount charged to expense was $68,000 and $131,000 for the years ended December 31, 2017 and 2016, respectively. |
Income Taxes | Income Taxes We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The company recognizes interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. |
Incentive Compensation | Incentive Compensation We use a Black-Scholes option-pricing model to determine the grant date fair value of our incentive awards and recognize the expense on a straight-line basis over the vesting period less awards expected to be forfeited using estimated forfeiture rates. See Note 6 for additional information. |
Net Income (Loss) Per Common Share | Net Income (Loss) Per Common Share 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, unless their effect is antidilutive. A reconciliation of basic and diluted share amounts for the years ended December 31, 2017 and 2016 is as follows: 2017 2016 Basic weighted average common shares outstanding Weighted average common stock equivalents from assumed exercise of stock options — Diluted weighted average common shares outstanding Due to the loss in 2017, basic and diluted shares are the same. Any outstanding shares would result in anti-dilution. Outstanding stock options totaling 23,250 for the year ended December 31, 2016, were excluded from the net income per share calculation because the shares would be anti-dilutive. |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt and line of credit approximates its fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability, reflecting the reporting entity’s own assumptions about the assumptions that market participants would use in pricing Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. We endeavor to use the best available information in measuring fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. |
Acquisition-Related Contingent Consideration | Acquisition-Related Contingent Consideration The Company acquired Devicix on July 1, 2015. The aggregate consideration paid to Devicix shareholders includes up to $2,500,000 of contingent consideration to be paid based on the achievement of certain performance-based milestones. The fair value of the contingent consideration was measured using an expected present value approach to estimate an expected value. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of contingent consideration is measured using projected payment dates, discount rates and probabilities of payment. Projected contingent payment are discounted back to the current period using a discounted cash flow model. Changes in projected probabilities of payment, discount rates, or projected payment dates may result in higher or lower fair value measurements. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs: December 31, 2017 December 31, 2016 Discount Rate % % Probability of payment % % Projected fiscal years of payment(s) 2018 - 2019 2017 - 2019 The following table summarizes the contingent consideration balance and activity for the years ended December 31, 2017 and 2016: Beginning fair value of contingent liability, December 31, 2015 $ Period change in valuation ) Payments ) Contingent liability balance, December 31, 2016 Period change in valuation ) Payments ) Contingent liability balance, December 31, 2017 $ Balance Sheet Classification 2017 2016 Other Accrued Liabilities $ $ Other Long-Term Liabilities Contingent liability balance $ $ |
Goodwill | Goodwill The changes in the carrying amount of goodwill for the years presented are as follows: Carrying amount at December 31, 2015 $ Changes to the carrying amount — Carrying amount at December 31, 2016 Impairment of goodwill ) Carrying amount at December 31,2017 $ In determining the nonrecurring fair value measurements of impairment of goodwill we utilized a blend of the market value and discounted cash flow approach. Based on the blend of market value and discounted cash flow approach, we determined fair values for the identified assets and recorded an impairment charge of goodwill during the year ended December 31, 2017, set forth in the table below: Fair value as Quoted prices Significant Significant Impairment Goodwill $ — — $ $ |
Enterprise-Wide Disclosures | Enterprise-Wide Disclosures Our results of operations for the years ended December 31, 2017 and 2016 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources. Export sales from our domestic operations represent approximately 4.5% and 8.0% of consolidated net sales for the years ended December 31, 2017 and 2016, respectively. Net sales by our major EMS industry markets for the years ended December 31, 2017 and 2016 are as follows: 2017 2016 Aerospace and Defense $ $ Medical Industrial Total Net Sales $ $ Noncurrent assets, excluding deferred taxes, by country are as follows: United States Mexico China Total December 31, 2017 Property and equipment, net $ $ $ $ Other assets — December 31, 2016 Property and equipment, net $ $ $ $ Other assets — |
