10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to          

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

Executive Offices: 7550 Meridian Circle N., Suite # 150, Maple Grove, MN 55369

Telephone number: (952) 345-2244

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	NSYS	NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐	Accelerated Filer ☐
Non-accelerated Filer ☒	Smaller Reporting Company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

Number of shares of $.01 par value common stock outstanding at November 8, 2019 was 2,657,314.

1

TABLE OF CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION
	Item 1  -  Financial Statements
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Shareholders’ Equity	6
	Condensed Notes to Consolidated Financial Statements	7-17
	Item 2  -  Management's Discussion and Analysis of Financial Condition And Results of Operations	18-23
	Item 3  -  Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4  -  Controls and Procedures	24
PART II - OTHER INFORMATION
	Item 1  -  Legal Proceedings	25
	Item 1A.  -  Risk Factors	25
	Item 2  -  Unregistered Sales of Equity Securities, Use of Proceeds	25
	Item 3  -  Defaults on Senior Securities	25
	Item 4  -  Mine Safety Disclosures	25
	Item 5  -  Other Information	25
	Item 6  -  Exhibits	26
SIGNATURES		27

2

PART I

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMEBR 30,						SEPTEMBER 30,
	2019			2018			2019			2018
Net Sales	$	30,058		$	29,558		$	85,515		$	84,543
Cost of Goods Sold		26,423			26,171			76,594			74,311
Gross Profit		3,635			3,387			8,921			10,232
Operating Expenses
Selling Expenses		589			717			2,147			2,792
General and Administrative Expenses		2,333			2,021			7,374			6,177
Total Operating Expenses		2,922			2,738			9,521			8,969
Income (Loss) From Operations		713			649			(600	)		1,263
Other Expense
Interest Expense		(256	)		(170	)		(780	)		(551	)
Income (Loss) Before Income Taxes		457			479			(1,380	)		712
Income Tax Expense		44			115			122			350
Net Income (Loss)	$	413		$	364		$	(1,502	)	$	362
Net Income (Loss) Per Common Share:
Basic (in dollars per share)	$	0.16		$	0.14		$	(0.56	)	$	0.13
Weighted Average Number of Common Shares Outstanding - Basic (in shares)		2,657,911			2,680,684			2,667,754			2,698,950
Diluted (in dollars per share)	$	0.16		$	0.14		$	(0.56	)	$	0.13
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)		2,657,911			2,682,901			2,667,754			2,702,503
Other comprehensive income (loss)
Foreign currency translation		(56	)		(83	)		(56	)		(137	)
Comprehensive income (loss), net of tax	$	357		$	281		$	(1,558	)	$	225

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	SEPTEMBER 30,			DECEMBER 31,
	2019			2018(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	160		$	480
Restricted Cash		1,794			467
Accounts Receivable, less allowances of $323 and $222		20,135			20,093
Inventories		16,941			17,004
Contract Assets		7,211			6,431
Prepaid Expenses and Other Current Assets		2,019			1,381
Total Current Assets		48,260			45,856
Property and Equipment, Net		9,710			10,178
Operating Lease Assets		5,018			-
Goodwill		2,375			2,375
Other Intangible Assets, Net		1,397			1,523
Other Non Current Assets		19			28
Total Assets	$	66,779		$	59,960
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	444		$	780
Current Portion of Finance Lease Obligation		476			337
Current Portion of Operating Lease Obligations		841			-
Accounts Payable		18,384			18,142
Accrued Payroll and Commissions		2,626			2,747
Other Accrued Liabilities		2,845			2,886
Total Current Liabilities		25,616			24,892
Long-Term Liabilities
Long Term Line of Credit		12,430			9,264
Long-Term Debt, Net		3,295			3,624
Long Term Finance Lease Obligation, Net		1,168			951
Long-Term Operating Lease Obligation, Net		4,517			-
Other Long-Term Liabilities		118			139
Total Long-Term Liabilities		21,528			13,978
Total Liabilities		47,144			38,870
Commitments and Contingencies
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding		250			250
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,686,328 and 2,739,250 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		15,713			15,610
Accumulated Other Comprehensive Loss		(289	)		(233	)
Retained Earnings		3,934			5,436
Total Shareholders' Equity		19,635			21,090
Total Liabilities and Shareholders' Equity	$	66,779		$	59,960

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

⁽¹⁾ The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	NINE MONTHS ENDED
	SEPTEMBER 30,
	2019			2018
Cash Flows From Operating Activities
Net (Loss) Income	$	(1,502	)	$	362
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization		1,648			1,655
Compensation on Stock-Based Awards		226			80
Deffered Taxes		1			1
Change in Accounts Receivable Allowance		101			(5	)
Change in Inventory Reserves		285			118
Changes in Operating Assets and Liabilities:
Changes in Current Operating Items
Accounts Receivable		(158	)		(1,619	)
Inventories		(237	)		(1,959	)
Contract Assets		(780	)		(617	)
Prepaid Expenses and Other Current Assets		(641	)		(278	)
Accounts Payable		663			4,913
Accrued Payroll and Commissions		(120	)		(374	)
Other Accrued Liabilities		281			287
Net Cash (Used in) Provided by Operating Activities		(233	)		2,564
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment		-			17
Purchase of Intangible Asset		(37	)		(3	)
Purchases of Property and Equipment		(785	)		(999	)
Net Cash Used in Investing Activities		(822	)		(985	)
Cash Flows from Financing Activities
Net Change in Line of Credit		3,165			(445	)
Principal Payments on Long-Term Debt		(728	)		(819	)
Principal Payments on Finance Leases		(251	)		(231	)
Stock option exercises		7			-
Share Repurchases		(130	)		(229	)
Net Cash Provided By (Used In) Financing Activities		2,063			(1,724	)
Effect of Exchange Rate Changes on Cash		(2	)		(1	)
Net Change in Cash		1,006			(146	)
Cash - Beginning of Period		948			779
Cash - Ending of Period	$	1,954		$	633
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	160		$	397
Restricted Cash		1,794			236
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	1,954		$	633
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	739		$	507
Cash Paid (Refunded) During the Period for Income Taxes		(83	)		167
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		30			304
Equipment Acquired under Finance Lease		607			100

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

	Preferred		Common		Additional Paid-In			Accumulated Other Comprehensive			Retained Income			Total Shareholders' Equity
BALANCE JUNE 30, 2018		250		27		15,619			(155	)		5,268			21,009
Net Income		-		-		-			-			364			364
Cumulative Adjustment		-		-		-			-			-			-
Foreign currency translation adjustment		-		-		-			(83	)		-			(83	)
Compensation on stock-based awards		-		-		35			-			-			35
Share repurchases		-		-		(42	)		-			-			(42	)
BALANCE SEPTEMBER 30, 2018	$	250	$	27	$	15,612		$	(238	)	$	5,632		$	21,283
BALANCE DECEMBER 31, 2017		250		27		15,760			(101	)		3,889			19,825
Net Income		-		-		-			-			362			362
Cumulative Adjustment		-		-		-			-			1,381			1,381
Foreign currency translation adjustment		-		-		-			(137	)		-			(137	)
Compensation on stock-based awards		-		-		80			-			-			80
Share repurchases		-		-		(228	)		-			-			(228	)
BALANCE SEPTEMBER 30, 2018	$	250	$	27	$	15,612		$	(238	)	$	5,632		$	21,283
BALANCE JUNE 30, 2019	$	250	$	27	$	15,682		$	(233	)	$	3,521		$	19,247
Net Income		-		-		-			-			413			413
Foreign currency translation adjustment		-		-		-			(56	)		-			(56	)
Compensation on stock-based awards		-		-		35			-			-			35
Share repurchases		-		-		(4	)		-			-			(4	)
BALANCE SEPTEMBER 30, 2019	$	250	$	27	$	15,713		$	(289	)	$	3,934		$	19,635
BALANCE DECEMBER 31, 2018	$	250	$	27	$	15,610		$	(233	)	$	5,436		$	21,090
Net Loss		-		-		-			-			(1,502	)		(1,502	)
Foreign currency translation adjustment		-		-		-			(56	)		-			(56	)
Stock option exercises		-		-		7			-			-			7
Compensation on stock-based awards		-		-		226			-			-			226
Share repurchases		-		-		(130	)		-			-			(130	)
BALANCE SEPTEMBER 30, 2019	$	250	$	27	$	15,713		$	(289	)	$	3,934		$	19,635

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

6

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

7

Stock-Based Awards

Following is the status of all stock options as of September 30, 2019:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2019		224,750		$	3.44
Granted		186,200			4.31
Exercised		(2,250	)		3.20
Cancelled		(109,700	)		3.50
Outstanding - September 30, 2019		299,000		$	3.96		9.13	$	-
Exercisable - September 30, 2019		26,867		$	3.41		8.46	$	-

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 16,700 and 186,200 stock options granted during the three and nine months ended September 30, 2019, respectively.

Total compensation expense was $35 for both the three ended September 30, 2019 and 2018, and $110 and $80 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $403 of unrecognized compensation which will vest over the next 3.13 years.

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. 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 the 2010 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 market value for each reporting period.

