# Nortech Systems Inc: Form 10-Q for the period ended Sep 30, 2020

- Company: [Nortech Systems Inc](/companies/nsys.md) (CIK 722313)
- Form: 10-Q
- Filed: 2020-11-12
- Accepted by EDGAR: Nov 12, 2020, 17:17 ET
- Period: 2020-09-30
- Accession: 0001437749-20-023674
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722313/000143774920023674/nsys20200930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722313/000143774920023674/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $26.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $80.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $24.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $73.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $1.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $7.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $2.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $3.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $126.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $526.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $612.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $638.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $2.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $2.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.73 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $0.74 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $0.75 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 2,703,029 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 2,678,698 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | −$99.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $397.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-09-30 | $328.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $40.8m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $60.0m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $18.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $37.8m | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $6.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $444.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $22.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,537 characters.

### Overview

We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the aerospace and defense, medical, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Mankato, Maple Grove, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

### Recent Developments

#### Global Pandemic

In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID-19”) as a pandemic. While the COVID-19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.

The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations.

We continue to actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

#### Facility Consolidation

To further improve operational efficiencies and lower overhead costs, the Company approved on August 7, 2020, the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations. The Merrifield production facility consolidation is expected to be complete on or before December 31, 2020, and will impact approximately 60 employees, who will be offered positions at other Nortech facilities in Minnesota. As of September 30, 2020, this closure did not qualify for held for sale nor discontinued operations accounting.

### Results of Operations

The following table presents statements of operations data as percentages of total net sales for the periods indicated:

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of Goods Sold | 93.8 | 87.9 | 91.2 | 89.6 |
| Gross Profit | 6.2 | 12.1 | 8.8 | 10.4 |
| Selling Expenses | 2.3 | 2.0 | 2.4 | 2.5 |
| General and Administrative Expenses | 8.2 | 7.7 | 7.2 | 8.6 |
| Gain on Sale of Property and Equipment | (14.5) | 0.0 | (4.8) | 0.0 |
| Income (Loss) from Operations | 10.2 | 2.4 | 4.0 | (0.7) |
| Other Expenses | (0.5) | (0.9) | (0.7) | (0.9) |
| Income (Loss) Before Income Taxes | 9.7 | 1.5 | 3.3 | (1.6) |
| Income Tax Expense | 2.3 | 0.1 | 0.8 | 0.2 |
| Net Income (Loss) | 7.4% | 1.4% | 2.5% | (1.8)% |

### Net Sales

Net sales were $26.4 million in the third quarter of 2020, as compared to $30.1 million in the third quarter of the prior year, a decrease of $3.7 million or 12.3% that was driven in part by the COVID-19 pandemic. Net sales results were varied by markets; the medical market decreased by $2.8 million or 16.6% with medical devices accounting for the largest portion of the decrease. The industrial market decreased by $2.7 million or 31.1% of sales in the third quarter of 2020 as compared to the same quarter of 2019. Net sales from the aerospace and defense markets increased by $1.8 million or 41.3% of sales in the third quarter of 2020 as compared to the third quarter of 2019.

Net sales were $80.3 million in the nine months ended 2020, as compared to $85.5 million in the prior year, a decrease of $5.3 million or 6.1% that was driven in part by the COVID-19 pandemic. Net sales results were varied by markets; the medical market decreased by $3.3 million, or 7.1% with medical device accounting for 45.6% of the decrease and medical component products the remaining 54.4%. The industrial market decreased by $4.3 million of sales or 16.3% for the nine months ended September 30, 2020 as compared to the same period of 2019. Net sales from aerospace and defense markets increased by $2.3 million of sales or 17.3% for the nine months ended September 30, 2020 as compared to the same period of 2019.

Net sales by our major EMS industry markets for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

|  | Three months Ended September 30, | Nine Months Ended September 30, |
| --- | ---: | ---: |
|  | 2020 2019% | 2020 2019% |
|  | $$ Change | $$ Change |
| Medical | 14,218 17,043 (16.6) | 42,753 46,006 (7.1) |
| Industrial | 5,938 8,623 (31.1) | 22,001 26,290 (16.3) |
| Aerospace and Defense | 6,206 4,392 41.3 | 15,509 13,219 17.3 |
| Total Net Sales | 26,362 30,058 (12.3) | 80,263 85,515 (6.1) |