Foreign Currency Transactions | Foreign Currency Transactions The functional currency for our Mexico subsidiary is the US dollar. Foreign exchange transaction gains and losses attributable to exchange rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income (expense). The functional currency for our China subsidiary is the Renminbi (RMB). Assets and liabilities of the China operation are translated from RMB into U.S. dollars at period-end rates, while income and expense are translated at the weighted-average exchange rates for the period. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within shareholders’ equity. The total foreign currency translation adjustment decreased shareholders’ equity by $56,340, from an accumulated foreign currency translation loss of $44,445 as of December 31, 2016 to an accumulated foreign currency translation loss of $100,785 as of December 31, 2017. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated statements of income. Net foreign currency transaction losses included in the determination of net earnings was $192,187 and $82,000 for the years ended December 31, 2017 and 2016, respectively. |
Recent Accounting Pronouncements | Recent Accounting Pronouncements In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is to be applied on a prospective basis effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. We adopted ASU 2017-04 in 2017. In November 2016, the FASB issued ASU 2016-18, Restricted Cash in the Statement of Cash Flows (Topic 230), which prescribes that restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, although early adoption is permitted, including adoption in an interim period. We adopted this guidance in 2017. See Note 1, “Summary of Significant Accounting Policies,” of Condensed Notes to the Consolidated Financial Statements for further description of our restricted cash. During February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of, and obtain the benefits from, the goods or services. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. We will adopt the new guidance beginning January 1, 2018. We have engaged the services of a third-party service provider and have performed a review of the requirements of the new guidance and have initially identified which of our revenue streams will be within the scope of ASU 2014-09. We are continuing to work through an adoption plan which includes a review of customer contracts, applying the five-step model of the new standard to each revenue stream and comparing the results to our current accounting; an evaluation of the method of adoption; and assessing changes that might be necessary to our processes, internal controls and changes in financial reporting. Based on our assessment to date, we believe certain revenue will be recognized over time rather than the current method of at a point in time. In addition, our customer supplied material arrangements are being evaluated for the applicability of the provision of non-cash consideration whereby the fair value of the materials would be included in the sales price and related cost of sales. The Company is finalizing its review and evaluation of the impact of the accounting and disclosure changes on its business processes and controls for adoption in 2018. |
SUMMARY OF SIGNIFICANT ACCOUN18
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Schedule of inventories | 2017 2016 Raw materials $ $ Work in process Finished goods Reserves ) ) Total $ $ |
Schedule of estimated useful lives of property and equipment | Buildings 39 Years Leasehold improvements 3-15 Years Manufacturing equipment 3-7 Years Office and other equipment 3-7 Years |
Schedule of property and equipment | 2017 2016 Land $ $ Building and Leasehold Improvements Manufacturing Equipment Office and Other Equipment Accumulated Depreciation ) ) Total Property and Equipment, net $ $ |
Schedule of other intangible assets | December 31, 2017 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Customer Relationships 9 Intellectual Property 3 Trade Names 20 Other 7 — Totals $ $ $ December 31, 2016 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Bond Issue Costs 15 $ $ $ Customer Relationships 9 Trade Names 20 Totals $ $ $ |
Schedule of estimated future amortization expense | Year Amount 2018 $ 2019 2020 2021 2022 Thereafter $ |
Schedule of reconciliation of basic and diluted share amounts | 2017 2016 Basic weighted average common shares outstanding Weighted average common stock equivalents from assumed exercise of stock options — Diluted weighted average common shares outstanding |
Summary of recurring Level 3 fair value measurements of contingent consideration including significant unobservable inputs | December 31, 2017 December 31, 2016 Discount Rate % % Probability of payment % % Projected fiscal years of payment(s) 2018 - 2019 2017 - 2019 |
Summary of balance and activity of contingent consideration | Beginning fair value of contingent liability, December 31, 2015 $ Period change in valuation ) Payments ) Contingent liability balance, December 31, 2016 Period change in valuation ) Payments ) Contingent liability balance, December 31, 2017 $ Balance Sheet Classification 2017 2016 Other Accrued Liabilities $ $ Other Long-Term Liabilities Contingent liability balance $ $ |
Schedule of goodwill | Carrying amount at December 31, 2015 $ Changes to the carrying amount — Carrying amount at December 31, 2016 Impairment of goodwill ) Carrying amount at December 31,2017 $ Fair value as Quoted prices Significant Significant Impairment Goodwill $ — — $ $ |