During the nine months ended September 30, 2019, 100,000 units were granted in the first quarter. During the three and nine months ended September 30, 2018, no units were granted.

Total compensation expense related to vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for both the three and nine months ended September 30, 2019 and 2018.

During the nine months ended September 30, 2019, there were 25,000 shares awarded that vested immediately that had expense of $116 during the first quarter.

8

Net Income (Loss) per Common Share

For the three months ended September 30, 2019, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of income per common share amount. For the nine months ended September 30, 2019, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount. For both the three months and nine months ended September 30, 2018, 2,217 and 3,553 stock options, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

Share Repurchase Program

We had a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 1,245 and 32,985 shares in the open market transactions totaling $4 and $130 for the three months and nine months ended September 30, 2019, respectively. 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. As of September 30, 2019, our share repurchase program has expired, and no additional amounts are available for repurchase.

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 September 30, 2019 balance included 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 September 30, 2019, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the three months ended and nine months ended September 30, 2019 have been reduced by an allowance for doubtful accounts of $323 at September 30, 2019 and $222 at December 31, 2018.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	September 30,			December 31,
	2019			2018
Raw Materials	$	17,036		$	16,769
Work in Process		1,105			1,015
Finished Goods		198			332
Reserves		(1,398	)		(1,112	)
Total	$	16,941		$	17,004

9

Other Intangible Assets

Other intangible assets at September 30, 2019 and December 31, 2018 are as follows:

			September 30, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	615	$	687
Intellectual Property		3		100		86		14
Trade Names		20		814		173		641
Patents		7		55		-		55
Totals			$	2,271	$	874	$	1,397

			December 31, 2018
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	506	$	796
Intellectual Property		3		100		61		39
Trade Names		20		814		143		671
Patents		7		17		-		17
Totals			$	2,233	$	710	$	1,523

Amortization expense for the three and nine months ended September 30, 2019 was $55 and $164, respectively.

Estimated future annual amortization expense (not including projects in process) related to these assets is approximately as follows (in thousands):

Year	Amount
Remainder of 2019	$	55
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,342

10

Impairment of 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. No events were identified during the nine months ended September 30, 2019 that would require us to test for impairment. 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 it 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.

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, 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. 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. No impairment expense was recorded during the three and nine months ended September 30, 2019 and 2018, respectively.

Recently Adopted Accounting Standards

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year. We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases.

The impact of adopting the new lease standard was the recognition of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had no impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Shareholders’ Equity.

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $160 in cash at September 30, 2019, approximately $105 was held at banks located in China. 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 three and nine months ended September 30, 2019 and 2018. One division accounted for approximately 19% and 21% of net sales for the three and nine months ended September 30, 2019, respectively, and approximately 20% for both the three and nine months ended September 30, 2018. The other division accounted for approximately 3% of net sales for both the three months and nine months ended September 30, 2019, and approximately 1% net sales for the three and nine months ended September 30, 2018. Together they accounted for approximately 22% and 24% of net sales for the three and nine months ended September 30, 2019, respectively, and approximately 21% of net sales for both the three and nine months ended September 30, 2018. Accounts receivable from the customer at September 30, 2019 and December 31, 2018 represented approximately 28% and 16% of our total accounts receivable, respectively.

11

Export sales represented approximately 9% and 20% of net sales for the three months ended September 30, 2019 and 2018, respectively. Export sales represented 15% and 19% of net sales for the nine months ended September 30, 2019 and 2018, respectively.

NOTE 3. REVENUE

Revenue recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for both the three and nine months ended September 30, 2019. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.

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Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three and nine months ended September 30, 2019 was as follows (in thousands):

Nine Months Ended September 30, 2019
Outstanding at January 1, 2019	$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(4,923	)
Product transferred over time		5,703
Outstanding at September 30, 2019	$	7,211

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2019, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the three and nine months ended September 30, 2019 (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

NOTE 4. FINANCING ARRANGEMENTS

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and amended effective December 29, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022.

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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 a weighted-average interest rate of 5.4% and 4.3% as of September 30, 2019 and 2018, respectively. We had borrowings on our line of credit of $12,430 and $9,264 outstanding as of September 30, 2019 and December 31, 2018, 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 as amended 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. As of September 30, 2019, we did not meet the fixed charge coverage ratio which was waived by BofA in the third amendment to the credit agreement received on November 8, 2019.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At September 30, 2019, we had unused availability under our line of credit of $3,523, supported by our borrowing base. The line is 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 $1,000 and $1,300, which was fully paid off during the first half of 2019.

In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of credit arrangement of 6,000,000 Renminbi (RMB) that expires on April 3, 2021. This line of credit bears an interest rate of 6% and we had no amounts outstanding as of September 30, 2019.

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Long-term debt at September 30, 2019 and December 30, 2018 consisted of following:

	September 30,			December 31,
	2019			2018
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.4% and 4.8% as of September 30, 2019 and December 31, 2018, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,880		$	4,253
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		-			156
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		-			203
		3,880			4,612
Discount on Devicix Notes Payable		-			(23	)
Debt issuance Costs		(141	)		(185	)
Total long-term debt		3,739			4,404
Current maturities of long-term debt		(444	)		(780	)
Long-term debt - net of current maturities	$	3,295		$	3,624

NOTE 5. LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At September 30, 2019, we do not have material lease commitments that have not commenced.

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The components of lease expense were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
Lease Cost	2019		2019
Operating lease cost	$	253	$	785
Finance lease interest cost		21		54
Finance lease amortization expense		65		196
Total lease cost	$	339	$	1,035

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	September 30, 2019
Assets
Operating lease assets	Operating lease assets	$	5,018
Finance lease assets	Property, Plant and Equipment		1,834
Total leased assets			6,852
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		841
Current finance lease liabilities	Current Portion of Finance Lease Obligations		476
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,517
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,168
Total lease liabilities		$	7,002

Supplemental cash flow information related to leases was as follows:

	Nine Months Ended September 30,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	555
Right-of-use assets obtained in exchange for lease obligations	$	—

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Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2019	$	191		$	133		$	324
2020		858			534			1,392
2021		722			534			1,256
2022		726			359			1,085
2023		738			138			876
Thereafter		3,381			102			3,483
Total lease payments	$	6,616		$	1,800		$	8,416
Less: Interest		(1,258	)		(156	)		(1,414	)
Present value of lease liabilities	$	5,358		$	1,644		$	7,002

The lease term and discount rate at June 30, 2019 were as follows:

Weighted-average remaining lease term (years)
Operating leases	7.6
Finance leases	3.4
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Rent expense for our operating leases the three and nine months ended September 30, 2018 as accounted under ASC 840, Leases, was $297 and $951, respectively.

The future minimum lease commitments as of December 31, 2018, under ASC 840 are as follows:

	Operating Leases
2019	$	1,024
2020		858
2021		722
2022		726
2023		738
Thereafter		3,380
Total minimum obligations	$	7,448

NOTE 6. INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and nine months ended September 30, 2019 was 10% and (9%), respectively and our effective tax rate for the three and nine months ended September 30, 2018 was 24% and 49%, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, Eden Prairie, Mankato, 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.

Results of Operations

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold		87.9			88.5			89.6			87.9
Gross Profit		12.1			11.5			10.4			12.1
Selling Expenses		2.0			2.4			2.5			3.3
General and Administrative Expenses		7.7			6.8			8.6			7.3
Income from Operations		2.4			2.3			(0.7	)		1.5
Other Expenses		(0.9	)		(0.7	)		(0.9	)		(0.7	)
Income (Loss) Before Income Taxes		1.5			1.6			(1.6	)		0.8
Income Tax Expense		0.1			0.4			0.2			0.4
Net Income (Loss)		1.4	%		1.2	%		(1.8	%)		0.4	%

Net Sales

Net sales were $30.1 million in the third quarter of 2019, as compared to $29.6 million in the third quarter of the prior year, an increase of $0.5 million or 1.7%. Net sales results were varied by markets; the medical market increased by $2.7 million or 19.3% with medical devices accounting for the increase. The industrial market decreased by $2.5 million or 22.3% of sales in the third quarter of 2019 as compared to the same quarter of 2018. Net sales from the aerospace and defense markets increased by $0.2 million or 5.0% of sales in the third quarter of 2019 as compared to the third quarter of 2018.

Net sales were $85.5 million in the nine months ended 2019, as compared to $84.5 million in the prior year, an increase of $1.0 million or 1.1%.  Net sales results were varied by markets; the medical market increased by 9.1 million, or 24.9% with medical device accounting for 84.5% of the increase and medical component products the remaining 15.5%. The industrial market decreased by $8.0 million of sales or 23.3% for the nine months ended September 30, 2019 as compared to the same period of 2018. Net sales from aerospace and defense markets remained flat in the nine months ended September 30, 2019 as compared to the same period of 2018.

