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 June 30, 2020

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 August 7, 2020 was 2,657,530.

1

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
			PAGE
	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	7-18
	Item 2	-   Management's Discussion and Analysis of Financial Condition And Results of Operations	19-26
	Item 3	-   Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4	-   Controls and Procedures	26
PART II - OTHER INFORMATION
	Item 1	-   Legal Proceedings	27
	Item 1A.	-   Risk Factors	27
	Item 2	-   Unregistered Sales of Equity Securities, Use of Proceeds	27
	Item 3	-   Defaults on Senior Securities	27
	Item 4	-   Mine Safety Disclosures	27
	Item 5	-   Other Information	27
	Item 6	-   Exhibits	28
SIGNATURES			29

2

PART

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2020			2019			2020			2019
Net Sales	$	26,461		$	27,292		$	53,901		$	55,457
Cost of Goods Sold		24,020			24,967			48,455			50,171
Gross Profit		2,441			2,325			5,446			5,286
Operating Expenses
Selling Expenses		730			797			1,351			1,558
General and Administrative Expenses		1,662			2,737			3,655			5,041
Total Operating Expenses		2,392			3,534			5,006			6,599
Income (Loss) From Operations		49			(1,209	)		440			(1,313	)
Other Expense
Interest Expense		(176	)		(279	)		(400	)		(524	)
(Loss) Income Before Income Taxes		(127	)		(1,488	)		40			(1,837	)
Income Tax (Benefit) Expense		(4	)		64			26			78
Net (Loss) Income	$	(123	)	$	(1,552	)	$	14		$	(1,915	)
Net (Loss) Income Per Common Share - Basic	$	(0.05	)	$	(0.58	)	$	0.01		$	(0.72	)
Weighted Average Number of Common Shares Outstanding - Basic		2,657,530			2,676,449			2,657,530			2,672,758
Net (Loss) Income Per Common Share - Diluted	$	(0.05	)	$	(0.58	)	$	0.01		$	(0.72	)
Weighted Average Number of Common Shares Outstanding - Diluted		2,657,530			2,676,449			2,666,532			2,672,758
Other comprehensive loss
Foreign currency translation		19			(56	)		(42	)		–
Comprehensive Loss, net of tax	$	(104	)	$	(1,608	)	$	(28	)	$	(1,915	)

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

(IN THOUSANDS, EXCEPT SHARE DATA)

	JUNE 30,			DECEMBER 31,
	2020			2019(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	345		$	351
Restricted Cash		409			309
Accounts Receivable, less allowances of $391 and $335		19,219			18,558
Inventories		15,492			14,279
Contract Assets		6,399			7,659
Prepaid Expenses and Other Current Assets		1,785			2,128
Total Current Assets		43,649			43,284
Property and Equipment, Net		9,371			9,581
Operating Lease Assets		4,446			4,827
Goodwill		2,375			2,375
Other Intangible Assets, Net		1,237			1,343
Total Assets	$	61,078		$	61,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	444		$	444
Current Portion of Finance Lease Obligation		643			557
Current Portion of Operating Lease Obligations		791			858
Accounts Payable		13,523			14,014
Accrued Payroll and Commissions		3,294			3,493
Other Accrued Liabilities		3,188			2,866
Total Current Liabilities		21,883			22,232
Long-Term Liabilities
Long Term Line of Credit		4,392			10,088
Long-Term Debt, Net		9,046			3,179
Long Term Finance Lease Obligation, Net		1,486			1,451
Long-Term Operating Lease Obligation, Net		4,132			4,366
Other Long-Term Liabilities		116			118
Total Long-Term Liabilities		19,172			19,202
Total Liabilities		41,055			41,434
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: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		15,823			15,748
Accumulated Other Comprehensive Loss		(299	)		(257	)
Retained Earnings		4,222			4,208
Total Shareholders' Equity		20,023			19,976
Total Liabilities and Shareholders' Equity	$	61,078		$	61,410

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

The balance sheet at December 31, 2019 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)

	SIX MONTHS ENDED
	JUNE 30,
	2020			2019
Cash Flows From Operating Activities
Net Income (Loss)	$	14		$	(1,915	)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used In) Operating Activities
Depreciation and Amortization		1,131			1,096
Compensation on Stock-Based Awards		75			191
Change in Accounts Receivable Allowance		56			40
Change in Inventory Reserves		(92	)		54
Changes in Current Operating Items
Accounts Receivable		(699	)		(646	)
Inventories		(1,105	)		670
Contract Assets		1,260			(798	)
Prepaid Expenses and Other Current Assets		357			(395	)
Income Taxes		(117	)		-
Accounts Payable		(728	)		(1,087	)
Accrued Payroll and Commissions		(610	)		596
Other Accrued Liabilities		930			(49	)
Net Cash Provided by (Used in) Operating Activities		472			(2,243	)
Cash Flows from Investing Activities
Purchase of Intangible Asset		(6	)		(25	)
Purchases of Property and Equipment		(241	)		(545	)
Net Cash Used in Investing Activities		(247	)		(570	)
Cash Flows from Financing Activities
Net Change in Line of Credit		(5,696	)		3,469
Proceeds from Long-term Debt		6,077			-
Principal Payments on Long-Term Debt		(238	)		(584	)
Principal Payments on Finance Leases		(274	)		(96	)
Stock Option Exercises		-			7
Share Repurchases		-			(126	)
Net Cash (Used in) Provided By Financing Activities		(131	)		2,670
Net Change in Cash		94			(143	)
Cash - Beginning of Period		660			948
Cash - Ending of Period	$	754		$	805
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	345		$	399
Restricted Cash		409			406
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	754		$	805
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	394		$	477
Cash Paid and (Refunded) During the Period for Income Taxes		72			(47	)
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		237			180
Equipment Acquired under Finance Lease		395			-

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

								Accumulated
					Additional			Other						Total
	Preferred		Common		Paid-In			Comprehensive			Retained			Shareholders'
	Stock		Stock		Capital			Loss			Earnings			Equity
BALANCE MARCH 31, 2019	$	250	$	27	$	15,757		$	(177	)	$	5,073		$	20,930
Net Loss		-		-		-			-			(1,552	)		(1,552	)
Foreign currency translation adjustment		-		-		-			(56	)		-			(56	)
Compensation on stock-based awards		-		-		38			-			-			38
Share repurchases		-		-		(113	)		-			-			(113	)
BALANCE JUNE 30, 2019	$	250	$	27	$	15,682		$	(233	)	$	3,521		$	19,247
BALANCE DECEMBER 31, 2018	$	250	$	27	$	15,610		$	(233	)	$	5,436		$	21,090
Net Loss		-		-		-			-			(1,915	)		(1,915	)
Foreign currency translation adjustment		-		-		-			-			-			-
Stock option exercises		-		-		7			-			-			7
Compensation on stock-based awards		-		-		191			-			-			191
Share repurchases		-		-		(126	)		-			-			(126	)
BALANCE JUNE 30, 2019	$	250	$	27	$	15,682		$	(233	)	$	3,521		$	19,247
BALANCE MARCH 31, 2020	$	250	$	27	$	15,787		$	(318	)	$	4,345		$	20,091
Net Loss		-		-		-			-			(123	)		(123	)
Foreign currency translation adjustment		-		-		-			19			-			19
Compensation on stock-based awards		-		-		36			-			-			36
BALANCE JUNE 30, 2020	$	250	$	27	$	15,823		$	(299	)	$	4,222		$	20,023
BALANCE DECEMBER 31, 2019	$	250	$	27	$	15,748		$	(257	)	$	4,208		$	19,976
Net Income		-		-		-			-			14			14
Foreign currency translation adjustment		-		-		-			(42	)		-			(42	)
Compensation on stock-based awards		-		-		75			-			-			75
BALANCE JUNE 30, 2020	$	250	$	27	$	15,823		$	(299	)	$	4,222		$	20,023

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

6

CONDENSED NOTES TO 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, 2019. 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 June 30, 2020:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised		-
Cancelled		(4,000	)		3.29
Outstanding - June 30, 2020		379,500		$	3.83		8.13	$	218
Exercisable - June 30, 2020		182,240		$	3.72		7.70	$	119

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares, an additional 50,000 shares were authorized in March 2020. There were 11,300 stock options granted during the six months ended June 30, 2020.

Total compensation expense related to stock options for the three months ended June 30, 2020 and 2019 was $36 and $38, respectively and $75 and $191 for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was $292 of unrecognized compensation which will vest over the next 2.69 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. During the six months ended June 30, 2019, there were 137,500 units granted. There were no units granted during the six months ended June 30, 2020.

Net Income (Loss) per Common Share 

For the three months ended June 30, 2020, all stock options are deemed to be antidilutive and therefore, were not included in the computation of incomer per common share amount. For the six months ended June 30 ,2020, stock options of 9,002 were included in the computation of diluted income per common share amount as their impact were dilutive. For both the three months and six months ended June 30, 2019, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

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 June 30, 2020 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 June 30, 2020, we had no outstanding letters of credit.

8

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 have been reduced by an allowance for doubtful accounts of $391 at June 30, 2020 and $335 at December 31, 2019.

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 (in thousands):

	June 30,			December 31,
	2020			2019
Raw Materials	$	15,846		$	15,245
Work in Process		628			479
Finished Goods		412			41
Reserves		(1,394	)		(1,486	)
Total	$	15,492		$	14,279

9

Other Intangible Assets

Other intangible assets at June 30, 2020 and December 31, 2019 are as follows (in thousands):

			June 30, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	723	$	579
Trade Names		3		100		100		-
Intellectual Property		20		814		203		611
Patents		7		47		-		47
Totals			$	2,263	$	1,026	$	1,237

			December 31, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	651	$	651
Intellectual Property		3		100		95		5
Trade Names		20		814		183		631
Patents		7		56		-		56
Totals			$	2,272	$	929	$	1,343

Amortization expense for the three and six months ended June 30, 2020 was $47 and $98, 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 2020	$	93
2021		186
2022		185
2023		185
2024		113
Thereafter		428
Total	$	1,190

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 six months ended June 30, 2020 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.

10

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 six months ended June 30, 2020 and 2019.

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after December 15, 2022; early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

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 $754 in cash at June 30, 2020, approximately $318 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 six months ended June 30, 2020 and 2019. One division accounted for approximately 20% and 22% of net sales for the three and six months ended June 30, 2020, respectively, and approximately 21% and 22% for both the three and six months ended June 30, 2019, respectively. The other division accounted for approximately 3% and 2% of net sales for the three months and six ended June 30, 2020, respectively, and approximately 2% net sales for both the three and six months ended June 30, 2019, respectively. Together they accounted for approximately 23% and 24% of net sales for the three and six months ended June 30, 2020, respectively, and approximately 23% and 24% of net sales for the three and six months ended June 30, 2019, respectively. Accounts receivable from the customer at June 30, 2020 and December 31, 2019 represented approximately 40% and 36% of our total accounts receivable, respectively.

11

Export sales represented approximately 9% and 17% of net sales for the three months ended June 30, 2020 and 2019, respectively. Export sales represented 11% and 18% of net sales for the six months ended June 30, 2020 and 2019, 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 84.6% and 86.1% of our revenue for both the three and six months ended June 30, 2020, respectively. 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.