Schedule of net sales by markets | 2017 2016 Aerospace and Defense $ $ Medical Industrial Total Net Sales $ $ |
Schedule of noncurrent assets, excluding deferred taxes, by country | United States Mexico China Total December 31, 2017 Property and equipment, net $ $ $ $ Other assets — December 31, 2016 Property and equipment, net $ $ $ $ Other assets — |
FINANCING ARRANGEMENTS (Tables)
FINANCING ARRANGEMENTS (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
FINANCING ARRANGEMENTS | |
Summary of long-term debt balances | December 31, December 31, 2017 2016 Term note payable - Bank of America Real estate term note bearing interest at one-month LIBOR + 2.25% (4.5% as of December 31, 2017) maturing June 15, 2022 with monthly payments of approximately $41,000 plus interest secured by substantially all assets. $ $ — Term notes payable - Wells Fargo Bank, N.A. Real estate term notes bearing interest at three month LIBOR + 2.75% paid in full in 2017 via refinancing with Bank of America — Equipment notes bearing interest at three month LIBOR + 2.75% paid in full in 2017 via refinancing with Bank of America — Industrial revenue bond payable to the City of Blue Earth, Minnesota which bears a variable interest rate had a maturity date on June 1, 2021, with principal of $80,000 payable annually on June 1. Bond redeemed on August 15, 2017. — Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019. Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019. Discount on Devicix Notes Payable ) ) Debt issuance Costs ) ) Total long-term debt Current maturities of long-term debt ) ) Long-term debt - net of current maturities $ $ |
Schedule of future maturity requirements for long-term debt | Years Ending December 31, Amount 2018 $ 2019 2020 2021 2022 Future $ |
Schedule of future minimum non-cancelable capital leases | Years Ending December 31, Amount 2018 $ 2019 2020 2021 2022 Total noncancelable future lease commitments $ Less: interest ) Present value of obligations under capital leases $ |
INCOME TAXES (Tables)
INCOME TAXES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
INCOME TAXES | |
Schedule of income tax expense (benefit) | 2017 2016 Current taxes - Federal $ ) $ Current taxes - State Current taxes - Foreign ) Deferred taxes - Federal ) Deferred taxes - State Deferred taxes - Foreign ) Income tax expense $ $ |
Schedule of statutory rate reconciliation | 2017 2016 Statutory federal tax provision (benefit) $ ) $ State income tax benefit ) ) Effect of foreign operations ) Uncertain tax positions — Income tax credits ) ) Valuation allowance Permanent differences Loss of Section 199 due to carryback claim — Effects of tax reform — Other — Income tax expense $ $ |
Schedule of income (loss) from operations before income taxes | 2017 2016 Domestic $ ) $ Foreign ) Total $ ) $ |
Schedule of deferred tax assets (liabilities) | 2017 2016 Deferred Tax Allowance for uncollectable accounts $ $ Inventories reserve Accrued vacation Amortization Stock-based compensation and equity appreciation rights Net operating loss carryforwards Tax credit carryforwards Other Valuation allowance ) ) Deferred tax assets Prepaid expenses ) ) Property and equipment ) ) Deferred tax liabilities ) ) Net deferred tax assets $ $ |
Schedule of changes in total gross unrecognized tax benefit liabilities, excluding accrued interest | Balance as of December 31, 2015 $ Tax positions related to 2016: Additions based on tax positions related to the current year Additions based on tax positions related to the prior year Reductions based on tax positions related to a prior year ) Statute of limitations ) Balance as of December 31, 2016 $ Tax positions related to current year: Additions based on tax positions related to the current year Statute of limitations ) Balance as of December 31, 2017 $ |
INCENTIVE PLANS (Tables)
INCENTIVE PLANS (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
INCENTIVE PLANS | |
Summary of option activity | Shares Weighted- Weighted- Aggregate Outstanding — January 1, 2017 $ 4.75 Granted Exercised — — Cancelled — — Outstanding — December 31, 2017 $ 3.70 $ Exercisable on December 31, 2017 $ 4.75 $ |
Summary of the liability and changes during the years | 2017 2016 Beginning Balance $ $ Reductions ) ) Payments ) ) Ending Balance $ — $ |
COMMITMENTS AND CONTINGENCIES (
COMMITMENTS AND CONTINGENCIES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
COMMITMENTS AND CONTINGENCIES | |
Schedule of future minimum lease payments under non-cancelable leases | Years Ending Amount 2018 $ 2019 2020 2021 2022 Total $ |
SUMMARY OF SIGNIFICANT ACCOUN23
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Reclassifications, A/R, Inventories, Property and Equipment (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Restricted Cash | ||
Outstanding letters of credit | $ 0 | |
Restricted Cash | 305,683 | $ 0 |
Accounts Receivable and Allowance for Doubtful Accounts | ||
Accounts Receivable Allowances | 209,000 | 883,000 |
Inventories | ||
Raw materials | 13,870,006 | 14,533,690 |
Work in process | 3,112,407 | 4,104,968 |
Finished goods | 2,388,496 | 2,688,596 |
Reserves | (844,187) | (673,413) |
Total | 18,526,722 | 20,653,841 |
Property and Equipment | ||