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Net sales by our major EMS industry markets for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):

	Three months Ended September 30,							Nine Months Ended September 30,
	2019 $		2018 $		% Change			2019 $		2018 $		% Change
Medical		17,043		14,280		19.3			46,006		36,838		24.9
Industrial		8,623		11,094		(22.3	)		26,290		34,261		(23.3	)
Aerospace and Defense		4,392		4,184		5.0			13,219		13,444		(1.7	)
Total Net Sales		30,058		29,558		1.7			85,515		84,543		1.1

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

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Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2018 is as follows (in thousands):

	Three Months Ended September 30, 2018
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,461	$	151	$	668	$	14,280
Industrial		9,486		1,116		492		11,094
Aerospace and Defense		3,931		50		203		4,184
Total net sales	$	26,878	$	1,317	$	1,363	$	29,558

	Nine Months Ended September 30, 2018
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	34,513	$	720	$	1,605	$	36,838
Industrial		29,698		3,165		1,398		34,261
Aerospace and Defense		12,675		170		599		13,444
Total net sales	$	76,886	$	4,055	$	3,602	$	84,543

Backlog

Our 90-day shipment backlog as of September 30, 2019 was $32 million, a 2.0% increase from the beginning of the quarter and a 15.6% increase from the prior year. Backlog for our medical customers has increased 6.4% from the beginning of the quarter and increased 37.8% from the prior year. Our industrial customers’ backlog increased 6.0% from the beginning of the quarter and decreased 10.2% from the prior year. The aerospace and defense backlog decreased 13.5% from the beginning of the quarter and increased 6.9% 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,		June 30,		September 30,
	2019		2019		2018
Medical	$	17,778	$	16,701	$	12,902
Industrial		8,334		7,863		9,279
Aerospace and Defense		5,909		6,833		5,530
Total 90-Day Backlog	$	32,021	$	31,397	$	27,711

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 $58.1 million at September 30, 2019 compared to $43.1 million at the end of September 30, 2018.

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Gross Profit

Gross profit as a percent of net sales for the three months ended September 30, 2019 and 2018 was 12.1% and 11.5%, respectively, driven by favorable product mix. Gross profit as a percentage of sales for the nine months ended September 30, 2019 and 2018 was 10.4% and 12.1%, respectively. The decline in gross profit in the year to date comparison was driven by product mix and operational inefficiencies due to component shortages.

Selling Expense

Selling expenses for the three months ended September 30, 2019 and 2018 was $0.6 million or 2.0% of sales and $0.7 million or 2.4% of sales, respectively. Selling expense for the nine months ended September 30, 2019 and 2018 was $2.1 million or 2.5% of sales and $2.8 million or 3.3% of sales, respectively. The decrease in both the three and nine month periods is due to lower sales incentives and timing of events.

General and Administrative Expense

General and administrative expenses for the three months ended September 30, 2019 and 2018 were $2.3 million or 7.7% of sales and $2.0 million or 6.8% of sales, respectively. General and administrative expenses for the nine months ended September 30, 2019 and 2018 were $7.4 million or 8.6% of sales and $6.2 million or 7.3% of sales, respectively. The increase in both comparisons was due to additional spend related to our recently implemented ERP system and one-time expenditures to improve operations.

Income (Loss) from Operations

Third quarter 2019 income from operations was $0.7 million compared to $0.6 million for the third quarter in 2018. Loss from operations for the first nine months in 2019 was $0.6 million as compared to income of $1.3 million for the same comparable period in 2018.  The decrease to a loss from operations for the period was due to the gross profit decline and higher general and administrative expenses.

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, 2019 was 10% and (9%) and the rate for the three and nine months ended September 30, 2018 was 24% and 49%, respectively.

Net Income (Loss)

Net income for the three months ended September 30, 2019 and September 30, 2018 was $0.4 million. Net loss for the nine months ended September 30, 2019 was $1.5 million and net income for the nine months ended September 30, 2018 was $0.4 million.

21

Liquidity and Capital Resources

Net cash used in operating activities for the nine months ended September 30, 2019 was $0.2 million. Net cash provided by operating activities for the nine months ended September 30, 2018 was $2.6 million driven by the net income net of the noncash adjustment of depreciation and amortization, along with an increase in accounts payable, partially offset by an increase in accounts receivable and inventories.

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, 2019, we had outstanding advances of $12.4 million under the line of credit and unused availability of $3.5 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 $22.7 million and $20.7 million as of September 30, 2019 and December 31, 2018, respectively.

The BofA credit agreement as amended 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. As of September 30, 2019, we did not meet the fixed charge coverage ratio which was waived by BofA in the third amendment to the credit agreement received on November 8, 2019.

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, 2018. 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.

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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. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

♦	General economic, financial and business conditions that could affect our financial condition and results of operations;
♦	Volatility in the marketplace which may affect market supply and demand for 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 operating facilities or those of third parties;
♦	Risks related to availability of labor;
♦	Increase in certain raw material costs such as copper and oil;
♦	Commodity and energy cost instability;
♦	Risks related to quality, regulatory, securities laws and debt covenant noncompliance;
♦	Loss of a major customer or changes to customer orders;
♦	Increased or unanticipated costs related to compliance with securities and environmental regulation; and
♦	Disruption of global or local information management systems due to natural disaster or cyber-security incident.

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, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 4. CONTROLS AND PROCEDURES

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. 

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PART II

ITEM 1. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

ITEM 1A. RISK FACTORS

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, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding the repurchases we made of our common stock during the periods indicated.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
July 1 - July 31, 2019		1,029	$	3.94		1,029	$	33,508
August 1 - August 30, 2019		216	$	3.90		216	$	32,644
September 1 - September 30, 2019		-	$	-		-	$	-
Total		1,245	$	3.93		1,245	$	-

As of September 30, 2019, our share repurchase program has expired, and no additional amounts are available for repurchase.

ITEM 3. DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibits

10.2*	Third Amendment to Loan and Security Agreement and Waiver.
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32* Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101* Financial statements from the quarterly report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

*Filed herewith

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Signatures

---------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Nortech Systems Incorporated and Subsidiaries

------------------------------------------------------------

Date: November 12, 2019	by /s/ Jay D. Miller Jay D. Miller Chief Executive Officer and President Nortech Systems Incorporated
Date: November 12, 2019	by /s/ Constance M. Beck Constance M. Beck Vice President and Chief Financial Officer Nortech Systems Incorporated

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EX-10.2

Exhibit 10.2

Execution Version

THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER

THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT AND WAIVER (this “Amendment”) is made and entered into effective as of November __, 2019, by and between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (“Borrower”), and BANK OF AMERICA, N.A., a national banking association (the “Lender”).

RECITALS:     

A.     Borrower and Lender are parties to a certain Loan and Security Agreement dated as of June 15, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”). Capitalized terms not otherwise defined in this Amendment shall have the meanings assigned to them in the Loan Agreement.

B.     The Borrower has requested that the Lender (i) amend and modify certain terms and provisions of the Loan Agreement and (ii) waive the Borrower’s non-compliance with certain provisions set forth in the Loan Agreement.

C.     The Lender has agreed to grant such waiver and to so amend the Loan Agreement upon the terms and subject to the conditions set forth in this Amendment.

AGREEMENTS:

NOW, THEREFORE, in consideration of the premises herein set forth and for other good and valuable consideration, the nature, receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1.     Recitals. The Borrower and the Lender agree that the Recitals set forth above are true and correct.

2.     Waiver.

a.     Pursuant to Section 9.3.1 of the Loan Agreement (prior to giving effect to this Amendment), the Borrower is required maintain a Fixed Charge Coverage Ratio of at least 1.0 to 1.0 for each period of four Fiscal Quarters. The Borrower has informed the Lender that the Fixed Charge Coverage Ratio for the four Fiscal Quarter period ending September 30, 2019, was less than 1.0 to 1.0. Such non-compliance with Section 9.3.1 of the Loan Agreement constitutes an Event of Default pursuant to Section 10.1(c) of the Loan Agreement (the “Existing Default”).

b.     Borrower has requested that the Lender waive the Existing Default. Subject to the Borrower’s full satisfaction of all conditions precedent set forth in Section 4 below, the Lender hereby so waives the Existing Default. The foregoing waiver shall not apply to any other provision of the Loan Agreement or the other Loan Documents, and shall not give rise to any course of dealing or course of performance with respect to future requests.

3.     Amendment. Section 9.3.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:

9.3.1     Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio, determined as of the last day of each Fiscal Quarter for the measurement period then ended, of not less than the applicable ratio set forth below for such measurement period:

Measurement Period	Minimum Fixed Charge Coverage Ratio
Three months ending December 31, 2019	1.0 to 1.0
Six months ending March 31, 2020	1.0 to 1.0
Nine months ending June 30, 2020	1.0 to 1.0
Twelve months ending September 30, 2020 and each Fiscal Quarter end thereafter	1.0 to 1.0

4.     Conditions Precedent. This Amendment shall become effective upon delivery to the Lender of the following, each in form and substance acceptable to the Lender:

a.     This Amendment, duly executed by the Borrower and the Lender.

b.     Such other documents, instruments and agreements as the Lender may reasonably require.