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2020 is as follows (in thousands):

|  | Three Months Ended September 30, 2020 Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market |
| --- | ---: | ---: | ---: | ---: |
| Medical | $10,960 | $1,853 | $1,405 | $14,218 |
| Industrial | 4,527 | 791 | 620 | 5,938 |
| Aerospace and Defense | 5,525 | 16 | 665 | 6,206 |
| Total net sales | $21,012 | $2,660 | $2,690 | $26,362 |

|  | Nine Months Ended September 30, 2020 Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market |
| --- | ---: | ---: | ---: | ---: |
| Medical | $35,835 | $4,454 | $2,464 | $42,753 |
| Industrial | 17,434 | 3,354 | 1,213 | 22,001 |
| Aerospace and Defense | 14,160 | 396 | 953 | 15,509 |
| Total net sales | $67,429 | $8,204 | $4,630 | $80,263 |

20

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2019 is as follows (in thousands):

|  | Three Months Ended September 30, 2019 Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market |
| --- | ---: | ---: | ---: | ---: |
| Medical | $14,399 | $1,661 | $983 | $17,043 |
| Industrial | 7,279 | 822 | 522 | 8,623 |
| Aerospace and Defense | 3,978 | 133 | 281 | 4,392 |
| Total net sales | $25,656 | $2,616 | $1,786 | $30,058 |

|  | Nine Months Ended September 30, 2019 Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market |
| --- | ---: | ---: | ---: | ---: |
| Medical | $42,039 | $1,914 | $2,053 | $46,006 |
| Industrial | 22,847 | 2,297 | 1,146 | 26,290 |
| Aerospace and Defense | 12,236 | 375 | 608 | 13,219 |
| Total net sales | $77,122 | $4,586 | $3,807 | $85,515 |

### Backlog

Our 90-day shipment backlog as of September 30, 2020 was $23 million, a 0.8% decrease from the beginning of the quarter and a 27.8% decrease from the prior year. Backlog for our medical customers has decreased 4.2% from the beginning of the quarter and decreased 35.4% from the prior year. Our industrial customers’ backlog increased 10.4% from the beginning of the quarter and decreased 41.7% from the prior year. The aerospace and defense backlog decreased 2.0% from the beginning of the quarter and increased 14.5% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

90-day shipment backlog by our major EMS industry markets are as follows (in thousands):

|  | Shipment Backlog as of the Period Ended September 30, 2020 | June 30, 2020 | September 30, 2019 |
| --- | ---: | ---: | ---: |
| Medical | $11,484 | $11,987 | $17,778 |
| Industrial | 4,860 | 4,401 | 8,334 |
| Aerospace and Defense | 6,764 | 6,900 | 5,909 |
| Total 90-Day Backlog | $23,108 | $23,288 | $32,021 |

21

Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $45.7 million at September 30, 2020 compared to $58.1 million at the end of September 30, 2019. This decrease was driven in part to the impact of COVID-19.

### Gross Profit

Gross profit as a percent of net sales for the three months ended September 30, 2020 and 2019 was 6.2% and 12.1%, respectively. Gross profit as a percentage of sales for the nine months ended September 30, 2020 and 2019 was 8.8% and 10.4%, respectively. The decrease in both comparisons was driven by lower sales on a fixed cost base in part due to the impact of COVID-19 and increased inventory reserves.

### Selling Expense

Selling expenses for the three months ended September 30, 2020 and 2019 was $0.6 million or 2.3% of sales and $0.6 million or 2.0% of sales, respectively. Selling expense for the nine months ended September 30, 2020 and 2019 was $1.9 million or 2.4% of sales and $2.1 million or 2.5% of sales, respectively.

### General and Administrative Expense

General and administrative expenses for the three months ended September 30, 2020 and 2019 were $2.2 million or 8.2% of sales and $2.3 million or 7.7% of sales, respectively. General and administrative expenses for the nine months ended September 30, 2020 and 2019 were $5.8 million or 7.2% of sales and $7.4 million or 8.6% of sales, respectively. The decrease in the year to date comparison was due to higher spend in the prior year related one-time expenditures to improve operations in 2019 and the benefits of those cost reduction measures in 2020.

### Gain on Sale of Property and Equipment

The gain on sale of property and equipment was $3.8 million in the three and nine months ended September 30, 2020. This gain was due to the sale leaseback transaction we completed in the period relating to the manufacturing facilities in Bemidji and Mankato, Minnesota.