Accumulated Depreciation | (26,312,628) | (24,524,750) |
Total Property and Equipment, net | 10,175,533 | 10,330,834 |
Land | ||
Property and Equipment | ||
Property and equipment | 359,500 | 375,000 |
Building and Leasehold Improvements | ||
Property and Equipment | ||
Property and equipment | $ 8,826,802 | 9,393,092 |
Buildings | ||
Property and Equipment | ||
Estimated useful lives | 39 years | |
Leasehold improvements | Minimum | ||
Property and Equipment | ||
Estimated useful lives | 3 years | |
Leasehold improvements | Maximum | ||
Property and Equipment | ||
Estimated useful lives | 15 years | |
Manufacturing equipment | ||
Property and Equipment | ||
Property and equipment | $ 21,267,133 | 19,632,033 |
Manufacturing equipment | Minimum | ||
Property and Equipment | ||
Estimated useful lives | 3 years | |
Manufacturing equipment | Maximum | ||
Property and Equipment | ||
Estimated useful lives | 7 years | |
Office and other equipment | ||
Property and Equipment | ||
Property and equipment | $ 6,034,726 | $ 5,455,459 |
Office and other equipment | Minimum | ||
Property and Equipment | ||
Estimated useful lives | 3 years | |
Office and other equipment | Maximum | ||
Property and Equipment | ||
Estimated useful lives | 7 years |
SUMMARY OF SIGNIFICANT ACCOUN24
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Goodwill, Other Intangible Assets (Details) - USD ($) | 12 Months Ended | |||
Dec. 31, 2017 | Dec. 31, 2016 | Dec. 31, 2015 | Jul. 01, 2015 | |
Finite-Lived Intangible Assets | ||||
Gross Carrying Amount | $ 2,229,819 | $ 2,195,373 | ||
Accumulated Amortization Amount | 491,198 | 333,609 | ||
Net Book Value Amount | 1,738,621 | 1,861,764 | ||
Amortization expense | 236,962 | 190,654 | ||
Estimated future amortization expense | ||||
2,018 | 218,712 | |||
2,019 | 218,712 | |||
2,020 | 190,918 | |||
2,021 | 185,376 | |||
2,022 | 185,376 | |||
Thereafter | 725,708 | |||
Total | 1,724,802 | |||
Goodwill and Other Intangible Assets | ||||
Impairment of Goodwill | 908,000 | 0 | ||
Goodwill | 2,375,454 | $ 3,283,454 | $ 3,283,454 | |
Devicix, LLC | ||||
Goodwill and Other Intangible Assets | ||||
Impairment of Goodwill | $ 908,000 | |||
Goodwill | $ 3,200,000 | |||
Bond Issue Costs | ||||
Finite-Lived Intangible Assets | ||||
Remaining lives | 15 years | |||
Gross Carrying Amount | $ 79,373 | |||
Accumulated Amortization Amount | 55,561 | |||
Net Book Value Amount | $ 23,812 | |||
Customer Relationships | ||||
Finite-Lived Intangible Assets | ||||
Remaining lives | 9 years | 9 years | ||
Gross Carrying Amount | $ 1,302,000 | $ 1,302,000 | ||
Accumulated Amortization Amount | 361,662 | 216,998 | ||
Net Book Value Amount | $ 940,338 | $ 1,085,002 | ||
Intellectual Property | ||||
Finite-Lived Intangible Assets | ||||
Remaining lives | 3 years | |||
Gross Carrying Amount | $ 100,000 | |||
Accumulated Amortization Amount | 27,786 | |||
Net Book Value Amount | $ 72,214 | |||
Trade Names | ||||
Finite-Lived Intangible Assets | ||||
Remaining lives | 20 years | 20 years | ||
Gross Carrying Amount | $ 814,000 | $ 814,000 | ||
Accumulated Amortization Amount | 101,750 | 61,050 | ||
Net Book Value Amount | $ 712,250 | $ 752,950 | ||
Other | ||||
Finite-Lived Intangible Assets | ||||
Remaining lives | 7 years | |||
Gross Carrying Amount | $ 13,819 | |||
Net Book Value Amount | $ 13,819 |
SUMMARY OF SIGNIFICANT ACCOUN25
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Preferred Stock, Revenue Recognition, Product Warranties, Advertising, Net Income (Loss) Per Common Share (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Preferred Stock | ||
Non-cumulative dividend rate (as a percent) | 12.00% | |
Liquidation preference (in dollars per share) | $ 1 | |
Preferred stock dividends declared (in dollars per share) | $ 0 | $ 0 |
Revenue Recognition | ||
Percentage of sales (as a percent) | 10.00% | 10.00% |
Advertising | ||
Advertising expense charged | $ 68,000 | $ 131,000 |
Reconciliation of basic and diluted share amounts | ||
Basic weighted average common shares outstanding | 2,745,602 | 2,747,424 |
Weighted average common stock equivalents from assumed exercise of stock options (in shares) | 2,121 | |
Diluted weighted average common shares outstanding | 2,745,602 | 2,749,545 |
Outstanding options excluded from computation of income per share as effect would be antidilutive (in shares) | 23,250 |
SUMMARY OF SIGNIFICANT ACCOUN26
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Acquisition-Related Contingent Consideration (Details) - USD ($) | 12 Months Ended | ||||
Dec. 31, 2017 | Dec. 31, 2016 | Dec. 31, 2017 | Dec. 31, 2016 | Jul. 01, 2015 | |
Summary of balance and activity of contingent consideration | |||||
Period change in valuation | $ (486,044) | $ (295,000) | |||
Devicix, LLC | |||||
Acquisition-Related Contingent Consideration | |||||
Contingent consideration paid | $ 2,500,000 | ||||
Summary of balance and activity of contingent consideration | |||||
Beginning fair value of contingent liability | 556,000 | 851,000 | |||
Period change in valuation | (483,465) | (294,342) | |||
Payments | (2,579) | (658) | |||
Ending fair value of contingent liability | 69,956 | 556,000 | |||
Balance Sheet Classification | |||||
Contingent liability balance | $ 556,000 | $ 851,000 | $ 69,956 | $ 556,000 | |