5.     Representations; No Default. Borrower represents and warrants that: (a) Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized the execution and delivery of this Amendment and other agreements and documents executed and delivered by Borrower in connection herewith, (b) neither this Amendment nor the agreements contained herein contravene or constitute a Default or Event of Default under the Loan Agreement or a default under any other agreement, instrument or indenture to which Borrower is a party or a signatory, or any provision of Borrower’s Articles of Incorporation or By-Laws or, to the best of Borrower’s knowledge, any other agreement or requirement of law, or result in the imposition of any lien or other encumbrance on any of its property under any agreement binding on or applicable to Borrower or any of its property except, if any, in favor of the Lender, (c) no consent, approval or authorization of or registration or declaration with any party, including but not limited to any governmental authority, is required in connection with the execution and delivery by Borrower of this Amendment or other agreements and documents executed and delivered by Borrower in connection herewith or the performance of obligations of Borrower herein described, except for those which Borrower has obtained or provided and as to which Borrower has delivered certified copies of documents evidencing each such action to the Lender, (d) no events have taken place and no circumstances exist at the date hereof which would give Borrower grounds to assert a defense, offset or counterclaim to the obligations of Borrower under the Loan Agreement or any of the other Loan Documents, (e) there are no known claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including attorneys’ fees) of any kind, character or nature whatsoever, fixed or contingent, which Borrower may have or claim to have against the Lender, which might arise out of or be connected with any act of commission or omission of the Lender existing or occurring on or prior to the date of this Amendment, including, without limitation, any claims, liabilities or obligations arising with respect to the indebtedness evidenced by any promissory note executed by Borrower in favor of the Lender, (f) the representations and warranties of Borrower contained in the Loan Agreement are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date and (g) except as expressly set forth in Section 2 above, no Default or Event of Default has occurred and is continuing under the Loan Agreement.

6.     Affirmation, Further References. The Lender and the Borrower each acknowledge and affirm that the Loan Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Loan Agreement (except as amended by this Amendment) and of each of the other Loan Documents shall remain unmodified and in full force and effect. All references in any document or instrument to the Loan Agreement are hereby amended and shall refer to the Loan Agreement as amended by this Amendment.

7.     Severability. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction.

8.     Successors. This Amendment shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and to the respective successors and assigns of the Lender.

9.     Costs and Expenses. The Borrower agrees to reimburse the Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys’ fees and legal expenses of counsel for the Lender) incurred in connection with the Loan Agreement, including in connection with the negotiation, preparation and execution of this Amendment and all other documents negotiated, prepared and executed in connection with this Amendment, and in enforcing the obligations of the Borrower under this Amendment, and to pay and save the Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment.

10.     Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment.

11.     Counterparts; Digital Copies. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and any party to this Amendment may execute any such agreement by executing a counterpart of such agreement. A facsimile or digital copy (pdf) of this signed Amendment shall be deemed to be an original thereof.

12.     Governing Law. This Amendment shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof.

13.     Release of Rights and Claims. Borrower, for itself and its successors and assigns, hereby releases, acquits, and forever discharges the Lender and its successors and assigns for any and all manner of actions, suits, claims, charges, judgments, levies and executions occurring or arising from the transactions entered into with the Lender prior to entering into this Amendment whether known or unknown, liquidated or unliquidated, fixed or contingent, direct or indirect which Borrower may have against the Lender.

14.     No Waiver. Except as expressly provided in Section 2 above, nothing contained in this Amendment (or in any other agreement or understanding between the parties) shall constitute a waiver of, or shall otherwise diminish or impair, the Lender’s rights or remedies under the Loan Agreement or any of the other Loan Documents, or under applicable law.

[Remainder of Page Intentionally Blank]

IN WITNESS WHEREOF, the parties hereto have entered into this Amendment as of the date first above written.

BORROWER:	NORTECH SYSTEMS INCORPORATED By:/s/ Constance M. Beck Name: Constance M. Beck Title: CFO
LENDER:	BANK OF AMERICA, N.A.

 5

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Jay D. Miller, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2019	By:	/s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Constance M. Beck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2019	By:	/s/ Constance M. Beck
		Constance M. Beck
		Vice President and Chief Financial Officer
		Nortech Systems Incorporated

EX-32

Exhibit 32

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Jay D. Miller, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 12, 2019

By:	/s/ Jay D. Miller
	Jay D. Miller
	Chief Executive Officer and President
	Nortech Systems Incorporated

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Constance M. Beck, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 12, 2019

By:	/s/ Constance M. Beck
	Constance M. Beck
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

XML

Note 4 - Financing Arrangements - Long-term Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Long-term debt gross	$ 3,880	$ 4,612
Discount on Devicix Notes Payable		(23)
Debt issuance Costs	(141)	(185)
Total long-term debt	3,739	4,404
Current maturities of long-term debt	(444)	(780)	[1]
Long-term debt - net of current maturities	3,295	3,624
Real Estate Term Note [Member]
Long-term debt gross	3,880	4,253
First Unsecured Subordinated Promissory Notes Payable [Member]
Long-term debt gross		156
Second Unsecured Subordinated Promissory Notes Payable [Member]
Long-term debt gross		$ 203

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

XML

Note 1 - Summary of Significant Accounting Policies - Other Intangible Assets (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Gross carrying amount	$ 2,271	$ 2,233
Accumulated amortization	874	710
Other Intangible Assets, Net	$ 1,397	$ 1,523	[1]
Customer Relationships [Member]
Remaining lives (Year)	9 years	9 years
Gross carrying amount	$ 1,302	$ 1,302
Accumulated amortization	615	506
Other Intangible Assets, Net	$ 687	$ 796
Intellectual Property [Member]
Remaining lives (Year)	3 years	3 years
Gross carrying amount	$ 100	$ 100
Accumulated amortization	86	61
Other Intangible Assets, Net	$ 14	$ 39
Trade Names [Member]
Remaining lives (Year)	20 years	20 years
Gross carrying amount	$ 814	$ 814
Accumulated amortization	173	143
Other Intangible Assets, Net	$ 641	$ 671
Patents [Member]
Remaining lives (Year)	7 years	7 years
Gross carrying amount	$ 55	$ 17
Accumulated amortization
Other Intangible Assets, Net	$ 55	$ 17

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

XML

Note 3 - Revenue 2 (Details Textual)	Sep. 30, 2019
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period	180 days

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net sales	$ 30,058	$ 29,558	$ 85,515	$ 84,543
Cost of Goods Sold	26,423	26,171	76,594	74,311
Gross Profit	3,635	3,387	8,921	10,232
Operating Expenses
Selling Expenses	589	717	2,147	2,792
General and Administrative Expenses	2,333	2,021	7,374	6,177
Total Operating Expenses	2,922	2,738	9,521	8,969
Income (Loss) From Operations	713	649	(600)	1,263
Other Expense
Interest Expense	(256)	(170)	(780)	(551)
Income (Loss) Before Income Taxes	457	479	(1,380)	712
Income Tax Expense	44	115	122	350
Net Income (Loss)	$ 413	$ 364	$ (1,502)	$ 362
Net Income (Loss) Per Common Share:
Basic (in dollars per share) (in dollars per share)	$ 0.16	$ 0.14	$ (0.56)	$ 0.13
Weighted Average Number of Common Shares Outstanding - Basic (in shares) (in shares)	2,657,911	2,680,684	2,667,754	2,698,950
Diluted (in dollars per share) (in dollars per share)	$ 0.16	$ 0.14	$ (0.56)	$ 0.13
Weighted Average Number of Common Shares Outstanding - Diluted (in shares) (in shares)	2,657,911	2,682,901	2,667,754	2,702,503
Other comprehensive income (loss)
Foreign currency translation	$ (56)	$ (83)	$ (56)	$ (137)
Comprehensive income (loss), net of tax	$ 357	$ 281	$ (1,558)	$ 225

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Note 5 - Leases - Maturity of Lease Liabilities (Details) - USD ($)	Sep. 30, 2019	Jan. 01, 2019
Operating leases, remaining 2019	$ 191,000
Finance leases, remaining 2019	133,000
Total, remaining 2019	324,000
Operating leases, 2020	858,000
Finance leases, 2020	534,000
Total, 2020	1,392,000
Operating leases, 2021	722,000
Finance leases, 2021	534,000
Total, 2021	1,256,000
Operating leases, 2022	726,000
Finance leases, 2022	359,000
Total, 2022	1,085,000
Operating leases, 2023	738,000
Finance leases, 2023	138,000
Total, 2023	876,000
Operating leases, thereafter	3,381,000
Finance leases, thereafter	102,000
Total, thereafter	3,483,000
Operating leases, total lease payments	6,616,000
Finance leases, total lease payments	1,800,000
Total, total lease payments	8,416,000
Operating leases, less: Interest	(1,258,000)
Finance leases, less: Interest	(156,000)
Total, less: Interest	(1,414,000)
Operating leases, present value of lease liabilities	5,358,000	$ 5,731,000
Finance leases, present value of lease liabilities	1,644,000
Total, present value of lease liabilities	$ 7,002,000

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Note 4 - Financing Arrangements - Long-term Debt (Details) (Parentheticals) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Real Estate Term Note [Member]
Variable rate basis	2.25%	2.25%
Interest rate	4.40%	4.80%
Monthly payments	$ 41	$ 41
First Unsecured Subordinated Promissory Notes Payable [Member]
Interest rate		4.00%
Second Unsecured Subordinated Promissory Notes Payable [Member]
Interest rate		4.00%