12

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the six months ended June 30, 2020 was as follows (in thousands):

Six Months Ended June 30, 2020
Outstanding at January 1, 2020	$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(6,277	)
Product transferred over time		5,017
Outstanding at June 30, 2020	$	6,399

We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2020, 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 six months ended June 30 (in thousands):

	Three Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	11,464	$	1,540	$	367	$	13,371
Aerospace and Defense		4,522		246		138		4,906
Industrial		6,395		1,593		196		8,184
Total net sales	$	22,381	$	3,379	$	701	$	26,461

	Three Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,145	$	218	$	661	$	14,024
Aerospace and Defense		4,155		222		205		4,582
Industrial		7,428		878		380		8,686
Total net sales	$	24,728	$	1,318	$	1,246	$	27,292

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	Six Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	25,084	$	2,601	$	1,048	$	28,733
Aerospace and Defense		8,944		379		367		9,690
Industrial		12,390		2,563		525		15,478
Total net sales	$	46,418	$	5,543	$	1,940	$	53,901

	Six Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	27,640	$	253	$	1,070	$	28,963
Aerospace and Defense		8,258		242		327		8,827
Industrial		15,568		1,475		624		17,667
Total net sales	$	51,466	$	1,970	$	2,021	$	55,457

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 3.2% and 5.8% as of June 30, 2020 and 2019, respectively. We had borrowings on our line of credit of $4,392 and $10,088 outstanding as of June 30, 2020 and December 31, 2019, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0, for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each Fiscal Quarter end thereafter. The Company met the covenants for the period ended June 30, 2020.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At June 30, 2020, we had unused availability under our line of credit of $8,311, supported by our borrowing base. The line is secured by substantially all of our assets.

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On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6,077 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 10 months after the end of the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

Long-term debt at June 30, 2020 and December 30, 2019 consisted of following:

	June 30,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of June 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,518		$	3,755
Promissory Note		6,077			-
		9,595			3,755
Debt issuance Costs		(105	)		(132	)
Total long-term debt		9,490			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	9,046		$	3,179

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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 June 30, 2020, we do not have material lease commitments that have not commenced.

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	June 30, 2020
Assets
Operating lease assets	Operating lease assets	$	4,446
Finance lease assets	Property, Plant and Equipment		2,842
Total leased assets		$	7,288
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		791
Current finance lease liabilities	Current Portion of Finance Lease Obligations		643
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,132
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,486
Total lease liabilities		$	7,052

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Supplemental cash flow information related to leases was as follows:

	Three Months Ended June 30,
	2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	215
Right-of-use assets obtained in exchange for lease obligations	$	—

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2020	$	435		$	391		$	826
2021		722			738			1,460
2022		726			575			1,301
2023		738			333			1,071
2024		798			277			1,075
Thereafter		2,582			20			2,602
Total lease payments	$	6,001		$	2,334		$	8,335
Less: Interest		(1,078	)		(205	)		(1,283	)
Present value of lease liabilities	$	4,923		$	2,129		$	7,052

The lease term and discount rate at June 30, 2020 were as follows:

Weighted-average remaining lease term (years)
Operating leases	7.5
Finance leases	3.2
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	4.9	%

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NOTE 6. INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full calendar 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 six months ended June 30, 2020 was (3.2%) and 65.0%, respectively, and the rate for the three and six months ended June 30, 2019 was (4%).

NOTE 7. RELATED PARTY TRANSACTIONS

During three and six months ended June 30, 2020, we did business with Printed Circuits, Inc. which is 90% owned by the Kunin family, of which, owns a majority of our stock. We had expenses incurred totaling $14 and $0 during the three months ended June 30, 2020 and 2019, and $28 and $51 for the six months ended June 30, 2020 and 2019, respectively to Printed Circuits, Inc.

NOTE 8. SUBSEQUENT EVENTS

Sale and Leaseback Agreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota. Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions. 

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5,000. The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position. At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

Facility Consolidation

To further improve operational efficiencies and lower overhead costs, the Company approved on August 7, 2020, the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations. The Merrifield production facility consolidation is expected to be complete on or before December 31, 2020, and will impact approximately 60 employees, who will be offered positions at other Nortech facilities in Minnesota.

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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, 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.

Recent Developments

Global Pandemic

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

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

Sale and Leaseback Agreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota.  Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions. 

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5 million.  The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position.  At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

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Results of Operations

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold		90.8			91.5			89.9			90.5
Gross Profit		9.2			8.5			10.1			9.5
Selling Expenses		2.7			2.9			2.5			2.8
General and Administrative Expenses		6.3			10.0			6.8			9.1
Income from Operations		0.2			(4.4	)		0.8			(2.4	)
Other Expenses		(0.7	)		(1.0	)		(0.7	)		(0.9	)
(Loss) Income Before Income Taxes		(0.5	)		(5.4	)		0.1			(3.3	)
Income Tax Expense (Benefit)		0.0			0.2			0.1			0.1
Net (Loss) Income		(0.5	)%		(5.6	)%		0.0	%		(3.4	)%

Net Sales

Net sales were $26.5 million in the second quarter of 2020, as compared to $27.3 million in the second quarter of the prior year, a decrease of $0.8 million or 3.0%. Net sales results were varied by markets, the medical market decreased by $0.7 million or 4.7% with medical devices accounting for most of that decrease. Net sales from the aerospace and defense markets increased by $0.3 million or 7.1% in the second quarter of 2020 as compared to the second quarter of 2019. The industrial market decreased by $0.5 million or 5.8% of sales in the second quarter of 2020 as compared to the same quarter of 2019.

Net sales were $53.9 million in the six months ended 2020, as compared to $55.5 million in the prior year, a decrease of $1.6 million or 2.8%. Net sales results were varied by markets, the medical market decreased by $0.2 million, or 0.8%. Net sales from the aerospace and defense markets increased $0.9 million or 9.8%. The industrial market decreased by $2.2 million of sales or 12.4%

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

	Three Months Ended June 30,							Six Months Ended June 30,
	2020		2019		%			2020		2019		%
	$		$		Change			$		$		Change
Medical		13,371		14,024		(4.7	)		28,733		28,963		(0.8	)
Aerospace and Defense		4,906		4,582		7.1			9,690		8,827		9.8
Industrial		8,184		8,686		(5.8	)		15,478		17,667		(12.4	)
Total Net Sales		26,461		27,292		(3.0	)		53,901		55,457		(2.8	)

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

	Three Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	11,464	$	1,540	$	367	$	13,371
Aerospace and Defense		4,522		246		138		4,906
Industrial		6,395		1,593		196		8,184
Total net sales	$	22,381	$	3,379	$	701	$	26,461

	Six Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	25,084	$	2,601	$	1,048	$	28,733
Aerospace and Defense		8,944		379		367		9,690
Industrial		12,390		2,563		525		15,478
Total net sales	$	46,418	$	5,543	$	1,940	$	53,901

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

	Three Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,145	$	218	$	661	$	14,024
Aerospace and Defense		4,155		222		205		4,582
Industrial		7,428		878		380		8,686
Total net sales	$	24,728	$	1,318	$	1,246	$	27,292

	Six Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	27,640	$	253	$	1,070	$	28,963
Aerospace and Defense		8,258		242		327		8,827
Industrial		15,568		1,475		624		17,667
Total net sales	$	51,466	$	1,970	$	2,021	$	55,457

Backlog

Our 90-day shipment backlog as of June 30, 2020 was $23.3 million, a decrease of 15.3% from the beginning of the quarter and a 25.8% decrease as compared to the prior year. Backlog for our medical customers has decreased 16.4% from the beginning of the quarter and decreased 28.2% from the prior year. The aerospace and defense backlog increased 1.3% from the beginning of the quarter and increased 1.0% from the prior year. Our industrial customers’ backlog decreased 30.7% from the beginning of the quarter and decreased 44.0% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days.

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

	Shipment Backlog as of the Period Ended
	June 30,		March 31,		June 30,
	2020		2020		2019
Medical	$	11,987	$	14,330	$	16,701
Aerospace and Defense		6,900		6,812		6,833
Industrial		4,401		6,352		7,863
Total Backlog	$	23,288	$	27,494	$	31,397

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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 $46.6 million at June 30, 2020 compared to $58.7 million at the end of June 30, 2019.

Gross Profit

Gross profit as a percent of net sales for the three months ended June 30, 2020 and 2019 was 9.2% and 8.5%, respectively. Gross profit as a percentage of sales for the six months ended June 30, 2020 and 2019 was 10.1% and 9.5%, respectively. The increase in gross profit in both comparisons was driven by product mix.

Selling Expense

Selling expenses for the three months ended June 30, 2020 and 2019 was $0.7 million or 2.7% of sales and $0.8 million or 2.9% of sales, respectively. Selling expense for the six months ended June 30, 2020 and 2019 was $1.4 million or 2.5% of sales and $1.6 million or 2.8% of sales, respectively. The decrease in both the three and six month periods is due cost reduction measures taken in prior year.

General and Administrative Expense

General and administrative expenses for the three months ended June 30, 2020 and 2019 were $1.7 million or 6.3% of sales and $2.7 million or 10.0% of sales, respectively. General and administrative expenses for the six months ended June 30, 2020 and 2019 were $3.7 million or 6.8% of sales and $5.0 million or 9.1% of sales, respectively. The decrease in both comparisons was due to higher spend in the prior year related one-time expenditures to improve operations in 2019 and the benefits of those cost reduction measures in 2020.

Income / Loss from Operations

Second quarter 2020 Income from operations was $0.1 million compared to loss of $1.2 million for the second quarter in 2019. Income from operations for the first six months in 2019 was $0.4 million as compared to loss of $1.3 million for the same comparable period in 2019.  The increase in income from operations in both comparison periods was due to increased gross margin as a percent of sales and the decreased administrative expenses due to largely to cost reduction measures taken in the prior year.

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 six months ended June 30, 2020 was (3.2%) and 65.0%, respectively, and the rate for the three and six months ended June 30, 2019 was (4%).

Net Income (Loss)

Net loss for the three and net income for the six months ended June 30, 2020 was $0.1 million and $0.0 million, respectively. Net loss for the three months ended June 30, 2019 was $1.6 million and for six month ended June 30, 2019 was $1.9 million.

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Liquidity and Capital Resources

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

Net cash provided by operating activities for the six months ended June 30, 2020 was $0.5 million. Earnings adjusted for depreciation and amortization of $1.1 million drove the cash provided offset by an increase in working capital.

Net cash used in operating activities for the six months ended June 30, 2019 was $2.2 million. The increase in accounts receivable and unbilled revenue and decrease in accounts payable drove this cash outflow, partially offset by a decrease in inventory.

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 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 June 30, 2020, we had outstanding advances of $4.4 million under the line of credit and unused availability of $8.3 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 $21.8 million and $21.1 million as of June 30, 2020 and December 31, 2019, respectively.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter. The Company met the covenants for the six months ended June 30, 2020.

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

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Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

Forward-Looking Statements

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

♦ Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;

♦ Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;

♦ Changes in the reliability and efficiency of our operating facilities or those of third parties;

♦ Risks related to availability of labor;

♦ Increases in certain raw material costs such as copper and oil;

♦ Commodity and energy cost instability;

♦ Risks related to FDA noncompliance;

♦ The loss of a major customer;

♦ General economic, financial and business conditions that could affect our financial condition and results of operations;

♦ Increased or unanticipated costs related to compliance with securities and environmental regulation;

♦ Disruption of global or local information management systems due to natural disaster or cyber-security incident;

♦ Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

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

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Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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

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, 2019.

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

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

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

As of June 30, 2020, 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

10.1* Purchase and Sale Agreement

10.2*	Second Quarter 2020 Earnings Release
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 June 30, 2020, 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: August 11, 2020		by /s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated
Date: August 11, 2020		by /s/ Constance M. Beck
		Constance M. Beck
		Vice President and Chief Financial Officer
		Nortech Systems Incorporated

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EX-10.1

Exhibit 10.1

PURCHASE AND SALE AGREEMENT

1950 Excel Drive, Mankato MN

4050 Norris Court NW, Bemidji MN

THIS PURCHASE AND SALE AGREEMENT (“Agreement”), dated for reference purposes as of June 24, 2020 (the “Effective Date”), is entered into by and between NORTECH SYSTEMS, INC., a Minnesota corporation (“Seller”) and ESSJAY INVESTMENT COMPANY, LLC, a North Dakota limited liability company and/or its assigns hereunder (“Buyer”).