Devicix, LLC | Other accrued liabilities | |||||
Balance Sheet Classification | |||||
Other Accrued Liabilities | 21,956 | 21,700 | |||
Devicix, LLC | Other Long-Term Liabilities | |||||
Balance Sheet Classification | |||||
Other Long-Term Liabilities | $ 48,000 | $ 534,300 | |||
Devicix, LLC | Significant unobservable inputs (Level 3) | Recurring | |||||
Acquisition-Related Contingent Consideration | |||||
Discount Rate | 21.00% | 21.00% | |||
Probability of payment | 33.30% | 33.30% |
SUMMARY OF SIGNIFICANT ACCOUN27
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Goodwill (Details1) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Goodwill | ||
Goodwill, Beginning Balance | $ 3,283,454 | $ 3,283,454 |
Impairment of Goodwill | (908,000) | 0 |
Goodwill, Ending Balance | 2,375,454 | 3,283,454 |
Fair Value of Goodwill | ||
Impairment of Goodwill | 908,000 | $ 0 |
Nonrecurring fair value | ||
Goodwill | ||
Impairment of Goodwill | (908,000) | |
Fair Value of Goodwill | ||
Goodwill | 2,375,454 | |
Impairment of Goodwill | 908,000 | |
Nonrecurring fair value | Significant unobservable inputs (Level 3) | ||
Fair Value of Goodwill | ||
Goodwill | $ 2,375,454 |
SUMMARY OF SIGNIFICANT ACCOUN28
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Enterprise Wide Disclosures and Foreign Currency Transactions (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Enterprise-Wide Disclosures | ||
Percentage of sales (as a percent) | 10.00% | 10.00% |
Total Net Sales | $ 112,334,749 | $ 116,621,719 |
Property and equipment, net | 10,175,533 | 10,330,834 |
Other assets | 4,121,801 | 5,152,944 |
Foreign Currency Transactions | ||
Foreign currency translation adjustment | 56,340 | |
Foreign currency translation loss | 100,785 | 44,445 |
Net foreign currency transaction gains (losses) | (192,187) | (82,000) |
United States | ||
Enterprise-Wide Disclosures | ||
Property and equipment, net | 8,712,902 | 8,731,205 |
Other assets | 4,114,075 | 5,145,218 |
Mexico | ||
Enterprise-Wide Disclosures | ||
Property and equipment, net | 1,003,040 | 1,238,087 |
Other assets | 7,726 | 7,726 |
China | ||
Enterprise-Wide Disclosures | ||
Property and equipment, net | $ 459,591 | $ 361,542 |
Export sales | Domestic | ||
Enterprise-Wide Disclosures | ||
Percentage of sales (as a percent) | 4.50% | 8.00% |
Aerospace and Defense | ||
Enterprise-Wide Disclosures | ||
Total Net Sales | $ 15,682,635 | $ 16,114,759 |
Medical | ||
Enterprise-Wide Disclosures | ||
Total Net Sales | 51,448,581 | 53,835,916 |
Industrial | ||
Enterprise-Wide Disclosures | ||
Total Net Sales | $ 45,203,533 | $ 46,671,044 |
CONCENTRATION OF CREDIT RISK 29
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Details) | 12 Months Ended | |
Dec. 31, 2017itemdivision | Dec. 31, 2016 | |
Major customers and concentration of credit risk | ||
Percentage of concentration risk (as a percent) | 10.00% | 10.00% |
Largest customer | ||
Major customers and concentration of credit risk | ||
Number of divisions | division | 2 | |
Credit concentration risk | ||
Major customers and concentration of credit risk | ||
Excess cash balance, number of high credit quality financial institution | item | 2 | |
Net sales | Customer concentration risk | Division one of largest customer | ||
Major customers and concentration of credit risk | ||
Percentage of concentration risk (as a percent) | 23.50% | 20.00% |
Net sales | Customer concentration risk | Division two of largest customer | ||
Major customers and concentration of credit risk | ||
Percentage of concentration risk (as a percent) | 1.40% | 3.80% |
Net sales | Customer concentration risk | Divisions one & two | ||
Major customers and concentration of credit risk | ||
Percentage of concentration risk (as a percent) | 24.90% | 23.80% |
Net sales | Customer concentration risk | Minimum | Largest customer | ||
Major customers and concentration of credit risk | ||
Percentage of concentration risk (as a percent) | 10.00% | 10.00% |
Accounts receivable | Customer concentration risk | Largest customer | ||
Major customers and concentration of credit risk | ||
Percentage of concentration risk (as a percent) | 16.40% | 13.60% |
FINANCING ARRANGEMENTS (Details
FINANCING ARRANGEMENTS (Details) | Jul. 01, 2015USD ($)item | Dec. 31, 2018 | Dec. 31, 2017USD ($) | Dec. 31, 2016USD ($) | Jun. 15, 2017USD ($) |
Financing arrangements | |||||
Loss on Extinguishment of Debt | $ 174,834 | ||||
Total long-term debt | 5,656,872 | $ 6,585,298 | |||
Discount on Devicix Notes Payable | (62,776) | (102,424) | |||
Debt Issuance Costs | (238,468) | (25,896) | |||
Long-term Debt | 5,355,628 | 6,456,978 | |||
Current maturities of long-term debt | (1,002,586) | (1,565,347) | |||
Long-term debt - net of current maturities | 4,353,042 | 4,891,631 | |||
Future maturity requirements for long-term debt | |||||
2,018 | 1,095,722 | ||||
2,019 | 805,880 | ||||
2,020 | 497,892 | ||||
2,021 | 497,892 | ||||
2,022 | 497,892 | ||||
Future | 2,261,594 | ||||
Total long-term debt | $ 5,656,872 | 6,585,298 | |||
Devicix, LLC | |||||
Financing arrangements | |||||
Number of promissory notes | item | 2 | ||||
Line of credit | |||||
Financing arrangements | |||||
Weighted-average interest rate (as a percent) | 3.74% | ||||