XML

Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($)	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member]	Total
BALANCE at Dec. 31, 2017	$ 250,000	$ 27,000	$ 15,760,000	$ (101,000)	$ 3,889,000	$ 19,825,000
Net Income (Loss)					362,000	362,000
Cumulative Adjustment					1,381,000	1,381,000
Foreign currency translation adjustment				(137,000)		(137,000)
Compensation on stock-based awards			80,000			80,000
Share repurchases			(228,000)			(228,000)
BALANCE at Sep. 30, 2018	250,000	27,000	15,612,000	(238,000)	5,632,000	21,283,000
BALANCE at Jun. 30, 2018	250,000	27,000	15,619,000	(155,000)	5,268,000	21,009,000
Net Income (Loss)					364,000	364,000
Cumulative Adjustment
Foreign currency translation adjustment				(83,000)		(83,000)
Compensation on stock-based awards			35,000			35,000
Share repurchases			(42,000)			(42,000)
BALANCE at Sep. 30, 2018	250,000	27,000	15,612,000	(238,000)	5,632,000	21,283,000
BALANCE at Dec. 31, 2018	250,000	27,000	15,610,000	(233,000)	5,436,000	21,090,000	[1]
Net Income (Loss)					(1,502,000)	(1,502,000)
Foreign currency translation adjustment				(56,000)		(56,000)
Compensation on stock-based awards			226,000			226,000
Share repurchases			(130,000)			(130,000)
Stock option exercises			7,000			7,000
BALANCE at Sep. 30, 2019	250,000	27,000	15,713,000	(289,000)	3,934,000	19,635,000
BALANCE at Jun. 30, 2019	250,000	27,000	15,682,000	(233,000)	3,521,000	19,247,000
Net Income (Loss)					413,000	413,000
Foreign currency translation adjustment				(56,000)		(56,000)
Compensation on stock-based awards			35,000			35,000
Share repurchases			(4,000)			(4,000)
BALANCE at Sep. 30, 2019	$ 250,000	$ 27,000	$ 15,713,000	$ (289,000)	$ 3,934,000	$ 19,635,000

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do

not

include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented

not

misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form

10

-K for the year ended

December 31, 2018.

The operating results for the interim periods presented are

not

necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Revenue [Policy Text Block]

Revenue Recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than

10%

of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Share-based Payment Arrangement [Policy Text Block]

Stoc

k-Based Awards

Following is the status of all stock options as of

September 30, 2019:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2019		224,750		$	3.44
Granted		186,200			4.31
Exercised		(2,250	)		3.20
Cancelled		(109,700	)		3.50
Outstanding - September 30, 2019		299,000		$	3.96		9.13	$	-
Exercisable - September 30, 2019		26,867		$	3.41		8.46	$	-

The

2005

Plan has

not

been renewed, and therefore

no

further grants

may

be made under the

2005

Plan. In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

350,000

shares. There were

16,700

and

186,200

stock options granted during the

three

and

nine

months ended

September 30, 2019,

respectively.

Total compensation expense was

$35

for both the

three

ended

September 30, 2019

and

2018,

and

$110

and

$80

for the

nine

months ended

September 30, 2019

and

2018,

respectively. As of

September 30, 2019,

there was

$403

of unrecognized compensation which will vest over the next

3.13

years.

In

November 2010,

the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (

“2010

Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the

2010

Plan shall

not

exceed an aggregate of

1,000,000

Units as amended and restated on

March 11, 2015.

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 the

2010

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 market value for each reporting period.

During the

nine

months ended

September 30, 2019,

100,000

units were granted in the

first

quarter. During the

three

and

nine

months ended

September 30, 2018,

no

units were granted.

Total compensation expense related to vested outstanding Units based on the estimated appreciation over their remaining terms was

$0

for both the

three

and

nine

months ended

September 30, 2019

and

2018.

During the

nine

months ended

September 30, 2019,

there were

25,000

shares awarded that vested immediately that had expense of

$116

during the

first

quarter.

Earnings Per Share, Policy [Policy Text Block]

Net Income (Loss) per Common Share

For the

three

months ended

September 30, 2019,

all stock options are deemed to be antidilutive and, therefore, were

not

included in the computation of income per common share amount. For the

nine

months ended

September 30, 2019,

the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were

not

included in the computation of loss per common share amount. For both the

three

months and

nine

months ended

September 30, 2018,

2,217

and

3,553

stock options, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

Share Repurchase Program [Policy Text Block]

Share Repurchase Program

We had a

$250

share repurchase program which was authorized by our Board of Directors in

August 2017.

Under this repurchase program, we repurchased

1,245

and

32,985

shares in the open market transactions totaling

$4

 and

$130

 for the

three

months and

nine

months ended

September 30, 2019,

respectively. 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. As of

September 30, 2019,

our share repurchase program has expired, and

no

additional amounts are available for repurchase.

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]

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

September 30, 2019

balance included 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

September 30, 2019,

we had

no

outstanding letters of credit.

Accounts Receivable [Policy Text Block]

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is

not

required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the

three

months ended and

nine

months ended

September 30, 2019

have been reduced by an allowance for doubtful accounts of

$323

at

September 30, 2019

and

$222

at

December 31, 2018.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost (

first

-in,

first

-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that

may

have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	September 30,			December 31,
	2019			2018
Raw Materials	$	17,036		$	16,769
Work in Process		1,105			1,015
Finished Goods		198			332
Reserves		(1,398	)		(1,112	)
Total	$	16,941		$	17,004

Goodwill and Intangible Assets, Intangible Assets, Policy [Policy Text Block]

Other Intangible Assets

Other intangible assets at

September 30, 2019

and

December 31, 2018

are as follows:

			September 30, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	615	$	687
Intellectual Property		3		100		86		14
Trade Names		20		814		173		641
Patents		7		55		-		55
Totals			$	2,271	$	874	$	1,397

			December 31, 2018
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	506	$	796
Intellectual Property		3		100		61		39
Trade Names		20		814		143		671
Patents		7		17		-		17
Totals			$	2,233	$	710	$	1,523

Amortization expense for the

three

and

nine

months ended

September 30, 2019

was

$55

and

$164,

respectively.

Estimated future annual amortization expense (

not

including projects in process) related to these assets is approximately as follows (in thousands):

Year	Amount
Remainder of 2019	$	55
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,342

Impairment or Disposal of Long-Lived Assets, Including Intangible Assets, Policy [Policy Text Block]

Impairment of 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

.

No

events were identified during the

nine

months ended

September 30, 2019

that would require us to test for impairment. 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 it 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.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, 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. 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.

No

impairment expense was recorded during the

three

and

nine

months ended

September 30, 2019

and

2018,

respectively.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently

Adopted

Accounting Standards

On

January 1, 2019,

we adopted ASU

No.

2016

-

02,

Leases (Topic

842

). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us

not

to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will

not

recognize operating lease related assets or liabilities for leases with a lease term less than

one

year. We did

not

elect the hindsight practical expedient to determine the reasonably certain term of existing leases.

The impact of adopting the new lease standard was the recognition of

$5,731

of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had

no

impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Shareholders’ Equity.

XML

Note 5 - Leases (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Lease, Cost [Table Text Block]

	Three Months Ended September 30,		Nine Months Ended September 30,
Lease Cost	2019		2019
Operating lease cost	$	253	$	785
Finance lease interest cost		21		54
Finance lease amortization expense		65		196
Total lease cost	$	339	$	1,035

	Nine Months Ended September 30 ,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	555
Right-of-use assets obtained in exchange for lease obligations	$	—

Weighted-average remaining lease term (years)
Operating leases	7.6
Finance leases	3.4
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Schedule of Supplemental Balance Sheet Information Related to Leases [Table Text Block]

	Balance Sheet Location	September 30 , 2019
Assets
Operating lease assets	Operating lease assets	$	5,018
Finance lease assets	Property, Plant and Equipment		1,834
Total leased assets			6,852
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		841
Current finance lease liabilities	Current Portion of Finance Lease Obligations		476
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,517
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,168
Total lease liabilities		$	7,002

Schedule of Lease Liability Maturity [Table Text Block]

	Operating Leases			Finance Leases			Total
Remaining 2019	$	191		$	133		$	324
2020		858			534			1,392
2021		722			534			1,256
2022		726			359			1,085
2023		738			138			876
Thereafter		3,381			102			3,483
Total lease payments	$	6,616		$	1,800		$	8,416
Less: Interest		(1,258	)		(156	)		(1,414	)
Present value of lease liabilities	$	5,358		$	1,644		$	7,002

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

	Operating Leases
2019	$	1,024
2020		858
2021		722
2022		726
2023		738
Thereafter		3,380
Total minimum obligations	$	7,448

XML

Note 5 - Leases - Future Minimum Lease Commitments (Details) $ in Thousands	Dec. 31, 2018 USD ($)
2019	$ 1,024
2020	858
2021	722
2022	726
2023	738
Thereafter	3,380
Total minimum obligations	$ 7,448