R E C I T A L S

A.    Seller is the owner of certain land and improvements consisting of two separate properties, one commonly known as 1950 Excel Drive in Mankato, Minnesota and the other as 4050 Norris Court NW in Bemidji, Minnesota, which are each legally described on the attached Exhibit A, together with: (a) all buildings and improvements now or hereafter constructed or located on the land (the “Improvements”), and (b) all easements, interests, rights and privileges benefiting or appurtenant to the land including, but not limited to, all right, title and interest of Seller in and to any land lying in the bed of any highway, street, road or avenue or alley, existing or proposed, in front of or abutting or adjoining the land and all right, title and interest of Seller in and to any unpaid award for the taking by eminent domain of any part of the land or the Improvements or for damage thereto by reason of a change of grade of any highway, street, road, avenue or alley (collectively, the “Real Property”).

B.     Seller desires to sell, and Buyer desires to purchase, the Real Property on the terms and conditions set forth in this Agreement.

A G R E E M E N T

1.     Sale of Real Property. Subject to the terms and on the conditions set forth in this Agreement, Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the Real Property. Buyer acknowledges that the sale of the Real Property expressly excludes any and all trade fixtures, equipment and other movable personal property of Seller or others located at the Real Property and used in the operation of Seller’s trade or business at the Real Property; provided, however, the Real Property to be sold to Buyer shall include all fixtures and equipment (whether affixed or not) that are related to the general operation of or otherwise appurtenant to the Real Property or Improvements (“Sold Fixtures”), but excluding items that are for the specific operation of Seller’s existing business activities that do not constitute building fixtures). Sold Fixtures shall include, by way of example and without limitation, all HVAC and A/C units and equipment, electrical generators, and all other heating, ventilation, air conditioning, electrical, plumbing and other mechanical and building systems and equipment, except with respect to extent of trade fixtures and specialty fixtures (e.g., emergency generators, special filtration / air pressure regulators, computer room supplemental air conditioning units and similar items that are not general building fixtures, with such excluded items to remain the personal property of Seller).

2.     Purchase Price. The total purchase price (“Purchase Price”) to be paid by Buyer to Seller for the Real Property shall be Six Million Three Hundred Thousand Dollars ($6,300,000). The Purchase Price shall be paid as follows:

2.1     Deposit. The “Deposit” shall consist of Fifty Thousand Dollars ($50,000.00), to be deposited with the Title Company (as defined below in Section 2.3) within three (3) business days of the Effective Date. If Buyer does not elect to terminate this Agreement during the Inspection Period (as defined below), Buyer shall deposit an additional Fifty Thousand Dollars ($50,000.00) with the Title Company within three (3) business days of the expiration of the Inspection Period. Such additional deposit shall be deemed to constitute part of the Deposit.

2.2     Balance. The balance of the Purchase Price shall be paid in cash, on or before Closing (as defined below in Section 3), subject to adjustments and prorations as provided in this Agreement.

2.3     Escrow. Within thee (3) business days after the Effective Date (as defined in Section 16.11), Buyer and Seller shall open an escrow for the purchase and sale of the Real Property with First American Title Insurance Company (“Title Company”), by depositing with Title Company a fully-executed copy of this Agreement. The Title Company shall hold the Deposit and deliver it in accordance with the terms of this Agreement and the letter of instruction attached to this Agreement as Exhibit B. Interest, if any, earned on the Deposit shall accrue to Buyer’s benefit. Except as otherwise provided in this Agreement, the Deposit, including any interest, shall be delivered to the Seller by the Title Company at Closing and shall be credited against the Purchase Price. The terms and conditions set forth in this Agreement shall constitute both the agreement between Buyer and Seller and joint escrow instructions for the Title Company. If the Title Company requires separate or additional escrow instructions or if Seller or Buyer desires to submit additional escrow instructions, Seller and Buyer agree to promptly execute and deliver the additional instructions to Title Company, provided such additional instructions are consistent with this Agreement and otherwise commercially reasonable. If there is any conflict or inconsistency between the terms and conditions of this Agreement and the additional instructions, this Agreement shall govern unless Buyer and Seller otherwise agree in writing. The additional instructions shall not be deemed to modify or amend the provisions of this Agreement unless Buyer and Seller so agree in writing.

2.4     Allocation of Purchase Price. The allocation of the Purchase Price between the two separate properties that collectively constitute the Real Property shall be reasonably determined by Seller and Buyer prior to Closing and shall be reflected appropriately in the closing statements executed by the parties at Closing.

3.     Title.

3.1     State of Title. Subject to and without limitation of the parties’ respective rights and obligations under Sections 3.2 and 3.3 below, at Closing, Seller shall convey fee simple title in the Real Property to Buyer by limited warranty deeds, subject to all matters of record; provided however that Buyer’s obligation to close shall be conditioned upon the Title Company being willing to issue to Buyer and its lender (if any) at closing and ALTA owner’s (and lender’s, if applicable) policy of title insurance that shows title vested in Buyer from and after Closing, subject only to the Permitted Exceptions.

3.2     Title Examination. Title examination of the Real Property will be conducted as follows:

(a)     Title Evidence. Within three (3) Business Days after the Effective Date, Seller shall, at Seller’s expense, order from Title Company, and thereafter promptly furnish Buyer, with the following (collectively, the “Title Evidence”):

  (i)     Title Insurance Commitment. A commitment for an ALTA Owner’s policy of title insurance for each of the two constituent parcels of the Real Property from the Title Company, dated subsequent to the date of this Agreement (the “Commitment”). The Commitment shall show all exceptions to title including, but not limited to, all covenants, conditions, restrictions, reservations, easements, rights and rights-of-way, liens and other matters of record, and shall include proper searches for bankruptcies, judgments and State and Federal tax liens affecting the two constituent parcels of the Real Property or Seller.

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  (ii)     Exception Documents. Complete and legible copies of or electronic links to all documents or instruments that are listed in the Commitment as affecting the Real Property (the “Exception Documents”).

(b)     ALTA Surveys. Within three (3) Business Days after the Effective Date, Seller shall provide Buyer with copies of Seller’s existing surveys, if any, for each of the two constituent parcels of the Real Property. Buyer (at Buyer’s cost and expense), shall have the right to obtain surveys of the Real Property or, if such exist, have such surveys updated (each new or updated survey, if any, a “Survey”).

(b)     Buyer’s Objections. Buyer shall be allowed until the date twenty (20) days after receiving all the Commitments and Surveys to notify Seller in writing of any objections based on the form of or the matters disclosed by the Title Evidence and/or Surveys (“Objections”). Buyer’s failure to make Objections within such time period will constitute a waiver of any Objections, except as otherwise expressly provided in this Agreement. Any matter shown on the Title Evidence and not objected to by Buyer shall be deemed a “Permitted Exception” except as otherwise provided below in Section 3.3. Seller agrees to diligently proceed to cure any Objections. If the Objections are not cured (to Buyer’s reasonable satisfaction) within ten (10) days after Seller’s receipt of a timely written notice of the Objections to Seller, Buyer will have the right (as Buyer’s sole remedy pertaining to such failure of Seller to remove an Objection to Buyer’s satisfaction, except as provided in Section 3.3. below) to either: (i) waive the Objection and proceed with the transaction; or (ii) terminate this Agreement by delivering written notice to Seller at any time prior to Closing, in which case the Deposit shall be immediately returned to Buyer. Any liens, encumbrances and other matters affecting title to the Real Property which are created and which may appear of record after the date of the Commitment but before the Closing Date (“Intervening Liens”), shall also be subject to Buyer’s approval, except such Intervening Liens which are created by or through Buyer. In addition to the other applicable means of written notice Buyer may elect under Section 17.1, any notice by Buyer of Objections or termination under this Section 3.2(b) is also permitted to be given by email sent to Seller’s legal counsel without need for other written notice pursuant to Section 17.1, in which case such notice shall be deemed delivered when sent by such email.

3.3     Deemed Objections. Notwithstanding anything to the contrary contained in this Agreement, Buyer shall automatically be deemed to have made Objections to and Seller shall be obligated to cure and satisfy at or prior to Closing any: (a) mortgage or deed of trust financing, security interest, collateral lease assignment, fixture filings or similar liens given for security or collateral purposes by Seller, (b) state, federal or local tax liens or liens for the nonpayment of any taxes or special assessments, (c) any judgment liens, (d) mechanic’s lien, construction lien or any other similar statutory liens, and (e) any other lien securing any monetary obligation (collectively, “Liens”). If Seller has not removed such Liens by Closing, then any such Liens will be cured and satisfied out of Seller’s proceeds at Closing; provided, however, that any of the items falling within the scope of items (b), (c) and (e) shall not be subject to the remedy of this sentence unless such Lien(s) under (b), (c) or (e) were caused or created by (or are against or in the name of) Seller or its affiliates, in which case Seller may elect, in lieu of payment of such Lien(s) under (b), (c) or (e) out of Seller’s proceeds at Closing, to diligently contest such Lien(s) so long as (i) Seller causes the Title Company to insure over such Lien(s) in the Title Policy, and (ii) Seller furnishes such security (e.g., escrowing a portion of Seller’s proceeds at Closing, or posting an appropriate bond, etc.) as is necessary to prevent any foreclosure of such Lien(s), or any portion thereof, at any time, for the benefit and to the reasonable satisfaction of the Title Company and Buyer. Notwithstanding the foregoing, Seller shall have no obligation to cure any Liens created by the act of Buyer or its agents or contractors, including without limitation, any mechanic’s liens filed with respect to labor and services performed or materials supplied at the instance and request of Buyer.

3.4     Title Insurance Policy. At the Closing (and as a condition to Buyer’s obligation to close), the Title Company shall issue in Buyer’s favor an ALTA extended coverage Owner’s Policy of Title Insurance (the “Title Policy”), in an amount not less than the Purchase Price, insuring Buyer’s title to the Real Property, subject only to the Permitted Exceptions and general property taxes payable during the year in which the Closing Date occurs, and with endorsements for zoning, access, contiguity, increased coverage and such other endorsements as Buyer may request.

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4.     Seller’s Representations and Warranties. Seller represents and warrants to Buyer, as of the Effective Date and as of the Closing Date, as follows:

4.1    Authority. Seller is a corporation, duly organized, existing and in good standing under the laws of and qualified to transact business in the State of Minnesota, and this Agreement and all documents and acts contemplated hereby are duly authorized by all requisite action of Seller. This Agreement has been duly executed and delivered; all of Seller’s Closing Documents (as defined in Section 10 below) to be signed by Seller will have been duly executed and delivered at Closing; such execution, delivery and performance by Seller does not conflict with, or result in, a violation of any judgment, order, or decree of any court or arbiter to which Seller is a party or by which it is bound; this Agreement and those of Seller’s Closing Documents to be signed by Seller will contain the valid and binding obligations of Seller, and be enforceable in accordance with their terms.

4.2     Title to Real Property. Seller owns the Real Property in fee simple.

4.3     Leases. As of the Effective Date and the Closing Date, the Real Property is not, and will not be, subject to any lease or occupancy agreement other than the Leases (as defined below in Section 6.5), the terms of which will commence at Closing, and the provisions of the Winland Communications lease of a portion of the Mankato property, provided that, at Closing, Seller shall be responsible for having the Winland Communications lease converted to a sublease under the Lease applicable to the Mankato property, pursuant to a written sublease agreement signed by both Seller and Winland Communications (“Winland Sublease”) to be effective from and after Closing, which Winland Sublease shall be in form and substance satisfactory to Buyer, and shall provide for, among other things, the following terms and conditions: (a) the rents, term (which term shall be for interval(s) no longer than year-to-year) and other material terms of the Winland Sublease, (b) that the Winland Sublease is subject and subordinate to the Lease for the Mankato property, and Winland Communications use of its subleased premises shall comply with all terms and conditions of the Lease, and the Winland Sublease shall terminate upon the expiration or sooner termination of the Lease, (c) that the Winland Sublease supersedes and replaces any prior written or oral lease between Winland Communications and Seller, and shall not be further amended without Buyer’s consent (such consent not to be unreasonably withheld, delayed or conditioned), (d) Winland Communications confirms no fact, event or circumstance exists that (with notice, the passage of time or both) would or could be reasonably anticipated to constitute a claim, breach, default or event of default by it or by Seller under the preceding lease arrangement as of the Closing Date or any period prior thereto, and (e) Winland Communications releases Buyer from any liability for any matters whatsoever (and agrees to look solely to Seller, as sublandlord, with respect to any default or claim under the Winland Sublease).