Outstanding balance | $ 8,502,853 | 7,315,262 | |||
Unused availability supported by entity's borrowing base | 4,231,000 | $ 5,710,602 | |||
Line of credit | Maximum | |||||
Financing arrangements | |||||
Interest rate margin on variable rate basis (as a percent) | 3.75% | ||||
Line of credit | Minimum | |||||
Financing arrangements | |||||
Interest rate margin on variable rate basis (as a percent) | 3.25% | ||||
Real estate term note 2 maturing on December 31, 2027 | |||||
Financing arrangements | |||||
Maximum borrowing capacity | 3,500,000 | ||||
Capital Term loan | |||||
Financing arrangements | |||||
Debt instrument, face amount | $ 1,000,000 | ||||
Outstanding balance | 684,000 | ||||
Capital Term loan | Maximum | |||||
Financing arrangements | |||||
Debt instrument, face amount | 1,000,000 | ||||
Equipment term loan tied to equipment purchased in Mankato acquisition | |||||
Financing arrangements | |||||
Debt instrument, face amount | 2,700,000 | ||||
Industrial revenue bond payable to the City of Blue Earth, Minnesota | |||||
Financing arrangements | |||||
Long-term Debt | 200,000 | ||||
Principal and interest payments | $ 80,000 | ||||
Devicix Acq Note 1, subordinate debt, due July 1, 2019 | |||||
Financing arrangements | |||||
Interest rate (as a percent) | 4.00% | ||||
Long-term Debt | $ 393,834 | 643,585 | |||
Devicix Acq Note 2, subordinate debt, due July 1, 2019 | |||||
Financing arrangements | |||||
Interest rate (as a percent) | 4.00% | ||||
Long-term Debt | $ 511,984 | 836,661 | |||
Promissory note subject to offsets | Devicix, LLC | |||||
Financing arrangements | |||||
Promissory note liability | $ 1,000,000 | ||||
Term of promissory note | 4 years | ||||
Interest rate per annum | 4.00% | ||||
Principal and interest payments | $ 22,579 | ||||
Promissory note not subject to offsets | Devicix, LLC | |||||
Financing arrangements | |||||
Promissory note liability | $ 1,300,000 | ||||
Term of promissory note | 4 years | ||||
Interest rate per annum | 4.00% | ||||
Principal and interest payments | $ 29,353 | ||||
Bank of America | Line of credit | |||||
Financing arrangements | |||||
Maximum borrowing capacity | $ 16,000,000 | ||||
Bank of America | Real estate term notes | |||||
Financing arrangements | |||||
Debt instrument, face amount | $ 5,000,000 | ||||
Variable rate basis | one-month LIBOR | ||||
Interest rate margin on variable rate basis (as a percent) | 2.25% | ||||
Interest rate (as a percent) | 4.50% | ||||
Long-term Debt | $ 4,751,054 | ||||
Principal and interest payments | 41,000 | ||||
Bank of America | Credit Agreement | |||||
Financing arrangements | |||||
Minimum fixed charge coverage ratio | 1 | ||||
Wells Fargo Bank, N.A. | |||||
Financing arrangements | |||||
Loss on Extinguishment of Debt | $ 174,834 | ||||
Wells Fargo Bank, N.A. | Line of credit | |||||
Financing arrangements | |||||
Maximum borrowing capacity | 15,000,000 | ||||
Outstanding balance | 7,315,262 | ||||
Wells Fargo Bank, N.A. | Real estate term notes | |||||
Financing arrangements | |||||
Variable rate basis | three month LIBOR | ||||
Interest rate margin on variable rate basis (as a percent) | 2.75% | ||||
Long-term Debt | 2,415,428 | ||||
Wells Fargo Bank, N.A. | Equipment notes maturing in May 2018 | |||||
Financing arrangements | |||||
Variable rate basis | three-month LIBOR | ||||
Interest rate margin on variable rate basis (as a percent) | 2.75% | ||||
Long-term Debt | $ 2,489,624 |
FINANCING ARRANGEMENTS - Capita
FINANCING ARRANGEMENTS - Capital Leases (Details) - USD ($) | 1 Months Ended | 3 Months Ended | 12 Months Ended | |
Sep. 30, 2017 | Sep. 30, 2017 | Dec. 31, 2017 | Dec. 31, 2016 | |
Capital Leases | ||||
Current Portion of Capital Lease Obligation | $ 295,372 | |||
Depreciation expense related to the leased assets | 9,370 | |||
Future minimum lease payments under non-cancelable capital leases | ||||
2,018 | 386,657 | |||
2,019 | 393,960 | |||
2,020 | 393,960 | |||
2,021 | 393,960 | |||
2,022 | 255,331 | |||
Total noncancelable future lease commitments | 1,823,868 | |||
Less interest | (226,077) | |||
Present value obligations under capital leases | 1,597,791 | |||
Five-year lease | ||||
Capital Leases | ||||
Capital lease, term of contract | 5 years | |||
Debt instrument, face amount | $ 1,095,768 | |||
Effective interest rate | 4.97% | |||
Property held under capital lease | $ 1,102,607 | $ 0 | ||
Four year and six month lease | ||||
Capital Leases | ||||
Capital lease, term of contract | 4 years 6 months | |||
Debt instrument, face amount | $ 502,023 | $ 502,023 | ||
Effective interest rate | 6.22% | 6.22% | ||
Property held under capital lease | 421,138 | $ 0 | ||
Depreciation expense related to the leased assets | 0 | |||
Second Lease | ||||
Future minimum lease payments under non-cancelable capital leases | ||||
Total noncancelable future lease commitments | $ 80,885 |
INCOME TAXES (Details)
INCOME TAXES (Details) - USD ($) | 3 Months Ended | 12 Months Ended | ||
Dec. 31, 2017 | Dec. 31, 2018 | Dec. 31, 2017 | Dec. 31, 2016 | |
Components of income tax expense | ||||
Current taxes - Federal | $ (124,000) | $ 240,000 | ||
Current taxes - State | 10,000 | 10,000 | ||
Current taxes - Foreign | 49,000 | (13,000) | ||
Deferred taxes - Federal | 176,000 | (167,000) | ||