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Sep. 30, 2019	Dec. 31, 2018
ASSETS
Cash	$ 160,000	$ 480,000	[1]
Restricted Cash	1,794,000	467,000	[1]
Accounts Receivable, less allowances of $323 and $222	20,135,000	20,093,000	[1]
Inventories	16,941,000	17,004,000	[1]
Contract Assets	7,211,000	6,431,000	[1]
Prepaid Expenses and Other Current Assets	2,019,000	1,381,000	[1]
Total Current Assets	48,260,000	45,856,000	[1]
Property and Equipment, Net	9,710,000	10,178,000	[1]
Operating Lease Assets	5,018,000
Goodwill	2,375,000	2,375,000	[1]
Other Intangible Assets, Net	1,397,000	1,523,000	[1]
Other Non Current Assets	19,000	28,000	[1]
Total Assets	66,779,000	59,960,000	[1]
Current Liabilities
Current Maturities of Long-Term Debt	444,000	780,000	[1]
Current Portion of Finance Lease Obligation	476,000	337,000
Current Portion of Operating Lease Obligations	841,000		[1]
Accounts Payable	18,384,000	18,142,000	[1]
Accrued Payroll and Commissions	2,626,000	2,747,000	[1]
Other Accrued Liabilities	2,845,000	2,886,000	[1]
Total Current Liabilities	25,616,000	24,892,000	[1]
Long-Term Liabilities
Long Term Line of Credit	12,430,000	9,264,000	[1]
Long-Term Debt, Net	3,295,000	3,624,000	[1]
Long Term Finance Lease Obligation, Net	1,168,000	951,000	[1]
Long-Term Operating Lease Obligation, Net	4,517,000		[1]
Other Long-Term Liabilities	118,000	139,000	[1]
Total Long-Term Liabilities	21,528,000	13,978,000	[1]
Total Liabilities	47,144,000	38,870,000	[1]
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	[1]
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,686,328 and 2,739,250 Shares Issued and Outstanding, respectively	27,000	27,000	[1]
Additional Paid-In Capital	15,713,000	15,610,000	[1]
Accumulated Other Comprehensive Loss	(289,000)	(233,000)	[1]
Retained Earnings	3,934,000	5,436,000	[1]
Total Shareholders' Equity	19,635,000	21,090,000	[1]
Total Liabilities and Shareholders' Equity	$ 66,779,000	$ 59,960,000	[1]

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

XML

Note 1 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

NOTE

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do

not

include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented

not

misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form

10

-K for the year ended

December 31, 2018.

The operating results for the interim periods presented are

not

necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than

10%

of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stoc

k-Based Awards

Following is the status of all stock options as of

September 30, 2019:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2019		224,750		$	3.44
Granted		186,200			4.31
Exercised		(2,250	)		3.20
Cancelled		(109,700	)		3.50
Outstanding - September 30, 2019		299,000		$	3.96		9.13	$	-
Exercisable - September 30, 2019		26,867		$	3.41		8.46	$	-

The

2005

Plan has

not

been renewed, and therefore

no

further grants

may

be made under the

2005

Plan. In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

350,000

shares. There were

16,700

and

186,200

stock options granted during the

three

and

nine

months ended

September 30, 2019,

respectively.

Total compensation expense was

$35

for both the

three

ended

September 30, 2019

and

2018,

and

$110

and

$80

for the

nine

months ended

September 30, 2019

and

2018,

respectively. As of

September 30, 2019,

there was

$403

of unrecognized compensation which will vest over the next

3.13

years.

In

November 2010,

the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (

“2010

Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the

2010

Plan shall

not

exceed an aggregate of

1,000,000

Units as amended and restated on

March 11, 2015.

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 the

2010

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 market value for each reporting period.

During the

nine

months ended

September 30, 2019,

100,000

units were granted in the

first

quarter. During the

three

and

nine

months ended

September 30, 2018,

no

units were granted.

Total compensation expense related to vested outstanding Units based on the estimated appreciation over their remaining terms was

$0

for both the

three

and

nine

months ended

September 30, 2019

and

2018.

During the

nine

months ended

September 30, 2019,

there were

25,000

shares awarded that vested immediately that had expense of

$116

during the

first

quarter.

Net Income (Loss) per Common Share

For the

three

months ended

September 30, 2019,

all stock options are deemed to be antidilutive and, therefore, were

not

included in the computation of income per common share amount. For the

nine

months ended

September 30, 2019,

the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were

not

included in the computation of loss per common share amount. For both the

three

months and

nine

months ended

September 30, 2018,

2,217

and

3,553

stock options, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

Share Repurchase Program

We had a

$250

share repurchase program which was authorized by our Board of Directors in

August 2017.

Under this repurchase program, we repurchased

1,245

and

32,985

shares in the open market transactions totaling

$4

 and

$130

 for the

three

months and

nine

months ended

September 30, 2019,

respectively. 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. As of

September 30, 2019,

our share repurchase program has expired, and

no

additional amounts are available for repurchase.

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

September 30, 2019

balance included 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

September 30, 2019,

we had

no

outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is

not

required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the

three

months ended and

nine

months ended

September 30, 2019

have been reduced by an allowance for doubtful accounts of

$323

at

September 30, 2019

and

$222

at

December 31, 2018.

Inventories

Inventories are stated at the lower of cost (

first

-in,

first

-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that

may

have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	September 30,			December 31,
	2019			2018
Raw Materials	$	17,036		$	16,769
Work in Process		1,105			1,015
Finished Goods		198			332
Reserves		(1,398	)		(1,112	)
Total	$	16,941		$	17,004

Other Intangible Assets

Other intangible assets at

September 30, 2019

and

December 31, 2018

are as follows:

			September 30, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	615	$	687
Intellectual Property		3		100		86		14
Trade Names		20		814		173		641
Patents		7		55		-		55
Totals			$	2,271	$	874	$	1,397

			December 31, 2018
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	506	$	796
Intellectual Property		3		100		61		39
Trade Names		20		814		143		671
Patents		7		17		-		17
Totals			$	2,233	$	710	$	1,523

Amortization expense for the

three

and

nine

months ended

September 30, 2019

was

$55

and

$164,

respectively.

Estimated future annual amortization expense (

not

including projects in process) related to these assets is approximately as follows (in thousands):

Year	Amount
Remainder of 2019	$	55
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,342

Impairment of 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

.

No

events were identified during the

nine

months ended

September 30, 2019

that would require us to test for impairment. 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 it 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.

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, 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. 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.

No

impairment expense was recorded during the

three

and

nine

months ended

September 30, 2019

and

2018,

respectively.

Recently

Adopted

Accounting Standards

On

January 1, 2019,

we adopted ASU

No.

2016

-

02,

Leases (Topic

842

). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us

not

to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will

not

recognize operating lease related assets or liabilities for leases with a lease term less than

one

year. We did

not

elect the hindsight practical expedient to determine the reasonably certain term of existing leases.

The impact of adopting the new lease standard was the recognition of

$5,731

of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had

no

impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Shareholders’ Equity.

XML

Note 5 - Leases (Details Textual) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018	Sep. 30, 2019
Operating Lease, Expense	$ 297	$ 951
Minimum [Member]
Lessee, Operating Lease, Renewal Term			1 year
Maximum [Member]
Lessee, Operating Lease, Renewal Term			5 years

XML

Note 6 - Income Taxes

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

6.

INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the

three

and

nine

months ended

September 30, 2019

was

10%

and (

9%

), respectively and our effective tax rate for the

three

and

nine

months ended

September 30, 2018

was

24%

and

49%,

respectively.

XML

Note 4 - Financing Arrangements (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Long-term Debt Instruments [Table Text Block]

	September 30,			December 31,
	2019			2018
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.4% and 4.8% as of September 30, 2019 and December 31, 2018, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,880		$	4,253
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		-			156
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		-			203
		3,880			4,612
Discount on Devicix Notes Payable		-			(23	)
Debt issuance Costs		(141	)		(185	)
Total long-term debt		3,739			4,404
Current maturities of long-term debt		(444	)		(780	)
Long-term debt - net of current maturities	$	3,295		$	3,624

XML

Note 1 - Summary of Significant Accounting Policies - Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Raw Materials	$ 17,036	$ 16,769
Work in Process	1,105	1,015
Finished Goods	198	332
Reserves	(1,398)	(1,112)
Total	$ 16,941	$ 17,004	[1]

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

XML

Note 3 - Revenue 1 (Details Textual)	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Percentage of Revenue Transferred to Customers	91.00%	91.00%
Revenue Remaining Performance Obligation, Customers Upon Shipment With Payment Terms		120 days