As of the Effective Date and the Closing Date, Seller has the financial ability to perform all its payment and other monetary obligations, as tenant, under the Leases from and after Closing.

4.4     Rights of Others. Seller has not entered into any other contracts for the sale of the Real Property, nor are there any rights of first refusal or options to purchase the Real Property or any other rights of others that might prevent the consummation of this Agreement.

4.5     FIRPTA. Seller is not a “foreign person”, “foreign partnership”, “foreign trust” or “foreign estate” as those terms are defined in Section 1445 of the Internal Revenue Code.

4.6     Proceedings. There are no claims, actions, suits, proceedings or investigations pending or, to Seller’s knowledge, threatened by any governmental department or agency, or any corporation, partnership, entity or person, which in any manner or to any extent may affect: (a) the Real Property, (b) Seller’s right, title and interest in and to any part or all of the Real Property, or (c) Seller’s ability to vest in Buyer a fee simple ownership interest in the Property. There is no pending or, to Seller’s knowledge, threatened condemnation, eminent domain or similar proceeding affecting any part of the Real Property as of the Effective Date.

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4.7     Legal Requirements. Based on Seller’s Actual Knowledge (as defined below) the Real Property is not in material violation of any governmental order, regulation, statute, code or ordinance dealing with the use, construction, operation, safety and/or maintenance thereof, and all existing zoning and building codes and other applicable laws and governmental regulations permit the operation of the Real Property, and Seller has not received any written or oral notice of any such violation or claimed violation from any local, state, or federal governing authority that has not been remedied or resolved, as applicable. Based on Seller’s Actual Knowledge, all necessary certificates of occupancy, licenses or permits, authorizations, consents and approvals required by all governmental authorities having jurisdiction have been issued for the Real Property and are in full force and effect. Seller is not prohibited from consummating the transactions contemplated by this Agreement by any law, regulation, agreement, instrument, restriction, order, or judgment.

4.8     Building Systems and Structure. To Seller’s “Actual Knowledge” (which for purposes of this Agreement shall mean the actual knowledge of Jay Miller and Connie Beck with an obligation of due inquiry), all heating, ventilation, air conditioning, electrical, plumbing and other mechanical and buildings systems of the Real Property are in good order working order and condition, taking into consideration the age and wear and tear on such items. To Seller’s Actual Knowledge, all foundations, walls, roofs and other structural and physical components of the Real Property are structurally sound and free from material defects or damage.

4.9     Insurance Claims. There has been no claims made, nor, to Seller’s Actual Knowledge, are any claims threatened or reasonably anticipated, under any existing policy of insurance (including, without limitation, any general liability or casualty policy) by Seller, or by any third party, with respect to the Real Property or any part thereof, including, without limitation any claim, whether pending or threatened, related to or arising from loss of life, personal or bodily injury or damage to property on, at or about any of the Real Property, or loss, damage or other casualty to the Real Property, or any portion thereof, nor has there been any loss of life, personal or bodily injury, damage to property on, at or about any of the Real Property that are outstanding and unresolved.

4.10   Environmental. Based on Seller’s Actual Knowledge, except as has been done in material compliance with all applicable laws, there have been no any hazardous, toxic or dangerous waste, substance or materials, placed, held, located, released or disposed on, under or at the Real Property by Seller, its employees, owners, officers, contractors and/or agents. To Seller’s Actual Knowledge, no underground wells, above or below ground fuel or other storage tanks or private septic systems exist on, under or upon the Real Property.

Seller shall indemnify and hold harmless Buyer from any claims, costs, damages or liabilities (including attorneys’ fees) arising from any breach of any representation or warranty contained in this Section 4. Such representations and warranties shall survive Closing for a period of one year; provided, however, consummation of this Agreement by Buyer with actual knowledge of any breach by Seller of any of the representations and warranties of Seller set forth in this Section 4 will constitute a waiver or release by Buyer of any claims due to such breach. Notwithstanding the foregoing, nothing contained in this paragraph shall apply to, reduce or in any manner impair any rights or remedies of Buyer (as landlord) under the Leases.

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5.    Buyer’s Representations and Warranties. Buyer is a limited liability company duly organized, existing and in good standing in the State of North Dakota, and Buyer (or its assignee as Buyer hereunder) will be qualified to transact business in the State of Minnesota as of the Closing Date, and this Agreement and all documents and acts contemplated hereby are duly authorized by all requisite action of Buyer.

6.     Buyer’s Contingencies.

6.1     Disclosure Materials. Within five (5) business days of the Effective Date, Seller, at its sole cost and expense, shall provide Buyer with complete and accurate copies of (or create a data room accessible by Buyer with) all relevant documents, materials and information in Seller’s possession or reasonable control pertaining to the Real Property (but such items shall not be deemed to include items that pertain solely to Seller’s business operations at the Real Property), including but not limited to the following: (a) maps, surveys, plans, Autocad drawings, specifications, drawings, assessments, reports, studies, tests, investigations, contracts, records of all capital improvements, maintenance and service contracts pertaining to HVAC units, leases and other agreements, and (b) permits, licenses, certificates, approvals and other entitlements pertaining to the Real Property (collectively, the “Disclosure Materials”).

6.2     Inspections. From the Effective Date and until (and including) the date forty-five (45) days following the Effective Date (the “Inspection Period”), Seller shall allow Buyer, and Buyer’s agents, reasonable access to the Real Property without charge and at all reasonable times for the purpose of Buyer investigating the same and the physical condition thereof, including, without limitation, topographic and soil conditions, test pits, soil borings, market and engineering studies, feasibility studies, environmental investigations and such other tests, studies or investigation with respect to the Real Property. Buyer shall promptly repair any damage to the Real Property caused by such inspections and studies and shall indemnify and defend Seller against and hold Seller harmless from any loss, cost, damage or expense, including without limitation, reasonable attorneys’ fees, to extent such arise from Buyer’s entry upon the Real Property prior to Closing, provided, however, the discovery of an existing adverse condition or defect at the Real Property (by way of example, and not limitation, any environmental contamination) shall not be deemed a disturbance or damaging of the Real Property and shall not be condition that Buyer is obligated to repair or indemnify Seller against.

6.3     Feasibility. Buyer’s obligation to close on the purchase of the Real Property under this Agreement is contingent upon the satisfaction or waiver by Buyer during the Inspection Period (as defined above) of the following contingencies: (a) Buyer shall have reviewed and approved the suitability of the Real Property for Buyer’s desired use of the Real Property; and (b) Buyer shall have reviewed and approved the physical and environmental condition of the Real Property. The foregoing contingencies are for the sole benefit and in the sole discretion of Buyer. In the event that any of these contingencies are not satisfied or waived by Buyer (or for any other reason or no reason, Buyer elects to not proceed with its purchase of the Property), Buyer shall have the right to terminate this Agreement upon written notice to Seller, in which case the Deposit shall be promptly refunded to Buyer, provided that such termination notice is delivered to Seller on or prior to the expiration of the Inspection Period. If Buyer does not terminate this Agreement prior to the expiration of the Inspection Period, Buyer shall be deemed to have waived the contingencies described in this Section 6.3. In addition to the other applicable means of written notice Buyer may elect under Section 17.1, any notice of termination by Buyer under this Section 6.3 is also permitted to be given by email sent to Seller’s legal counsel without need for other written notice pursuant to Section 17.1, in which case such notice shall be deemed delivered when sent by such email.

6.4     Cooperation. Seller shall, without charge to Buyer, cooperate in Buyer’s attempts to obtain all governmental approvals necessary in Buyer’s judgment in order to make use of the Real Property for Buyer’s intended or desired purposes. Seller shall further execute such documents as may be required by governmental bodies to accomplish the foregoing.

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6.5     Leases. Seller and Buyer shall enter into, at Closing, a Lease Agreement for each of the two constituent parcels of the Real Property, under which Seller will be the tenant of each lease (collectively, the “Leases”), which Leases shall each be in the agreed-to form of Lease Agreement attached hereto as Exhibit C, and the respective initial “Base Annual Rental” under the Leases for each constituent parcel of Real Property shall be as follows (which amounts shall be inserted in the respective Lease under Section 1.05 for execution at Closing): (a) with respect to the constituent parcel of Real Property commonly known as 1950 Excel Drive in Mankato, Minnesota, the “Base Annual Rental” under the Lease shall be $323,779.50 per year (subject to annual Rental Adjustments as set forth in the Lease); and (b) with respect to the constituent parcel of Real Property commonly known as 4050 Norris Court NW in Bemidji, Minnesota, the “Base Annual Rental” under the Lease shall be $215,250.50 per year (subject to annual Rental Adjustments as set forth in the Lease).

At Closing, Seller shall, at Seller’s cost and expense, cause to be issued and delivered to Buyer a fully executed, fully transferable, unconditional, irrevocable letter of credit (in form and substance reasonably satisfactory to Buyer) satisfying the criteria for such letter of credit set forth in the Leases.

6.6     “As-Is” Sale. Buyer acknowledges and agrees that, except as otherwise expressly set forth in this Agreement, if upon the completion of its desired inspections and investigations of the Real Property, Buyer elects to purchase the Real Property, Buyer will be acquiring the Real Property in “AS IS, WHERE IS, WITH ALL FAULTS AND DEFECTS” condition.

7.    Executory Period. From and after the Effective Date through Closing, Seller shall: (a) continue to maintain the Real Property in the same manner and condition as existed prior to the Effective Date; (b) remain current in the payment of all utilities, service contracts and real estate taxes and assessments pertaining to the property, (c) not enter into or permit any new easements, covenants, conditions, restrictions, liens, mortgages, or other encumbrances whatsoever upon the Real Property, or any amendments or modifications of any such existing encumbrances, without Buyer’s express written consent, (d) not enter into any new lease, contract or other agreement that would be binding upon Buyer following Closing without Buyer’s prior written consent, (e) maintain commercially prudent and reasonable levels of liability and hazard insurance for the Real Property, (f) not sell, mortgage, pledge, hypothecate or otherwise transfer, dispose of or encumber any part of the Real Property, (g) initiate, consent to, approve or otherwise take any action with respect to zoning or any other governmental rules or regulations applicable to the Real Property, and (h) promptly notify Buyer in writing of any material change or impairment to any portion of the Real Property that occurs during such executory period.

8.     Closing. The closing of the purchase and sale contemplated by this Agreement (the “Closing”) shall occur on the date which is on or prior to thirty (30) days following the expiration of the Inspection Period. Any reference in this Agreement to the “Closing Date” shall mean the actual date of Closing. The Closing shall take place at the offices of the Title Company or such other reasonable location as may be agreed to by the parties. Buyer acknowledges and agrees that its right to purchase the Real Property under this Agreement apply to the joint purchase of the two constituent parcels of the Real Property and that Buyer shall not have the right to purchase only one, but not the other, of such constituent parcels.

9.     Seller’s Closing Documents. On the Closing Date, Seller shall execute and/or deliver to Buyer the following (collectively, the “Seller’s Closing Documents”):

9.1     Deeds. Limited warranty deeds, in commercial reasonable and customary form, conveying each component of the Real Property to Buyer, in accordance with Section 3.1 above.

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9.2    Leases. Counterpart originals of the Leases, executed by Seller as the tenant, and a copy of the fully executed Winland Sublease (in accordance with Section 4.3) between Seller and Winland Communications.

9.3     Records. Copies of relevant records of Seller pertaining directly to operation, repair and maintenance of the Real Property as commercial buildings, but not including records that pertain to the operation of the business activities of Seller upon the Real Property.

9.4    Seller’s Affidavit. An affidavit of title to the Title Company, duly executed by Seller in commercial reasonable and customary form, and such other documents as may be reasonably required by the title insurer to record the Seller’s Closing Documents and issue the Title Policy required by this Agreement.