### Income (Loss) from Operations

Third quarter 2020 income from operations was $2.7 million compared to $0.7 million for the third quarter in 2019. Income from operations for the first nine months in 2020 was $3.1 million as compared to a loss of $0.6 million for the same comparable period in 2019. The increase in the income from operations in both comparisons was due to the gain on sale of property and equipment of $3.8 million partially offset by lower gross profit.

### Income Taxes

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and nine months ended September 30, 2020 was 24% and our effective tax rate for the three and nine months ended September 30, 2019 was 10% and (9%), respectively.

### Net Income (Loss)

Net income for the three months ended September 30, 2020 and September 30, 2019 was $2.0 and $0.4 million, respectively. Net income for the nine months ended September 30, 2020 was $2.0 million and net loss for the nine months ended September 30, 2019 was $1.5 million.

### Liquidity and Capital Resources

Our third quarter sales and shipment backlog were impacted by the COVID-19 pandemic. However, our focus on reducing costs, minimizing capital expenditures, and managing working capital mitigated the impact on liquidity. Due to the inherent uncertainty of this evolving situation, we are unable at this time to predict the likely impact of the COVID-19 pandemic on our future operations. However, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A. (BofA), funds available under a Promissory Note with BofA (“Promissory Note”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, funds received from our sales leaseback transaction and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

Net cash used in operating activities for the nine months ended September 30, 2020 and September 30, 2019 was $0.1 million and $0.2 million, respectively.

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA 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.

On September 30, 2020, we had outstanding advances of $2.5 million under the line of credit and unused availability of $8.6 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $22.6 million and $21.1 million as of September 30, 2020 and December 31, 2019, respectively.

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 the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter. The Company met the covenants for the nine months ended September 30, 2020.

On April 15, 2020, we entered into a Promissory Note, which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 10 months after the end of the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. We expect that all or a significant portion of the Promissory Note will be forgiven.

### Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

### Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.

### Forward-Looking Statements

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

- Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;
- Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;
- Changes in the reliability and efficiency of our operating facilities or those of third parties;
- Risks related to availability of labor;
- Increases in certain raw material costs such as copper and oil;
- Commodity and energy cost instability;
- Risks related to FDA noncompliance;
- The loss of a major customer;
- General economic, financial and business conditions that could affect our financial condition and results of operations;
- Increased or unanticipated costs related to compliance with securities and environmental regulation;
- Disruption of global or local information management systems due to natural disaster or cyber-security incident;
- Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and the risks set forth in PART II, ITEM 1A below.

## Controls and procedures

As filed, 1,550 characters.

### Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

### Changes in Internal Control Over Financial Reporting

Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), there was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,183 characters.

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.

***Pandemics or disease outbreaks such as the current novel coronavirus (COVID-19 virus) pandemic have affected and is expected to continue to affect adversely our operations, supply chains, financial condition and results of operations.***

The coronavirus (COVID-19) pandemic is adversely affecting, and is expected to continue to affect adversely, our operations, supply chains, financial condition and results of operations, and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our services. During the current COVID-19 pandemic, the Company has experienced reduced sales, supply chain disruption, reduced customer demand and reduced availability of workforce.

Outbreaks of epidemic, pandemic, or contagious diseases, such as, historically, the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could cause a disruption to our business. Business disruptions could include temporary closures of our facilities or the facilities of our suppliers, reduced demand from customers, unavailability or restricted availability of our material portions of our workforce, raw materials or components necessary to manufacture our products, or disruptions or restrictions on our ability to travel or to distribute our products. Any disruption of our operations, our suppliers or our customers would likely impact our sales and operating results. In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and services. Any of these events could negatively impact our sales and have a material adverse effect on our business, financial condition, results of operations, or cash flows.

***We may be subject to additional regulatory scrutiny in the form of an audit or review as a result of our Paycheck Protection Program Promissory Note which would have an adverse effect on our liquidity.***

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP under the CARES Act. Subsequently, on April 28, 2020, the secretary of the Treasury and SBA announced that the government will review all PPP loans of more than $2 million for which a borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in legal and reputational costs as well as significant use of management time. While the Company believes that it acted in good faith and has complied with all requirements of the PPP, if we are audited and receive an adverse or negative finding in such audit, we could be required to return up to the full amount of the Promissory Note, which would reduce our liquidity by such amount and potentially subject us to fines and penalties.

Filed Nov 12, 2020.
Source: SEC EDGAR, the filing index for accession 0001437749-20-023674. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.