XML

Note 4 - Financing Arrangements (Details Textual) $ in Thousands, ¥ in Billions		9 Months Ended
	Dec. 29, 2017 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018	Jun. 30, 2019 CNY (¥)	Dec. 31, 2018 USD ($)	Jul. 01, 2015 USD ($)
Real Estate Term Note [Member]
Debt Instrument, Interest Rate, Stated Percentage		4.40%			4.80%
First Unsecured Subordinated Promissory Notes Payable [Member]
Debt Instrument, Interest Rate, Stated Percentage					4.00%
Second Unsecured Subordinated Promissory Notes Payable [Member]
Debt Instrument, Interest Rate, Stated Percentage					4.00%
Promissory Note [Member] | First Unsecured Subordinated Promissory Notes Payable [Member]
Debt Instrument, Face Amount						$ 1,000
Promissory Note [Member] | Second Unsecured Subordinated Promissory Notes Payable [Member]
Debt Instrument, Face Amount						$ 1,300
Bank of America [Member] | Credit Agreement [Member]
Long-term Line of Credit, Total		$ 12,430			$ 9,264
Line of Credit, Minimum Fixed Charge Coverage Ratio During the Period	1
Line of Credit Facility, Remaining Borrowing Capacity		$ 3,523
Bank of America [Member] | Credit Agreement [Member] | Real Estate Term Note [Member]
Debt Instrument, Face Amount	$ 5,000
Bank of America [Member] | Credit Agreement [Member] | Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 16,000
Debt Instrument, Interest Rate During Period		5.40%	4.30%
China Construction Bank [Member] | Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity | ¥				¥ 6
Long-term Line of Credit, Total		$ 0
Debt Instrument, Interest Rate, Stated Percentage		6.00%

XML

Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($)	3 Months Ended			9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jan. 01, 2019	Dec. 31, 2018	May 31, 2017	Nov. 30, 2010
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	16,700			186,200
Incremental Common Shares Attributable to Share-based Payment Arrangements, Total		2,217			3,553
Stock Repurchase Program, Authorized Amount	$ 250,000			$ 250,000
Stock Repurchased During Period, Shares	1,245			32,985
Stock Repurchased During Period, Value	$ 4,000	$ 42,000		$ 130,000	$ 228,000
Letters of Credit Outstanding, Amount	0			0
Accounts Receivable, Allowance for Credit Loss, Current	323,000			323,000			$ 222,000
Amortization of Intangible Assets, Total	55,000			164,000
Impairment of Long-Lived Assets to be Disposed of	0	0		0	0
Operating Lease, Right-of-Use Asset	5,018,000			5,018,000		$ 5,731,000
Operating Lease, Liability, Total	5,358,000			5,358,000		$ 5,731,000
Share-based Payment Arrangement, Option [Member]
Share-based Payment Arrangement, Expense	35,000	35,000		110,000	80,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	403,000			$ 403,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition				3 years 47 days
Stock Appreciation Rights (SARs) [Member]
Share-based Payment Arrangement, Expense	$ 0	$ 0		$ 0	$ 0
Restricted Stock [Member]
Share-based Payment Arrangement, Expense				$ 116,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period				25,000
Stock Incentive Plan 2017 [Member] | Share-based Payment Arrangement, Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized								350,000
Equity Appreciation Rights Plan 2010 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized									1,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Granted			0	100,000	0

XML

Note 4 - Financing Arrangements

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Debt Disclosure [Text Block]

NOTE

4.

FINANCING ARRANGEMENTS

We have a credit agreement with Bank of America which was entered into on

June 15, 2017

and amended effective

December 29, 2017

and provides for a line of credit arrangement of

$16,000

that expires on

June 

15,

2022.

The credit arrangement also has a

$5,000

real estate term note outstanding with a maturity date of

June 15, 2022.

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 a weighted-average interest rate of

5.4%

and

4.3%

as of

September 30, 2019

and

2018,

respectively. We had borrowings on our line of credit of

$12,430

and

$9,264

outstanding as of

September 30, 2019

and

December 31, 2018,

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 as amended 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.

As of

September 30, 2019,

we did

not

meet the fixed charge coverage ratio which was waived by BofA in the

third

amendment to the credit agreement received on

November 8, 2019.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At

September 30, 2019,

we had unused availability under our line of credit of

$3,523,

supported by our borrowing base. The line is 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

$1,000

and

$1,300,

which was fully paid off during the

first

half of

2019.

In the

second

quarter of

2019,

our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of credit arrangement of

6,000,000

Renminbi (RMB) that expires on

April 3, 2021.

This line of credit bears an interest rate of

6%

and we had

no

amounts outstanding as of

September 30, 2019.

Long-term debt at

September 30, 2019

and

December 30, 2018

consisted of following:

	September 30,			December 31,
	2019			2018
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.4% and 4.8% as of September 30, 2019 and December 31, 2018, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,880		$	4,253
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		-			156
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		-			203
		3,880			4,612
Discount on Devicix Notes Payable		-			(23	)
Debt issuance Costs		(141	)		(185	)
Total long-term debt		3,739			4,404
Current maturities of long-term debt		(444	)		(780	)
Long-term debt - net of current maturities	$	3,295		$	3,624

XML

Note 1 - Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Share-based Payment Arrangement, Option, Activity [Table Text Block]

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2019		224,750		$	3.44
Granted		186,200			4.31
Exercised		(2,250	)		3.20
Cancelled		(109,700	)		3.50
Outstanding - September 30, 2019		299,000		$	3.96		9.13	$	-
Exercisable - September 30, 2019		26,867		$	3.41		8.46	$	-

Schedule of Inventory, Current [Table Text Block]

	September 30,			December 31,
	2019			2018
Raw Materials	$	17,036		$	16,769
Work in Process		1,105			1,015
Finished Goods		198			332
Reserves		(1,398	)		(1,112	)
Total	$	16,941		$	17,004

Schedule of Finite-Lived Intangible Assets [Table Text Block]

			September 30, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	615	$	687
Intellectual Property		3		100		86		14
Trade Names		20		814		173		641
Patents		7		55		-		55
Totals			$	2,271	$	874	$	1,397

			December 31, 2018
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	506	$	796
Intellectual Property		3		100		61		39
Trade Names		20		814		143		671
Patents		7		17		-		17
Totals			$	2,233	$	710	$	1,523

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

Year	Amount
Remainder of 2019	$	55
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,342

XML

Note 3 - Revenue

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

NOTE

3.

REVENUE

Revenue recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is

not

separately identifiable from other promises in the contract and, therefore,

not

distinct.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have

no

alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are

not

met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately

91%

of our revenue for both the

three

and

nine

months ended

September 30, 2019.

Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has

no

impact on overall profitability.

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the

three

and

nine

months ended

September 30, 2019

was as follows (in thousands):

Nine Months Ended September 30, 2019
Outstanding at January 1, 2019	$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(4,923	)
Product transferred over time		5,703
Outstanding at September 30, 2019	$	7,211

We expect substantially all the remaining performance obligations for the contract assets recorded as of

September 30, 2019,

to be transferred to receivables within

90

days, with any remaining amounts to be transferred within

180

days. We bill our customers upon shipment with payment terms of up to

120

days.

The following tables summarize our net sales by market for the

three

and

nine

months ended

September 30, 2019 (

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

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 08, 2019
Document Information [Line Items]
Entity Registrant Name	NORTECH SYSTEMS INC
Entity Central Index Key	0000722313
Trading Symbol	nsys
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		2,657,314
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Amendment Flag	false
Title of 12(b) Security	Common Stock ($0.01 par value)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash Flows From Operating Activities
Net Income (Loss)	$ (1,502)	$ 362
Adjustments to Reconcile Net (Loss) Income to Net Cash
Depreciation and Amortization	1,648	1,655
Compensation on Stock-Based Awards	226	80
Deffered Taxes	1	1
Change in Accounts Receivable Allowance	101	(5)
Change in Inventory Reserves	285	118
Changes in Current Operating Items
Accounts Receivable	(158)	(1,619)
Inventories	(237)	(1,959)
Contract Assets	(780)	(617)
Prepaid Expenses and Other Current Assets	(641)	(278)
Accounts Payable	663	4,913
Accrued Payroll and Commissions	(120)	(374)
Other Accrued Liabilities	281	287
Net Cash (Used in) Provided by Operating Activities	(233)	2,564
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment		17
Purchase of Intangible Asset	(37)	(3)
Purchases of Property and Equipment	(785)	(999)
Net Cash Used in Investing Activities	(822)	(985)
Cash Flows from Financing Activities
Net Change in Line of Credit	3,165	(445)
Principal Payments on Long-Term Debt	(728)	(819)
Principal Payments on Finance Leases	(251)	(231)
Stock option exercises	7
Share Repurchases	(130)	(229)
Net Cash Provided By (Used In) Financing Activities	2,063	(1,724)
Effect of Exchange Rate Changes on Cash	(2)	(1)
Net Change in Cash	1,006	(146)
Cash - Beginning of Period	948	779
Cash - Ending of Period	1,954	633
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	160	397
Restricted Cash	1,794	236
Cash - Ending of Period	1,954	633
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	739	507
Cash Paid (Refunded) During the Period for Income Taxes	(83)	167
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	30	304
Equipment Acquired under Finance Lease	$ 607	$ 100