9.5     FIRPTA Affidavit. A non-foreign affidavit, properly executed and in recordable form, containing such information as is required by IRC Section 1445(b)(2) and related regulations.

9.6     IRS Reporting Form. The appropriate federal income tax reporting form, if required.

9.7     Closing Statement. Seller closing statements for each of the two constituent parcels of the Real Property.

9.8    Authority. A Certificate of Seller, in form and substance reasonably acceptable to Buyer and the Title Company, evidencing and certifying Seller’s right, power and authority to sell the Property, Seller’s board of directors authorization of this Agreement and Closing of the transactions contemplated hereby, and the authority of the persons executing Seller’s Closing Documents on behalf of Seller.

9.9     Letter of Credit. The letter of credit in accordance with Section 6.5.

9.10   Other Documents. All other documents reasonably necessary to transfer the Real Property to Buyer free and clear of all Liens, charges and encumbrances except the Permitted Exceptions and to consummate the transaction set forth in this Agreement.

10.   Buyer’s Closing Documents. On the Closing Date, Buyer will execute and/or deliver to Seller the following (collectively, the “Buyer’s Closing Documents”):

10.1   Purchase Price. The balance of the Purchase Price in cash, certified funds or by wire transfer, in accordance with Section 2.2.

10.2   Leases. Counterpart originals of the Leases, executed by Buyer as the landlord.

10.3   Title Documents. Such documents as may be reasonably required by the title insurer to record the Seller’s Closing Documents and issue the Title Policy required by this Agreement.

10.4   Closing Statement. Buyer closing statements for each of the two constituent parcels of the Real Property.

10.5   Other Documents. All other documents reasonably required of Buyer to consummate the transaction set forth in this Agreement.

12.   Closing Costs and Prorations. Real estate taxes for the year of Closing, and all years prior to Closing, shall be the responsibility of Seller (as the owner of the Real Property prior to the Closing, and as the tenant responsible for the same under the Leases following Closing) and there shall be no proration of such real estate taxes at Closing. Seller shall pay or cause to be paid on or before Closing all assessments due and payable, levied or pending for the Real Property, and real property transfer taxes including State Deed Tax. Seller shall be responsible for the costs of the Commitment. Buyer shall be responsible for the premium for Buyer’s Title Policy. Buyer shall be responsible for the costs to update the Surveys (if Buyer elects to update) and the costs for any simultaneous issue of any lender title policy and costs for any endorsements desired by Buyer to its Title Policy. Buyer and Seller shall each pay one-half of the Title Company’s escrow fee and any closing fee. Any other closing fees and costs shall be allocated between the parties in accordance with the customary practice in the county in which the Real Property is located.

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13.   Risk of Loss.

13.1   Damage or Destruction. If the Real Property is damaged by fire or other casualty prior to the Closing Date which would cost in excess of One Hundred Thousand Dollars to repair (as determined by the parties in good faith), Buyer may elect one of the following actions: (a) Buyer may terminate this Agreement by written notice to Seller given on or before the Closing Date (in the event of such termination, this Agreement will be of no further effect, the Deposit shall be returned to Buyer, and neither Party will thereafter have any further obligation under this Agreement, except for any obligations which expressly survive termination); or (b) if Buyer does not elect to terminate this Agreement, then the Closing will take place as provided in this Agreement without abatement of or reduction in the Purchase Price, and Seller will assign and transfer to Buyer on the Closing Date all of Seller’s right, title and interest in and to all insurance proceeds paid or payable to Seller on account of such fire or other casualty, less such portion thereof as may have been applied to restoration prior to the Closing Date (with Buyer’s approval), if any, and shall give a credit to Buyer against the Purchase Price in the amount of any applicable policy deductible. If the Real Property or any part thereof is damaged by fire or other casualty prior to the Closing Date which would cost One Hundred Thousand Dollars ($100,00.00) or less to repair (as determined by the parties in good faith), Buyer will not have the right to terminate its obligations under this Agreement by reason of such damage or to any reduction in the Purchase Price, and the Closing will take place as provided in this Agreement, but Seller will assign and transfer to Buyer on the Closing Date all of Seller’s right, title and interest in and to all insurance proceeds paid or payable to Seller on account of any such fire or other casualty, less such portion as may have been applied to restoration of the Real Property prior to the Closing Date, if any, and shall give a credit to Buyer against the Purchase Price in the amount of any applicable policy deductible. Buyer does not bear the risk of loss to the Real Property prior to Closing. Prior to the Closing Date, Seller shall not settle, adjust, or consent or otherwise agree to any insurance settlement, resolution, or dispute without Buyer’s prior written consent (such consent not to be unreasonably withheld, delayed or conditioned). Seller shall promptly provide copies of all written information and communication sent and received by Seller pertaining to any insurance claim within the scope of this Section 13.1, and shall afford Buyer the opportunity to participate in all communications and meetings regarding such casualty matter.

13.2   Condemnation. If, prior to the Closing Date, eminent domain proceedings are commenced against all or any part of the Real Property, Seller shall immediately give Buyer written notice of such fact and Buyer shall have the right (to be exercised within thirty (30) days after receipt of Seller’s notice) to terminate this Agreement. If this Agreement is so terminated, neither party will have further obligations under this Agreement and the Deposit shall be returned to Buyer. If Buyer does not so terminate this Agreement, the Purchase Price shall be reduced by any condemnation awards paid to Seller prior to Closing and Seller shall, at Closing, assign to Buyer all of Seller’s right, title and interest in and to any award made or to be made in the condemnation proceedings. Prior to the Closing Date, Seller shall not designate counsel, appear in, or otherwise act with respect to the condemnation proceedings without Buyer’s prior written consent. Seller shall contemporaneously provide copies of all written information and communication sent and received by Seller, and shall afford Buyer the opportunity to participate in all communications and meetings regarding such condemnation matter.

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14.   Remedies. If Buyer should commit a breach under this Agreement that is not cured by Buyer within 10 days after Buyer’s receipt of written notice of the same from Seller, Seller shall have the right to terminate this Agreement by giving written notice to Buyer in accordance with Minnesota law. Upon such termination the Title Company will deliver the Deposit to Seller and Seller may retain the same as liquidated damages. The termination of this Agreement and retention of the Deposit by Seller will be the sole remedy available to Seller for such default by Buyer, and Buyer will not be liable for other damages and/or specific performance; provided, however, this limitation on remedies shall not be limited to any claim by Seller under the indemnity provision set forth above in Section 6.2. If Seller commits a breach under this Agreement that is not cured by Seller within 10 days after Seller’s receipt of written notice of the same from Buyer, Buyer’s sole remedy shall be limited to one of the following: (a) termination of the Agreement (in which case, the Deposit shall be returned to Buyer); or (b) specific performance (provided that action for specific performance must be commenced within three (3) months after Buyer becomes aware of Seller’s default. In the event of any action or dispute between Seller and Buyer arising out of this Agreement, the losing party shall pay the prevailing party a reasonable sum for attorneys’ fees incurred in bringing or defending such action and/or enforcing any judgment granted in such action.

15.   Brokers. Seller shall be solely responsible for any brokerage commission owed to CBRE in connection with the transaction set forth in this Agreement. Seller agrees to indemnify and hold the Buyer harmless against all claims, damages, costs or expenses of or for any other such brokerage fees or commissions resulting from Seller’s actions or agreements regarding the execution or performance of this Agreement.

16.  Blocked Persons. Neither Seller nor Buyer, nor, to the actual knowledge of Seller or Buyer, any of their respective affiliates, is in violation of any laws relating to terrorism or money laundering (“Anti-Terrorism Laws”), including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the “Executive Order”), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56. Neither party hereto nor, to the knowledge of the parties, any of their affiliates, or their respective brokers or other agents acting or benefiting in any capacity in connection with the transaction contemplated hereby, is any of the following: (a) a person or entity that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order; (b) a person or entity owned or controlled by, or acting for or on behalf of, any person or entity that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order; (c) a person or entity with which either party is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law; (d) a person or entity that commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order; or (e) a person or entity that is named as a “specially designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Asset Control at its official website or any replacement website or other replacement official publication of such list. Neither party, nor to the knowledge of either party, any of its brokers or other agents acting in any capacity in connection with the transaction contemplated hereby (a) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in this Section 16, (b) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order, or (c) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law. This Agreement may be terminated by either party if the other party is determined to be a blocked person within the meaning of the Executive Order.

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17.   Miscellaneous.

17.1   Notices. All notices required or permitted to be given hereunder shall be in writing and shall be deemed given upon: (a) personal service, (b) the date of deposit with an overnight courier service, or (c) three (3) business days following deposit in the United States first class mail, postage prepaid, and addressed as set forth below. The parties shall each have the right to change the addresses and numbers by written notice to the other party.

If to Seller:	Nortech Systems, Inc. 7550 Meridian Circle North Maple Grove, MN 55369 Attn: CFO
With a copies to:	Insitu Law, PLC 100 S. 5th St., Ste. 1900 Minneapolis, MN 55402 Attn: Mark Hooley
	MASLON, LLP 3300 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-4140 Attn: Andy Jacobson
If to Buyer:	Essjay Investment Company, LLC 4110 40th Street S, Suite 104      Fargo, North Dakota 58104 Attention: Josh Benson
With a copy to:	Vogel Law Firm 218 NP Avenue Fargo, ND 51807 Attention: Matthew L. Thompson
If to Title Company:	First American Title Insurance Company 121 South Eighth Street, Suite 1250 Minneapolis, MN  55402 Attn: Jim Erickson

17.2   Captions. The paragraph headings or captions appearing in this Agreement have been inserted for convenience only, are not part of this Agreement and are not to be considered in interpreting this Agreement.

17.3   Entire Agreement. This written Agreement together with the exhibits attached hereto constitutes the complete agreement between the parties and supersedes any prior or contemporaneous oral or written agreements between the parties regarding the Real Property. There are no verbal agreements that change this Agreement and no waiver of any of its terms will be effective unless in a writing executed by the parties.

17.4   Successors. This Agreement binds and benefits the parties and their successors and assigns. Buyer shall have the right to assign its interest under this Agreement and upon such assignment the original buyer shall be relieved of any further obligations under this Agreement. Buyer shall promptly notify Seller of any such assignment.

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17.5    Cooperation. Seller and Buyer agree to execute all further documents and to take all such further action as may be necessary or helpful to fully implement the provisions of this Agreement.

17.6    Controlling Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

.

17.7    No Joint Venture. This Agreement shall not be deemed under any circumstances to create any joint venture between Buyer and Seller or to render Buyer and Seller joint venturers or partners.

17.8    1031 Exchange. As an accommodation to the other party, Seller and Buyer each agrees to reasonably cooperate with each other if either or both of them elect to consummate the transaction contemplated by this Agreement in a manner intended to qualify as a like-kind exchange of property pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended (the “Exchange”), including, without limitation, so called “reverse exchanges.” Such cooperation shall include executing documents related to such Exchange, provided that the requesting party is not then in default of its obligations under this Agreement and the following terms and conditions are satisfied: (a)  the non-exchanging party shall in no way be obligated to pay any facilitator charges, escrow costs, brokerage commissions, title charges, survey costs, recording costs or other charges incurred with respect to the Exchange, (b) the exchanging party shall promptly reimburse the non-exchanging party for any reasonable professional fees, including attorneys' fees, incurred with respect to the Exchange; (c)  the non-exchanging party shall have no responsibility or liability to any third party involved in the Exchange; (d) the non-exchanging party shall not be required to make any representations or warranties nor assume any obligations, including but not limited, incurring any debt, taking title to any other property, expending any sum, or incurring any liability whatsoever in connection with the Exchange; and (e) the parties' rights and obligations under this Agreement, shall not be reduced or excused in any manner as the result of the Exchange. This Agreement shall constitute notice within the meaning of Section 1.1031(k)-1(g)(4)(v) of the Income Tax Regulations.

17.9    Further Assurances. Seller and Buyer shall, in good faith, take such further acts and execute and deliver such further documents and assurances as are reasonably required to give full effect and meaning to this Agreement.