Deferred taxes - State | 239,000 | 10,000 | ||
Deferred taxes - Foreign | 25,000 | (45,000) | ||
Income tax expense | 375,000 | 35,000 | ||
Reconciliation of federal income taxes and reported income taxes | ||||
Statutory federal tax provision (benefit) | (704,000) | 27,000 | ||
State income tax benefit | (117,000) | (32,000) | ||
Effect of foreign operations | (88,000) | 107,000 | ||
Uncertain tax positions | 2,000 | |||
Income tax credits | (112,000) | (134,000) | ||
Valuation allowance | 1,011,000 | 49,000 | ||
Permanent differences | 8,000 | 16,000 | ||
Loss of Section 199 due to carryback claim | 46,000 | |||
Effects of tax reforms | 280,000 | |||
Other | 51,000 | |||
Income tax expense | 375,000 | 35,000 | ||
Income (loss) from operations before income taxes | ||||
Domestic | (2,831,433) | 486,425 | ||
Foreign | 760,658 | (407,651) | ||
Income (Loss) before income taxes | (2,070,775) | 78,774 | ||
Components of deferred tax assets (liabilities) | ||||
Allowance for uncollectable accounts | $ 49,000 | 49,000 | 317,000 | |
Inventories reserve | 198,000 | 198,000 | 242,000 | |
Accrued vacation | 194,000 | 194,000 | 362,000 | |
Amortization | 191,000 | 191,000 | 56,000 | |
Stock-based compensation and equity appreciation rights | 23,000 | 23,000 | 29,000 | |
Net operating loss carryforwards | 359,000 | 359,000 | 134,000 | |
Tax credit carryforwards | 613,000 | 613,000 | 242,000 | |
Other | 23,720 | 23,720 | 188,000 | |
Deferred tax assets before valuation allowance | 1,650,720 | 1,650,720 | 1,570,000 | |
Valuation allowance | (1,146,000) | (1,146,000) | (135,000) | |
Deferred tax assets | 504,720 | 504,720 | 1,435,000 | |
Prepaid expenses | (165,000) | (165,000) | (323,000) | |
Property and equipment | (319,000) | (319,000) | (569,000) | |
Deferred tax liabilities | (484,000) | (484,000) | (892,000) | |
Net deferred tax assets | 20,720 | 20,720 | 543,000 | |
Valuation allowance on foreign assets | 0 | 0 | ||
Changes in total gross unrecognized tax benefit liabilities, excluding accrued interest | ||||
Balance at the beginning of the period | $ 52,000 | 52,000 | 51,000 | |
Additions based on tax positions related to the current year | 22,000 | 15,000 | ||
Additions based on tax positions related to a prior year | 5,000 | |||
Reductions based on tax positions related to a prior year | (6,000) | |||
Statute of limitations | (22,000) | (13,000) | ||
Balance at the end of the period | 52,000 | $ 52,000 | $ 52,000 | |
Effective corporate tax rate | 34.00% | |||
Estimated income tax provision due to impact of the Tax Act | 280,000 | |||
Provisional amount of net deferred tax | 223,000 | |||
Provisional amount of transition tax | 57,000 | |||
Provisional transition tax rate (in percent) | 8.00% | |||
Federal | ||||
Operating loss carryforwards | ||||
Net operating loss carryforwards | 948,000 | $ 948,000 | ||
Federal | General business | ||||
Tax credit carryforwards | ||||
Tax credit carryforwards | 404,000 | 404,000 | ||
Minnesota | State | ||||
Operating loss carryforwards | ||||
Net operating loss carryforwards | 1,144,000 | 1,144,000 | ||
Minnesota | State | R&D | ||||
Tax credit carryforwards | ||||
Tax credit carryforwards | 330,000 | 330,000 | ||
Iowa | State | ||||
Operating loss carryforwards | ||||
Net operating loss carryforwards | 357,000 | 357,000 | ||
Montana | State | ||||
Operating loss carryforwards | ||||
Net operating loss carryforwards | 21,000 | 21,000 | ||
Wisconsin | State | ||||
Operating loss carryforwards | ||||
Net operating loss carryforwards | $ 669,000 | $ 669,000 | ||
Forecast | ||||
Changes in total gross unrecognized tax benefit liabilities, excluding accrued interest | ||||
Effective corporate tax rate | 21.00% |
401(K) RETIREMENT PLAN (Details
401(K) RETIREMENT PLAN (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
401(K) RETIREMENT PLAN | ||
Requisite service period for employees to be eligible for the defined contribution plan | 3 months | |
Requisite age for employees to be eligible for the defined contribution plan | 18 years | |
Employee contributions limit as a percentage of wages, maximum | 60.00% | |
Employer match of employee contributions for 6% of eligible compensation (as a percent) | 25.00% | |
Maximum percentage of covered compensation matched 25% by employer | 6.00% | |
Contributions made | $ 287,051 | $ 270,028 |
INCENTIVE PLANS (Details)
INCENTIVE PLANS (Details) - USD ($) | 12 Months Ended | ||||
Dec. 31, 2017 | Dec. 31, 2016 | May 31, 2017 | Nov. 30, 2010 | May 03, 2005 | |
Stock Options | |||||
Incentive plans | |||||
Compensation expense | $ 43,200 | $ 994 | |||
Unrecognized compensation related to unvested awards | $ 164,160 | ||||
Unrecognized compensation, vesting period | 2 years 4 months 13 days | ||||
Options | |||||
Balance at the beginning of the period(in shares) | 37,750 | ||||
Granted (in shares) | 150,000 | ||||
Balance at the end of the period (in shares) | 187,750 | 37,750 | |||
Exercisable at the end of the period (in shares) | 37,750 | ||||
Weighted-Average Exercise Price Per Share | |||||
Outstanding at the beginning of the period (in dollars per share) | $ 4.75 | ||||
Granted (in dollars per share) | 3.43 | ||||
Outstanding at the end of the period (in dollars per share) | 3.70 | $ 4.75 | |||