XML

Note 5 - Leases - Supplemental Balance Sheet Information (Details) - USD ($)	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Operating lease assets	$ 5,018,000	$ 5,731,000
Finance lease assets	1,834,000
Total leased assets	6,852,000
Current operating lease liabilities	841,000			[1]
Current finance lease liabilities	476,000		337,000
Long-term operating lease liabilities	4,517,000			[1]
Long term finance lease liabilities	1,168,000		$ 951,000	[1]
Total lease liabilities	$ 7,002,000

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

XML

Note 1 - Summary of Significant Accounting Policies - Estimated Future Annual Amortization Expense (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Remainder of 2019	$ 55
2020	191
2021	185
2022	185
2023	185
Thereafter	541
Total	$ 1,342

XML

Note 3 - Revenue - Contract Assets (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Outstanding at January 1, 2019	$ 6,431	[1]
Transferred to receivables from contract assets recognized	(4,923)
Product transferred over time	5,703
Outstanding at September 30, 2019	$ 7,211

[1] The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

XML

Note 2 - Concentration of Credit Risk and Major Customers (Details Textual) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018	Sep. 30, 2019 USD ($)	Sep. 30, 2018	Dec. 31, 2018
Excess Cash Balances, Number of High Credit Quality Financial Institutions			2
Cash, Ending Balance	$ 160		$ 160
Concentration Risk, Number of Divisions	2	2	2	2
Geographic Concentration Risk [Member] | Revenue Benchmark [Member] | Division One of Largest Customer [Member]
Concentration Risk, Percentage	19.00%	20.00%	21.00%	20.00%
Geographic Concentration Risk [Member] | Revenue Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage	9.00%	20.00%	15.00%	19.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Division Two of Largest Customer [Member]
Concentration Risk, Percentage	3.00%	1.00%	3.00%	1.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage	22.00%	21.00%	24.00%	21.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Largest Customer [Member]
Concentration Risk, Percentage			28.00%		16.00%
UNITED STATES
Excess Cash Balances, Number of High Credit Quality Financial Institutions			1
CHINA
Excess Cash Balances, Number of High Credit Quality Financial Institutions			1
Cash, Ending Balance	$ 105		$ 105

XML

Note 3 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net sales	$ 30,058	$ 29,558	$ 85,515	$ 84,543
Medical [Member]
Net sales	17,043		46,006
Industrial [Member]
Net sales	8,623		26,290
Aerospace and Defense [Member]
Net sales	4,392		13,219
Transferred over Time [Member]
Net sales	25,656		77,122
Transferred over Time [Member] | Medical [Member]
Net sales	14,399		42,039
Transferred over Time [Member] | Industrial [Member]
Net sales	7,279		22,847
Transferred over Time [Member] | Aerospace and Defense [Member]
Net sales	3,978		12,236
Transferred at Point in Time [Member]
Net sales	2,616		4,586
Transferred at Point in Time [Member] | Medical [Member]
Net sales	1,661		1,914
Transferred at Point in Time [Member] | Industrial [Member]
Net sales	822		2,297
Transferred at Point in Time [Member] | Aerospace and Defense [Member]
Net sales	133		375
Noncash Consideration [Member]
Net sales	1,786		3,807
Noncash Consideration [Member] | Medical [Member]
Net sales	983		2,053
Noncash Consideration [Member] | Industrial [Member]
Net sales	522		1,146
Noncash Consideration [Member] | Aerospace and Defense [Member]
Net sales	$ 281		$ 608

XML

Note 5 - Leases

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Lease Disclosure [Text Block]

NOTE

5.

LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from

one

to

five

years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do

not

contain any material residual value guarantees or material restrictive covenants. At

September 30, 2019,

we do

not

have material lease commitments that have

not

commenced.

The components of lease expense were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
Lease Cost	2019		2019
Operating lease cost	$	253	$	785
Finance lease interest cost		21		54
Finance lease amortization expense		65		196
Total lease cost	$	339	$	1,035

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	September 30 , 2019
Assets
Operating lease assets	Operating lease assets	$	5,018
Finance lease assets	Property, Plant and Equipment		1,834
Total leased assets			6,852
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		841
Current finance lease liabilities	Current Portion of Finance Lease Obligations		476
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,517
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,168
Total lease liabilities		$	7,002

Supplemental cash flow information related to leases was as follows:

	Nine Months Ended September 30 ,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	555
Right-of-use assets obtained in exchange for lease obligations	$	—

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2019	$	191		$	133		$	324
2020		858			534			1,392
2021		722			534			1,256
2022		726			359			1,085
2023		738			138			876
Thereafter		3,381			102			3,483
Total lease payments	$	6,616		$	1,800		$	8,416
Less: Interest		(1,258	)		(156	)		(1,414	)
Present value of lease liabilities	$	5,358		$	1,644		$	7,002

The lease term and discount rate at

June 30, 2019

were as follows:

Weighted-average remaining lease term (years)
Operating leases	7.6
Finance leases	3.4
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Rent expense for our operating leases the

three

and

nine

months ended

September 30, 2018 

as accounted under ASC

840,

Leases

, was

$297

and

$951,

respectively.

The future minimum lease commitments as of

December 31, 2018,

under ASC

840

are as follows:

	Operating Leases
2019	$	1,024
2020		858
2021		722
2022		726
2023		738
Thereafter		3,380
Total minimum obligations	$	7,448

XML

Note 3 - Revenue (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Contract with Customer, Asset and Liability [Table Text Block]

Nine Months Ended September 30, 2019
Outstanding at January 1, 2019	$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(4,923	)
Product transferred over time		5,703
Outstanding at September 30, 2019	$	7,211

Disaggregation of Revenue [Table Text Block]

	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

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Note 1 - Summary of Significant Accounting Policies - Stock Option Activity (Details)	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($) $ / shares shares	Sep. 30, 2019 USD ($) $ / shares shares
Outstanding (in shares) | shares		224,750
Outstanding, weighted average exercise price per share (in dollars per share) | $ / shares		$ 3.44
Granted (in shares) | shares	16,700	186,200
Granted, weighted average exercise price per share (in dollars per share) | $ / shares		$ 4.31
Exercised (in shares) | shares		(2,250)
Exercised, weighted average exercise price per share (in dollars per share) | $ / shares		$ 3.20
Cancelled (in shares) | shares		(109,700)
Cancelled, weighted average exercise price per share (in dollars per share) | $ / shares		$ 3.50
Outstanding (in shares) | shares	299,000	299,000
Outstanding, weighted average exercise price per share (in dollars per share) | $ / shares	$ 3.96	$ 3.96
Outstanding, weighted average remaining contractual term (Year)		9 years 47 days
Outstanding, aggregate intrinsic value | $
Exercisable (in shares) | shares	26,867	26,867
Exercisable, weighted average exercise price per share (in dollars per share) | $ / shares	$ 3.41	$ 3.41
Exercisable, weighted average remaining contractual term (Year)		8 years 167 days
Exercisable, aggregate intrinsic value | $

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Note 6 - Income Taxes (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Effective Income Tax Rate Reconciliation, Percent, Total	10.00%	24.00%	(9.00%)	49.00%

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Note 5 - Leases - Lease Cost (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Operating lease cost	$ 253	$ 785
Finance lease interest cost	21	54
Finance lease amortization expense	65	196
Total lease cost	$ 339	1,035
Cash paid for amounts included in the measurement of lease liabilities		$ 555
Operating leases (Year)	7 years 219 days	7 years 219 days
Finance leases (Year)	3 years 146 days	3 years 146 days
Operating leases	4.80%	4.80%
Finance leases	5.40%	5.40%

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts receivable allowance	$ 323	$ 222
Preferred stock, par value (in dollars per share)	$ 1	$ 1
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	250,000	250,000
Preferred stock, shares outstanding (in shares)	250,000	250,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	9,000,000	9,000,000
Common stock, shares issued (in shares)	2,686,328	2,739,250
Common stock, shares outstanding (in shares)	2,686,328	2,739,250

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Note 2 - Concentration of Credit Risk and Major Customers

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

NOTE

2.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily

two

financial institutions,

one

in the United States and

one

in China. The account in the United States

may

at times exceed federally insured limits. Of the

$160

in cash at

September 30, 2019,

approximately

$105

was held at banks located in China. 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

three

and

nine

months ended

September 30, 2019

and

2018.

One division accounted for approximately

19%

and

21%

of net sales for the

three

and

nine

months ended

September 30, 2019,

respectively, and approximately

20%

for both the

three

and

nine

months ended

September 30, 2018.

The other division accounted for approximately

3%

of net sales for both the

three

months and

nine

months ended

September 30, 2019,

and approximately

1%

net sales for the

three

and

nine

months ended

September 30, 2018.

Together they accounted for approximately

22%

and

24%

of net sales for the

three

and

nine

months ended

September 30, 2019,

respectively, and approximately

21%

of net sales for both the

three

and

nine

months ended

September 30, 2018.

Accounts receivable from the customer at

September 30, 2019

and

December 31, 2018

represented approximately

28%

and

16%

of our total accounts receivable, respectively.

Export sales represented approximately

9%

and

20%

of net sales for the

three

months ended

September 30, 2019

and

2018,

respectively. Export sales represented

15%

and

19%

of net sales for the

nine

months ended

September 30, 2019

and

2018,

respectively.