17.10  No Third Party Beneficiaries. This Agreement, and each provision thereof, is intended solely for the mutual benefit of Seller and Buyer and their respective successors and assigns, and is not intended for the benefit of any third party. No third party has or shall acquire any rights under this Agreement and no third party shall be entitled to rely upon or enforce this Agreement.

17.11  Severability. In the event that any term or provision of this Agreement is determined to be invalid or unenforceable for any reason, such term or provisions shall be severed from this Agreement without affecting the validity or enforceability of the remainder of this Agreement.

17.12  Interpretation. The parties have jointly participated in the negotiation and drafting of this Agreement, and this Agreement shall be construed fairly and equally as to the parties, without regard to any rules of construction relating to the party who drafted a particular provision of this Agreement.

17.13  Time. All references in this Agreement to “days” shall mean calendar days unless expressly referred to as “business days.” If the day for performance of any obligation under this Agreement is a Saturday, Sunday or legal holiday, then the time for performance of that obligation shall be extended to the first following day that is not a Saturday, Sunday or legal holiday.     

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17.14  Counterparts and Electronic Signatures. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. Electronic copies of signatures shall be deemed to be originals..

[Signature Blocks on Following Page.]

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THE PARTIES have executed this Agreement, effective as of the Effective Date.

SELLER:		BUYER:
NORTECH SYSTEMS, INC.		ESSJAY INVESTMENT COMPANY, LLC
By:	/s/ Constance M. Beck	By:	/s/ Josh Benson
Name:	Constance M. Beck	Name:	Josh Benson
Its:	Vice President and Chief Financial Officer	Its:	Senior Vice President

4811-1968-3258

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FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT

This First Amendment to Purchase and Sale Agreement (this “Amendment”) is entered into effective as of August 7, 2020, by and between Essjay Investment Company, LLC, a North Dakota limited liability company (“Buyer”), and Nortech Systems Incorporated, a Minnesota corporation (“Seller”).

WHEREAS, Buyer and Seller are parties to that certain Purchase and Sale Agreement, dated June 24, 2020 (the “Agreement”);

WHEREAS, Seller and Buyer wish to amend the Agreement, and make certain other agreements, all as set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed as follows:

1.     Allocation of Purchase Price. Pursuant to Section 2.4 of the Agreement, Seller and Buyer agree that the total Purchase Price shall be allocated between the respective lands and Improvements that collectively constitute the Real Property, as follows:

a.     $3,448,120 shall be allocated to the land and Improvements located at 1950 Excel Drive, Mankato MN (described as Parcel 1 in the Title Evidence); and

b.     $2,851,880 shall be allocated to the land and Improvements located at 4050 Norris Court NW, Bemidji MN (described as Parcel 2 in the Title Evidence).

2.     Letter of Credit. The initial letter of credit to be delivered by Seller at Closing pursuant to Section 6.5 of the Agreement and in accordance with Section 4.08 of the Leases, and any replacement letter of credit thereunder, shall expressly name Central Minnesota Credit Union (and any assignee/successor lender(s) of the applicable Landlord(s)), as additional addressees/beneficiaries thereof, in addition to each of the applicable Buyer(s)/Landlord(s) (and their successor/assigns). Sections 4.08 of the Leases to be entered into at Closing pursuant to Section 6.5 of the Agreement, shall be likewise revised to reflect the foregoing.

3.     Amendment/Agreement in Full Force/Defined Terms. Except as expressly amended by this Amendment, the terms and provisions of the Agreement shall remain in full force and effect. To the extent any of the terms and provisions of the Agreement are inconsistent with the terms and provisions of this Amendment, the terms and provisions of this Amendment shall control. All defined terms used in this Amendment and not otherwise defined herein shall have the respective meanings ascribed to them in the Agreement. No modification, waiver, amendment, discharge or change of this Amendment shall be valid unless the same is in writing and signed by the Party against which enforcement of the same is or may be sought.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, this Amendment has been executed as of the date and year first above set forth.

SELLER:	BUYER:
NORTECH SYSTEMS, INC.	ESSJAY INVESTMENT COMPANY, LLC
By: /s/ Constance M. Beck	By: /s/ Josh Benson
Name: Constance M. Beck	Name: Josh Benson
Its: Vice President and Chief Financial Officer	Its: Senior Vice President

This Amendment may be executed in any number of counterparts, each of which so executed shall be deemed original; such counterparts shall together constitute but one agreement. Facsimile and/or digitally transmitted signatures shall be sufficient to bind the Parties and shall in all respects be treated in court proceedings or otherwise as the legal equivalent of an original signature

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EX-10.2

Exhibit 10.2

August 11, 2020

Nortech Systems Announces Second-Quarter 2020 Results, Sale-Leaseback and Plant Consolidation

MINNEAPOLIS, MINNESOTA, USA – Nortech Systems Incorporated (Nasdaq: NSYS), a leading provider of engineering and manufacturing solutions for complex electromedical and electromechanical products serving the medical, aerospace & defense and industrial markets, reported nets sales of $26.5 million for the second quarter ended June 30, 2020, compared with $27.3 million for the second quarter of 2019.

Operating income for the second quarter of 2020 was $49,000, which compares with an operating loss of $1.2 million for the second quarter of 2019. Net loss for the second quarter of 2020 was $123,000, or $0.05 per diluted common share. This compares with a net loss for the second quarter of 2019 of $1.6 million, or $0.58 per diluted common share. Nortech’s backlog at the end of the second quarter 2020 was $46.6 million.

The Company also announced today that it has entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota. Nortech and Essjay are expected to close the agreements during the Company’s fiscal third quarter, subject to final documentation and other customary conditions.

Nortech expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5 million. Nortech intends to use the funds to pay down debt, provide additional liquidity for initiatives, capital investments and working capital, and strengthen the Company’s financial position. At closing, Nortech will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

To further improve operational efficiencies and lower overhead costs, the Company announced that it is closing its Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations.

The Merrifield production facility consolidation is expected to be complete on or before December 31, 2020, and will impact approximately 60 employees, who will be offered positions at other Nortech facilities in Minnesota. Additionally, by the end of 2020, the company will shift its PCB manufacturing from it’s Monterrey, Mexico, location to its Mankato, Minnesota production facility, Nortech’s PCB center of excellence.

"Given the challenging economic environment, we are pleased with the significant improvement in operating profitability for the second quarter, our sale and leaseback agreements with Essjay and the Company’s plans to drive PCB manufacturing productivity. Our balance sheet continues to strengthen, and the sale leaseback and plant consolidation will provide significant liquidity to make further investments in the business. Our goal through these essential moves is to enhance Nortech’s ability to operate through the current COVID-19 pandemic and succeed long term." stated Jay D. Miller, Chief Executive Officer and President.

Nortech, in partnership with our medical, industrial and defense customers, uses intelligence, innovation, speed and global expertise to provide manufacturing and engineering solutions. This enables our customers to be leaders in digital connectivity and data management to achieve their business goals. Nortech strives to be a premier workplace that fosters valued relationships internally and in our communities.

About Nortech Systems Incorporated Nortech Systems is a leading provider of design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies, and components. Nortech Systems primarily serves the medical, aerospace & defense, and industrial markets. Its design services span concept development to commercial design, and include medical device, software, electrical, mechanical, and biomedical engineering. Its manufacturing and supply chain capabilities are vertically integrated around wire/cable/interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration, and final test. Headquartered in Maple Grove, Minn., Nortech currently has seven manufacturing locations and design centers across the U.S., Latin America, and Asia. Nortech Systems is traded on the NASDAQ Stock Market under the symbol NSYS. Nortech’s website is www.nortechsys.com.

Forward-Looking Statements This press release contains forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. While this release is based on management’s best judgment and current expectations, actual results may differ and involve a number of risks and uncertainties. Specifically, the company states above that it will complete the sale and leaseback transaction during the company’s fiscal third quarter of 2020 and that the company will gain operational efficiencies through plant consolidations. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: volatility in market conditions which may affect market supply of and demand for the company’s products; increased competition; changes in the reliability and efficiency of operating facilities or those of third parties; risks related to availability of labor; commodity and energy cost instability; general economic, financial and business conditions that could affect the company’s financial condition and results of operations; as well as risk factors listed from time to time in the company’s filings with the SEC.

Condensed Consolidated Statements of Operations

(in thousands, except for share data)

	THREE MONTHS ENDED						SIX MONTHS ENDED
	June 30,						June 30,
	Unaudited			Unaudited			Unaudited			Unaudited
	2020			2019			2020			2019
Net Sales	$	26,461		$	27,292		$	53,901		$	55,457
Cost of Goods Sold		24,020			24,967			48,455			50,171
Gross Profit		2,441			2,325			5,446			5,286
		9.2	%		8.5	%		10.1	%		9.5	%
Operating Expenses
Selling Expenses		730			797			1,351			1,558
General and Administrative Expenses		1,662			2,737			3,655			5,041
Total Operating Expenses		2,392			3,534			5,006			6,599
Income (Loss) from Operations		49			(1,209	)		440			(1,313	)
Interest Expense		(176	)		(279	)		(400	)		(524	)
Income (Loss) Before Income Taxes		(127	)		(1,488	)		40			(1,837	)
Income Tax (Benefit) Expense		(4	)		64			26			78
Net Income (Loss)	$	(123	)	$	(1,552	)	$	14		$	(1,915	)
Income (Loss) Per Common Share - Diluted	$	(0.05	)	$	(0.58	)	$	0.01		$	(0.72	)
Weighted Average Number of Common Shares Outstanding - Diluted		2,657,530			2,676,449			2,666,532			2,672,758

Condensed Consolidated Balance Sheets

(in thousands)

	June 30,		December 31,
	2020		2019
	Unaudited		Audited
Cash	$	345	$	351
Restricted Cash		409		309
Accounts Receivable		19,219		18,558
Inventories		15,492		14,279
Contract Assets		6,399		7,659
Prepaid Expenses and Other Current Assets		1,785		2,128
Property and Other Long-term Assets		13,817		14,408
Goodwill and Other Long-term Assets, Net		3,612		3,718
Total Assets	$	61,078	$	61,410
Accounts Payable	$	13,523	$	14,014
Current Portion of Lease Obligation		1,434		1,415
Other Current Liabilities		6,926		6,803
Long Term Line of Credit		4,392		10,088
Long-term Debt and Other Liabilities		9,162		3,297
Long Term Lease Obligation		5,618		5,817
Shareholders’ Equity		20,023		19,976
Total Liabilities and Shareholders’ Equity	$	61,078	$	61,410

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: August 11, 2020	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: August 11, 2020	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 June 30, 2020 (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: August 11, 2020

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 June 30, 2020 (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: August 11, 2020

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

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Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Aug. 07, 2020
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 Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		2,657,530
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Jun. 30, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Amendment Flag	false
Title of 12(b) Security	Common Stock, par value $.01 per share

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Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Net sales	$ 26,461	$ 27,292	$ 53,901	$ 55,457
Cost of Goods Sold	24,020	24,967	48,455	50,171
Gross Profit	2,441	2,325	5,446	5,286
Operating Expenses
Selling Expenses	730	797	1,351	1,558
General and Administrative Expenses	1,662	2,737	3,655	5,041
Total Operating Expenses	2,392	3,534	5,006	6,599
Income (Loss) From Operations	49	(1,209)	440	(1,313)
Other Expense
Interest Expense	(176)	(279)	(400)	(524)
(Loss) Income Before Income Taxes	(127)	(1,488)	40	(1,837)
Income Tax (Benefit) Expense	(4)	64	26	78
Net (Loss) Income	$ (123)	$ (1,552)	$ 14	$ (1,915)
Net (Loss) Income Per Common Share - Basic (in dollars per share)	$ (0.05)	$ (0.58)	$ 0.01	$ (0.72)
Weighted Average Number of Common Shares Outstanding - Basic (in shares)	2,657,530	2,676,449	2,657,530	2,672,758
Net (Loss) Income Per Common Share - Diluted (in dollars per share)	$ (0.05)	$ (0.58)	$ 0.01	$ (0.72)
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)	2,657,530	2,676,449	2,666,532	2,672,758
Foreign currency translation	$ 19	$ (56)	$ (42)
Comprehensive Loss, net of tax	$ (104)	$ (1,608)	$ (28)	$ (1,915)