Exercisable at the end of the period (in dollars per share) | $ 4.75 | ||||
Weighted-Average Remaining Contractual Term | |||||
Outstanding at the end of the period | 8 years 1 month 17 days | ||||
Exercisable at the end of the period | 3 years 2 months 12 days | ||||
Aggregate Intrinsic Value | |||||
Outstanding at the end of the period | $ 74,070 | ||||
Exercisable at the end of the period | 9,570 | ||||
Additional disclosures | |||||
Intrinsic value of options exercised | $ 0 | $ 964 | |||
Cash received from options exercised | $ 4,822 | ||||
Stock Options | Minimum | |||||
Incentive plans | |||||
Exercisable period | 1 year | ||||
Stock Options | Maximum | |||||
Incentive plans | |||||
Expiration term | 10 years | ||||
2003 Plan | Stock Options | |||||
Incentive plans | |||||
Number of shares eliminated | 172,500 | ||||
2005 Plan | Stock Options | |||||
Incentive plans | |||||
Shares available for grant | 0 | 200,000 | |||
Options | |||||
Granted (in shares) | 0 | ||||
2005 Plan | Stock Options | Minimum | |||||
Incentive plans | |||||
Purchase price as a percentage of market value | 100.00% | ||||
2010 Plan | Equity Appreciation Rights Plan | |||||
Incentive plans | |||||
Compensation (income) expense | $ (22,000) | $ 37,000 | |||
Equity Appreciation Rights Plan | |||||
Vesting period from the base date | 3 years | ||||
Shares granted (in units) | 100,000 | 31,666 | |||
Accrued compensation included in other accrued liabilities | $ 23,000 | ||||
Accrued compensation included in other long-term liabilities | 22,000 | ||||
Accrued compensation liability | |||||
Beginning Balance | $ 45,000 | 143,000 | |||
Reductions | (22,000) | (36,000) | |||
Payments | $ (23,000) | (62,000) | |||
Ending Balance | 45,000 | ||||
Accrued compensation liability | |||||
Compensation liability included in other accrued liabilities | 23,000 | ||||
Accrued compensation included in other long-term liabilities | $ 22,000 | ||||
2010 Plan | Equity Appreciation Rights Plan | Maximum | |||||
Incentive plans | |||||
Number of common shares authorized | 1,000,000 | ||||
Equity Appreciation Rights Plan | |||||
Redemption cash payment period | 90 days | ||||
2017 Plan | Stock Options | |||||
Incentive plans | |||||
Number of common shares authorized | 350,000 | ||||
Options | |||||
Granted (in shares) | 150,000 |
COMMITMENTS AND CONTINGENCIES -
COMMITMENTS AND CONTINGENCIES - Lease payments (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
COMMITMENTS AND CONTINGENCIES | ||
Rent expense | $ 1,271,000 | $ 1,153,000 |
Operating Leases | ||
2,018 | 888,000 | |
2,019 | 628,000 | |
2,020 | 382,000 | |
2,021 | 175,000 | |
2,022 | 143,000 | |
Total | $ 2,216,000 |
COMMITMENTS AND CONTINGENCIES36
COMMITMENTS AND CONTINGENCIES - Life Insurance and Control Agreements (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Share Repurchase Plan | ||
Share repurchase program authorized amount | $ 250,000 | |
Stock repurchased in open market transactions (in shares) | 8,581 | |
Stock repurchased in open market transactions | $ 30,340 | |
Authorized balance remaining under share repurchase program | 219,659 | |
Maximum | ||
Commitment and contingencies | ||
Professional outplacement services that would be received by the participants | $ 10,000 | |
2002 Plan | ||
Commitment and contingencies | ||
Period of graded vesting schedule | 5 years | |
Annual vesting by the participants (as a percent) | 20.00% | |
Expenses incurred | $ 207,000 | $ 327,000 |
2002 Plan | Officer participants | ||
Commitment and contingencies | ||
Bonus to be paid as a percentage of the participants base annual salary | 15.00% | |
2002 Plan | Other participants | ||
Commitment and contingencies | ||
Bonus to be paid as a percentage of the participants base annual salary | 10.00% | |
Agreement(s) | Officer participants | ||
Commitment and contingencies | ||
Period of continued participation in health, disability and life insurance plans after involuntary termination | 3 years | |
Agreement(s) | Other participants | ||
Commitment and contingencies | ||
Period of continued participation in health, disability and life insurance plans after involuntary termination | 2 years |
PLANT CLOSURE (Details)
PLANT CLOSURE (Details) - Building and Building Improvements - Augusta - Discontinued Operations, Disposed of by Sale - Plant closing | 1 Months Ended |
Mar. 31, 2017USD ($) | |
PLANT CLOSURE | |
Sale of property | $ 715,000 |
Net book value | 314,000 |
Gain on the sale, net of related expenses | 354,000 |
Net proceeds used to pay outstanding real estate term note | $ 668,000 |
RELATED PARTY TRANSACTIONS (Det
RELATED PARTY TRANSACTIONS (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Consulting arrangement | Matt Mahmood | ||
RELATED PARTY TRANSACTIONS | ||
Expenses incurred | $ 97,203 | $ 71,657 |
SUBSEQUENT EVENTS (Details)
SUBSEQUENT EVENTS (Details) - Subsequent Events | Feb. 22, 2018USD ($) | Feb. 21, 2018USD ($)ft² |
SUBSEQUENT EVENTS | ||
Lease term | 10 years | |
Area of land | ft² | 77,000 | |
Monthly rentals payable | $ 43,000 | |
Consulting arrangement | William Murray | ||
SUBSEQUENT EVENTS | ||
Term of consulting agreement | 3 months | |
Consulting fee per hour | $ 250 | |
Maximum daily consulting fee | $ 2,000 |