Nortech Systems reported $116 million in sales in 2019. But it just was approved for a $6.1 million paycheck protection loan that the U.S. Small Business Administration (SBA) will forgive if the company uses the money for to pay workers, utilities and rent.
The loan and forgiveness provisions the Maple Grove-based company received are part of the U.S. response to a COVID-19-driven economic collapse.
They also fuel a fiery debate that now engulfs a critical piece of Congress’ financial-rescue package.
The $350 billion Paycheck Protection Program, known as PPP, ran out of money less than two weeks after it became available April 3. On Thursday, the U.S. House voted almost unanimously to add $310 billion to the PPP, and the SBA told businesses that already received loans that they must certify that they have no other source of capital or return PPP funding by May 7.
The distribution of PPP funds to publicly traded companies was a hot button in the discussion of new funding that drove the country deeper into debt.
As lack of funds forces Main Street vendors to lay off workers and close, dozens of firms that trade on Wall Street have begun to report forgivable government loans in Security and Exchange Commission filings. Nortech Systems is among at least four Minnesota-based companies to disclose such loans, according to a Star Tribune review of SEC filings through noon on Friday.
Rep. Dean Phillips, D-Minn., said he has spent hours on the phone with angry trade groups representing small businesses generally and small restaurants that are shut down by pandemic restrictions on group gatherings.
Phillips said he did not “begrudge” big companies that tried to get paycheck protection money under existing rules, but he wished they would consider giving it back the way Shake Shack and Ruth’s Chris Steakhouse, both huge restaurant chains, returned millions of dollars after media reports revealed their PPP loans.
“I am dismayed by a federal policy that benefits those who need it the least at the expense of those who need it the most,” Phillips said.
The $6.1 million forgivable loan Nortech Systems received from Bank of America will keep “tens or hundreds” of people from losing their jobs making medical imaging equipment and ventilators badly needed to fight the COVID-19 coronavirus, company CEO Jay Miller said. He also predicted that PPP funds could keep Nortech going as it developed new business that produced new jobs.
“There are rules around this,” he explained. “We were diligent in following those rules. We should be a poster child for this program.”
Miller said Nortech has not decided whether to forfeit the PPP funds which the company does not yet have access to. Nortech has “a lot of debt” so it would be difficult to borrow more working capital, he said.
Even if the company met the certification test now required by the SBA, Miller acknowledged that “the political environment has certainly changed.”
Nortech had $116 million in sales in 2019 and operated in the U.S. Mexico and China, according to its 2019 annual report. The company reported 687 full-time and 97 part-time/temporary employees as of Dec 31, 2019. Miller said the PPP loan would go to support 470 employees in Minnesota.
Nortech’s shares trade around $3.70 per share and its stock is down 24% this year, bringing its market capitalization under $10 million.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) says companies may qualify for paycheck protection loans if they have fewer than 500 employees or “a standard size in number of employees established by the [Small Business] Administration.”
The SBA classifies Nortech Systems operations as “Other Electronic Component Manufacturing.” This designation allows companies with up to 750 employees to qualify as a small business.
Some smaller entrepreneurs feel misled, if not betrayed.
“I think the public would consider a company like Nortech a substantial company, not a small business,” said wine importer John Destein, who went to three different banks where he had accounts looking for PPP money for his 10-worker business only to be shut out. “It was obviously a sprint for the money and the people with the most resources got it.
“I don’t blame [Nortech] for going after the money. [PPP] was shoddy legislation [with] even shoddier oversight.”
Nortech Systems was the first of Minnesota’s publicly traded companies to report that it received an SBA PPP loan. It was not the last.
Duluth-based Ikonics Corp., a small publicly traded company, was able to get a $1.2 million loan from its banking partner, BMO Harris Bank NA, under the Paycheck Protection Program.
“It will be a very beneficial program for us,” said Jon Gerlach, Ikonics vice president of finance and chief financial officer. “This is helping us maintain our employment levels for the next several months.”
Ikonics is a distributor of screen printing and other specialty printing supplies including products for the aerospace industry. However, Gerlach said Ikonics is an outlier among the larger public companies. It has 82 employees and annual revenue of $17.6 million and limited means to raise additional capital.
Among public companies Ikonics is considered a micro-cap company with a market capitalization under $7 million. Its stock trades lightly and the share price has declined 35% year-to-date. More importantly, Gerlach said, its operations have been affected by the economic slowdown as a result of COVID-19. Gerlach would not go into detail about how much the company has been affected, but it is a condition of the loan that it demonstrate that it has been hurt.
“We are using the program exactly as it was intended and what the spirit of the program was,” Gerlach said.
Being a public company had little to do with Ikonics’ eligibility for the loan program. Having to make periodic financial filings means it might have had a least a small leg up in collecting data for the application, but an established banking relationship probably helped more than anything. “I would have been shocked if we could have called a bank out of the blue to help process our application,” Gerlach said.
A public company based in St. Paul also received a PPP loan through BMO Harris. Image Sensing Systems got a loan of $923,700 through the program. Its video and radar-processing products help control and monitor traffic on highways bridges, tunnels and at intersections.
Image Sensing Systems has 55 employees and is also considered a micro-cap company. In 2019 its annual revenue was $14.7 million and its market capitalization is around $20 million. Since the start of the year the company’s stock is down 16%. The company declined to comment.
On Thursday, Brooklyn Park-based Clearfield Inc., a maker of fiber-optic management products with annual revenue of about $85 million and a market capitalization of about $163 million, disclosed it had received a $3.7 million PPP loan that “provides us with an additional layer of financial protection to continue employing all of our team members through this period of significant uncertainty.”
Publicly traded companies “have stout relations with banks,” said Russell Price, a senior economist for Ameriprise Financial. “They can interact and fill out paperwork more quickly [than smaller businesses].”
In legislation passed as quickly as the CARES Act, “there are always loopholes and unintended consequences,” Price added. He said PPP money should go to companies that could not continue to employ workers without it.