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Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
ASSETS
Cash	$ 345	$ 351	[1]
Restricted Cash	409	309	[1]
Accounts Receivable, less allowances of $391 and $335	19,219	18,558	[1]
Inventories	15,492	14,279	[1]
Contract Assets	6,399	7,659	[1]
Prepaid Expenses and Other Current Assets	1,785	2,128	[1]
Total Current Assets	43,649	43,284	[1]
Property and Equipment, Net	9,371	9,581	[1]
Operating Lease Assets	4,446	4,827	[1]
Goodwill	2,375	2,375	[1]
Other Intangible Assets, Net	1,237	1,343	[1]
Total Assets	61,078	61,410	[1]
Current Liabilities
Current Maturities of Long-Term Debt	444	444	[1]
Current Portion of Finance Lease Obligation	643	557	[1]
Current Portion of Operating Lease Obligations	791	858	[1]
Accounts Payable	13,523	14,014	[1]
Accrued Payroll and Commissions	3,294	3,493	[1]
Other Accrued Liabilities	3,188	2,866	[1]
Total Current Liabilities	21,883	22,232	[1]
Long-Term Liabilities
Long Term Line of Credit	4,392	10,088	[1]
Long-Term Debt, Net	9,046	3,179	[1]
Long Term Finance Lease Obligation, Net	1,486	1,451	[1]
Long-Term Operating Lease Obligation, Net	4,132	4,366	[1]
Other Long-Term Liabilities	116	118	[1]
Total Long-Term Liabilities	19,172	19,202	[1]
Total Liabilities	41,055	41,434	[1]
Commitments and Contingencies
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250	250	[1]
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively	27	27	[1]
Additional Paid-In Capital	15,823	15,748	[1]
Accumulated Other Comprehensive Loss	(299)	(257)	[1]
Retained Earnings	4,222	4,208	[1]
Total Shareholders' Equity	20,023	19,976	[1]
Total Liabilities and Shareholders' Equity	$ 61,078	$ 61,410	[1]

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	[1]
Accounts receivable allowance	$ 391	$ 335
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)	2,657,530	2,657,530
Common stock, shares outstanding (in shares)	2,657,530	2,657,530

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash Flows From Operating Activities
Net Income (Loss)	$ 14	$ (1,915)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Depreciation and Amortization	1,131	1,096
Compensation on Stock-Based Awards	75	191
Change in Accounts Receivable Allowance	56	40
Change in Inventory Reserves	(92)	54
Changes in Current Operating Items
Accounts Receivable	(699)	(646)
Inventories	(1,105)	670
Contract Assets	1,260	(798)
Prepaid Expenses and Other Current Assets	357	(395)
Income Taxes	(117)
Accounts Payable	(728)	(1,087)
Accrued Payroll and Commissions	(610)	596
Other Accrued Liabilities	930	(49)
Net Cash Provided by (Used in) Operating Activities	472	(2,243)
Cash Flows from Investing Activities
Purchase of Intangible Asset	(6)	(25)
Purchases of Property and Equipment	(241)	(545)
Net Cash Used in Investing Activities	(247)	(570)
Cash Flows from Financing Activities
Net Change in Line of Credit	(5,696)	3,469
Proceeds from Long-term Debt	6,077
Principal Payments on Long-Term Debt	(238)	(584)
Principal Payments on Finance Leases	(274)	(96)
Stock Option Exercises		7
Share Repurchases		(126)
Net Cash (Used in) Provided By Financing Activities	(131)	2,670
Net Change in Cash	94	(143)
Cash - Beginning of Period	660	948
Cash - Ending of Period	754	805
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	345	399
Restricted Cash	409	406
Cash - Ending of Period	754	805
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	394	477
Cash Paid and (Refunded) During the Period for Income Taxes	72	(47)
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	237	180
Equipment Acquired under Finance Lease	$ 395

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Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($) $ in Thousands	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member]	Total
BALANCE at Dec. 31, 2018	$ 250	$ 27	$ 15,610	$ (233)	$ 5,436	$ 21,090
Net Income (Loss)					(1,915)	(1,915)
Foreign currency translation adjustment
Compensation on stock-based awards			191			191
Share repurchases			(126)			(126)
Stock option exercises			7			7
BALANCE at Jun. 30, 2019	250	27	15,682	(233)	3,521	19,247
BALANCE at Mar. 31, 2019	250	27	15,757	(177)	5,073	20,930
Net Income (Loss)					(1,552)	(1,552)
Foreign currency translation adjustment				(56)		(56)
Compensation on stock-based awards			38			38
Share repurchases			(113)			(113)
BALANCE at Jun. 30, 2019	250	27	15,682	(233)	3,521	19,247
BALANCE at Dec. 31, 2019	250	27	15,748	(257)	4,208	19,976	[1]
Net Income (Loss)					14	14
Foreign currency translation adjustment				(42)		(42)
Compensation on stock-based awards			75			75
BALANCE at Jun. 30, 2020	250	27	15,823	(299)	4,222	20,023
BALANCE at Mar. 31, 2020	250	27	15,787	(318)	4,345	20,091
Net Income (Loss)					(123)	(123)
Foreign currency translation adjustment				19		19
Compensation on stock-based awards			36			36
BALANCE at Jun. 30, 2020	$ 250	$ 27	$ 15,823	$ (299)	$ 4,222	$ 20,023

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2020

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, 2019.

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.

Stock-Based Awards

Following is the status of all stock options as of

June 30, 2020:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised		-
Cancelled		(4,000	)		3.29
Outstanding - June 30, 2020		379,500		$	3.83		8.13	$	218
Exercisable - June 30, 2020		182,240		$	3.72		7.70	$	119

In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

400,000

shares, an additional

50,000

shares were authorized in

March 2020.

There were

11,300

stock options granted during the

six

months ended

June 30, 2020.

Total compensation expense related to stock options for the

three

months ended

June 30, 2020

and

2019

was

$36

and

$38,

respectively and

$75

and

$191

for the

six

months ended

June 30, 2020

and

2019,

respectively. As of

June 30, 2020,

there was

$292

of unrecognized compensation which will vest over the next

2.69

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.

During the

six

months ended

June 30, 2019,

there were

137,500

units granted. There were

no

units granted during the

six

months ended

June 30, 2020.

Net Income (Loss) per Common Share

For the

three

months ended

June 30, 2020,

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

not

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

six

months ended

June 30 ,2020,

stock options of

9,002

were included in the computation of diluted income per common share amount as their impact were dilutive. For both the

three

months and

six

months ended

June 30, 2019,

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

not

included in the computation of loss per common share amount.

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

June 30, 2020

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

June 30, 2020,

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 have been reduced by an allowance for doubtful accounts of

$391

at

June 30, 2020

and

$335

at

December 31, 2019.

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 (in thousands):

	June 30,			December 31,
	2020			2019
Raw Materials	$	15,846		$	15,245
Work in Process		628			479
Finished Goods		412			41
Reserves		(1,394	)		(1,486	)
Total	$	15,492		$	14,279

Other Intangible Assets

Other intangible assets at

June 30, 2020

and

December 31, 2019

are as follows (in thousands):

			June 30, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	723	$	579
Trade Names		3		100		100		-
Intellectual Property		20		814		203		611
Patents		7		47		-		47
Totals			$	2,263	$	1,026	$	1,237

			December 31, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	651	$	651
Intellectual Property		3		100		95		5
Trade Names		20		814		183		631
Patents		7		56		-		56
Totals			$	2,272	$	929	$	1,343

Amortization expense for the

three

and

six

months ended

June 30, 2020

was

$47

and

$98,

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 2020	$	93
2021		186
2022		185
2023		185
2024		113
Thereafter		428
Total	$	1,190

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

six

months ended

June 30, 2020

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

six

months ended

June 30, 2020

and

2019.

Accounting Pronouncements Issued But

Not

Yet Adopted

In

June 2016,

the FASB issued ASU

No.

 

2016

-

13,

“Financial Instruments - Credit Losses (ASC

326

): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument's contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after

December 15, 2022;

early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

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Note 2 - Concentration of Credit Risk and Major Customers

6 Months Ended

Jun. 30, 2020

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

$754

in cash at

June 30, 2020,

approximately

$318

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

six

months ended

June 30, 2020

and

2019.

One division accounted for approximately

20%

and

22%

of net sales for the

three

and

six

months ended

June 30, 2020,

respectively, and approximately

21%

and

22%

for both the

three

and

six

months ended

June 30, 2019,

respectively. The other division accounted for approximately

3%

and

2%

of net sales for the

three

months and

six

ended

June 30, 2020,

respectively, and approximately

2%

net sales for both the

three

and

six

months ended

June 30, 2019,

respectively. Together they accounted for approximately

23%

and

24%

of net sales for the

three

and

six

months ended

June 30, 2020,

respectively, and approximately

23%

and

24%

of net sales for the

three

and

six

months ended

June 30, 2019,

respectively. Accounts receivable from the customer at

June 30, 2020

and

December 31, 2019

represented approximately

40%

and

36%

of our total accounts receivable, respectively.

Export sales represented approximately

9%

and

17%

of net sales for the

three

months ended

June 30, 2020

and

2019,

respectively. Export sales represented

11%

and

18%

of net sales for the

six

months ended

June 30, 2020

and

2019,

respectively.

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Note 3 - Revenue

6 Months Ended

Jun. 30, 2020

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

84.6%

and

86.1%

of our revenue for both the

three

and

six

months ended

June 30, 2020,

respectively. 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 Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the

six

months ended

June 30, 2020

was as follows (in thousands):

Six Months Ended June 30, 2020
Outstanding at January 1, 2020	$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(6,277	)
Product transferred over time		5,017
Outstanding at June 30, 2020	$	6,399

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

June 30, 2020,

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

six

months ended

June 30 (

in thousands):

	Three Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	11,464	$	1,540	$	367	$	13,371
Aerospace and Defense		4,522		246		138		4,906
Industrial		6,395		1,593		196		8,184
Total net sales	$	22,381	$	3,379	$	701	$	26,461

	Three Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,145	$	218	$	661	$	14,024
Aerospace and Defense		4,155		222		205		4,582
Industrial		7,428		878		380		8,686
Total net sales	$	24,728	$	1,318	$	1,246	$	27,292

	Six Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	25,084	$	2,601	$	1,048	$	28,733
Aerospace and Defense		8,944		379		367		9,690
Industrial		12,390		2,563		525		15,478
Total net sales	$	46,418	$	5,543	$	1,940	$	53,901

	Six Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	27,640	$	253	$	1,070	$	28,963
Aerospace and Defense		8,258		242		327		8,827
Industrial		15,568		1,475		624		17,667
Total net sales	$	51,466	$	1,970	$	2,021	$	55,457

XML

Note 4 - Financing Arrangements

6 Months Ended

Jun. 30, 2020

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

3.2%

and

5.8%

as of

June 30, 2020

and

2019,

respectively. We had borrowings on our line of credit of

$4,392

and

$10,088

outstanding as of

June 30, 2020

and

December 31, 2019,

respectively. There are

no

subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of

not

less than (i) 

1.0

to

1.0,

for the

three

months ending

December 31, 2019,

six

months ending

March 31, 2020,

nine

months ending

June 30, 2020

and

twelve

months ending

September 30, 2020

and each Fiscal Quarter end thereafter. The Company met the covenants for the period ended

June 30, 2020.

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

June 30, 2020,

we had unused availability under our line of credit of

$8,311,

supported by our borrowing base. The line is secured by substantially all of our assets.

On

April 15, 2020,

we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of

$6,077

pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on

April 22, 2020.

The Promissory Note has a term of

2

years with a

1%

per annum interest rate. Payments are deferred for

10

months after the end of the Promissory Note covered period (which is defined as

24

weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after

60

days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

Long-term debt at

June 30, 2020

and

December 30, 2019

consisted of following:

	June 30,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of June 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,518		$	3,755
Promissory Note		6,077			-
		9,595			3,755
Debt issuance Costs		(105	)		(132	)
Total long-term debt		9,490			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	9,046		$	3,179

XML

Note 5 - Leases

6 Months Ended

Jun. 30, 2020

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

June 30, 2020,

we do

not

have material lease commitments that have

not

commenced.

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	June 30, 2020
Assets
Operating lease assets	Operating lease assets	$	4,446
Finance lease assets	Property, Plant and Equipment		2,842
Total leased assets		$	7,288
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		791
Current finance lease liabilities	Current Portion of Finance Lease Obligations		643
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,132
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,486
Total lease liabilities		$	7,052

Supplemental cash flow information related to leases was as follows:

	Three Months Ended June 30,
	2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	215
Right-of-use assets obtained in exchange for lease obligations	$	—

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2020	$	435		$	391		$	826
2021		722			738			1,460
2022		726			575			1,301
2023		738			333			1,071
2024		798			277			1,075
Thereafter		2,582			20			2,602
Total lease payments	$	6,001		$	2,334		$	8,335
Less: Interest		(1,078	)		(205	)		(1,283	)
Present value of lease liabilities	$	4,923		$	2,129		$	7,052

The lease term and discount rate at

June 30, 2020

were as follows:

Weighted-average remaining lease term (years)
Operating leases	7.5
Finance leases	3.2
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	4.9	%

XML

Note 6 - Income Taxes

6 Months Ended

Jun. 30, 2020

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 calendar 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

six

months ended

June 30, 2020

was (

3.2%

) and

65.0%,

respectively, and the rate for the

three

and

six

months ended

June 30, 2019

was (

4%

).

XML

Note 7 - Related Party Transactions

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE

7.

RELATED PARTY TRANSACTIONS

During

three

and

six

months ended

June 30, 2020,

we did business with Printed Circuits, Inc. which is

90%

owned by the Kunin family, of which, owns a majority of our stock. We had expenses incurred totaling

$14

and

$0

during the

three

months ended

June 30, 2020

and

2019,

and

$28

and

$51

for the

six

months ended

June 30, 2020

and

2019,

respectively to Printed Circuits, Inc.

XML

Note 8 - Subsequent Events

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Subsequent Events [Text Block]

NOTE

8.

SUBSEQUENT EVENTS

Sale

and

Leaseback

Agreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company's manufacturing facilities in Bemidji and Mankato, Minnesota. Nortech and Essjay are expected to close during the Company's fiscal

third

quarter, subject to final documentation and other customary closing conditions. 

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately

$5,000.

 The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company's financial position. At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial

15

-year term, with multiple renewal options.

Facility Consolidation

To further improve operational efficiencies and lower overhead costs, the Company approved on

August 7, 2020,

the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech's other Minnesota locations. The Merrifield production facility consolidation is expected to be complete on or before

December 31, 2020,

and will impact approximately

60

employees, who will be offered positions at other Nortech facilities in Minnesota.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2020

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, 2019.

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]

Stock-Based Awards

Following is the status of all stock options as of

June 30, 2020:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised		-
Cancelled		(4,000	)		3.29
Outstanding - June 30, 2020		379,500		$	3.83		8.13	$	218
Exercisable - June 30, 2020		182,240		$	3.72		7.70	$	119

In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

400,000

shares, an additional

50,000

shares were authorized in

March 2020.

There were

11,300

stock options granted during the

six

months ended

June 30, 2020.

Total compensation expense related to stock options for the

three

months ended

June 30, 2020

and

2019

was

$36

and

$38,

respectively and

$75

and

$191

for the

six

months ended

June 30, 2020

and

2019,

respectively. As of

June 30, 2020,

there was

$292

of unrecognized compensation which will vest over the next

2.69

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.

During the

six

months ended

June 30, 2019,

there were

137,500

units granted. There were

no

units granted during the

six

months ended

June 30, 2020.

Earnings Per Share, Policy [Policy Text Block]

Net Income (Loss) per Common Share

For the

three

months ended

June 30, 2020,

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

not

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

six

months ended

June 30 ,2020,

stock options of

9,002

were included in the computation of diluted income per common share amount as their impact were dilutive. For both the

three

months and

six

months ended

June 30, 2019,

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

not

included in the computation of loss per common share amount.

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

June 30, 2020

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

June 30, 2020,

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 have been reduced by an allowance for doubtful accounts of

$391

at

June 30, 2020

and

$335

at

December 31, 2019.

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 (in thousands):

	June 30,			December 31,
	2020			2019
Raw Materials	$	15,846		$	15,245
Work in Process		628			479
Finished Goods		412			41
Reserves		(1,394	)		(1,486	)
Total	$	15,492		$	14,279

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

Other Intangible Assets

Other intangible assets at

June 30, 2020

and

December 31, 2019

are as follows (in thousands):

			June 30, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	723	$	579
Trade Names		3		100		100		-
Intellectual Property		20		814		203		611
Patents		7		47		-		47
Totals			$	2,263	$	1,026	$	1,237

			December 31, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	651	$	651
Intellectual Property		3		100		95		5
Trade Names		20		814		183		631
Patents		7		56		-		56
Totals			$	2,272	$	929	$	1,343

Amortization expense for the

three

and

six

months ended

June 30, 2020

was

$47

and

$98,

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 2020	$	93
2021		186
2022		185
2023		185
2024		113
Thereafter		428
Total	$	1,190

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

six

months ended

June 30, 2020

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

six

months ended

June 30, 2020

and

2019.

New Accounting Pronouncements, Policy [Policy Text Block]

Accounting Pronouncements Issued But

Not

Yet Adopted

In

June 2016,

the FASB issued ASU

No.

 

2016

-

13,

“Financial Instruments - Credit Losses (ASC

326

): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument's contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after

December 15, 2022;

early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

XML

Note 1 - Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2020

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, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised		-
Cancelled		(4,000	)		3.29
Outstanding - June 30, 2020		379,500		$	3.83		8.13	$	218
Exercisable - June 30, 2020		182,240		$	3.72		7.70	$	119

Schedule of Inventory, Current [Table Text Block]

	June 30,			December 31,
	2020			2019
Raw Materials	$	15,846		$	15,245
Work in Process		628			479
Finished Goods		412			41
Reserves		(1,394	)		(1,486	)
Total	$	15,492		$	14,279

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

			June 30, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	723	$	579
Trade Names		3		100		100		-
Intellectual Property		20		814		203		611
Patents		7		47		-		47
Totals			$	2,263	$	1,026	$	1,237

			December 31, 2019
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	651	$	651
Intellectual Property		3		100		95		5
Trade Names		20		814		183		631
Patents		7		56		-		56
Totals			$	2,272	$	929	$	1,343

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

Year	Amount
Remainder of 2020	$	93
2021		186
2022		185
2023		185
2024		113
Thereafter		428
Total	$	1,190

XML

Note 3 - Revenue (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

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

Six Months Ended June 30, 2020
Outstanding at January 1, 2020	$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(6,277	)
Product transferred over time		5,017
Outstanding at June 30, 2020	$	6,399

Disaggregation of Revenue [Table Text Block]

	Three Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	11,464	$	1,540	$	367	$	13,371
Aerospace and Defense		4,522		246		138		4,906
Industrial		6,395		1,593		196		8,184
Total net sales	$	22,381	$	3,379	$	701	$	26,461

	Three Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,145	$	218	$	661	$	14,024
Aerospace and Defense		4,155		222		205		4,582
Industrial		7,428		878		380		8,686
Total net sales	$	24,728	$	1,318	$	1,246	$	27,292

	Six Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	25,084	$	2,601	$	1,048	$	28,733
Aerospace and Defense		8,944		379		367		9,690
Industrial		12,390		2,563		525		15,478
Total net sales	$	46,418	$	5,543	$	1,940	$	53,901

	Six Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	27,640	$	253	$	1,070	$	28,963
Aerospace and Defense		8,258		242		327		8,827
Industrial		15,568		1,475		624		17,667
Total net sales	$	51,466	$	1,970	$	2,021	$	55,457

XML

Note 4 - Financing Arrangements (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

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

	June 30,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of June 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,518		$	3,755
Promissory Note		6,077			-
		9,595			3,755
Debt issuance Costs		(105	)		(132	)
Total long-term debt		9,490			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	9,046		$	3,179

XML

Note 5 - Leases (Tables)

6 Months Ended

Jun. 30, 2020

Notes Tables

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

	Balance Sheet Location	June 30, 2020
Assets
Operating lease assets	Operating lease assets	$	4,446
Finance lease assets	Property, Plant and Equipment		2,842
Total leased assets		$	7,288
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		791
Current finance lease liabilities	Current Portion of Finance Lease Obligations		643
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,132
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,486
Total lease liabilities		$	7,052

Lease, Cost [Table Text Block]

	Three Months Ended June 30,
	2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	215
Right-of-use assets obtained in exchange for lease obligations	$	—

Weighted-average remaining lease term (years)
Operating leases	7.5
Finance leases	3.2
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	4.9	%

Schedule of Lease Liability Maturity [Table Text Block]

	Operating Leases			Finance Leases			Total
Remaining 2020	$	435		$	391		$	826
2021		722			738			1,460
2022		726			575			1,301
2023		738			333			1,071
2024		798			277			1,075
Thereafter		2,582			20			2,602
Total lease payments	$	6,001		$	2,334		$	8,335
Less: Interest		(1,078	)		(205	)		(1,283	)
Present value of lease liabilities	$	4,923		$	2,129		$	7,052

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Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended			6 Months Ended
	Mar. 31, 2020	Jun. 30, 2020	Mar. 31, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019	[1]	May 31, 2017	Nov. 30, 2010
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in shares)			11,300		11,300
Letters of Credit Outstanding, Amount		$ 0			$ 0
Accounts Receivable, Allowance for Credit Loss, Current		391			391		$ 335
Amortization of Intangible Assets, Total		47			98
Impairment of Long-Lived Assets to be Disposed of					$ 0	$ 0
Share-based Payment Arrangement, Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares)					9,002
Share-based Payment Arrangement, Option [Member]
Share-based Payment Arrangement, Expense		36		$ 38	$ 75	$ 191
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total		$ 292			$ 292
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year)					2 years 251 days
Stock Incentive Plan 2017 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)									400,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized (in shares)	50,000
Equity Appreciation Rights Plan 2010 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)										1,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period (in shares)					0	137,500

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Stock Option Activity (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	6 Months Ended
	Mar. 31, 2020	Jun. 30, 2020
Outstanding (in shares)	372,200	372,200
Outstanding, weighted average exercise price per share (in dollars per share)	$ 3.85	$ 3.85
Granted (in shares)	11,300	11,300
Granted, weighted average exercise price per share (in dollars per share)		$ 2.95
Cancelled (in shares)		(4,000)
Cancelled, weighted average exercise price per share (in dollars per share)		$ 3.29
Outstanding (in shares)		379,500
Outstanding, weighted average exercise price per share (in dollars per share)		$ 3.83
Outstanding, weighted average remaining contractual term (Year)		8 years 47 days
Outstanding, aggregate intrinsic value		$ 218
Exercisable (in shares)		182,240
Exercisable, weighted average exercise price per share (in dollars per share)		$ 3.72
Exercisable, weighted average remaining contractual term (Year)		7 years 255 days
Exercisable, aggregate intrinsic value		$ 119

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Note 1 - Summary of Significant Accounting Policies - Inventories (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Raw Materials	$ 15,846	$ 15,245
Work in Process	628	479
Finished Goods	412	41
Reserves	(1,394)	(1,486)
Total	$ 15,492	$ 14,279	[1]

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Other Intangible Assets (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Gross carrying amount	$ 2,263	$ 2,272
Accumulated amortization	1,026	929
Net book value	$ 1,237	$ 1,343	[1]
Customer Relationships [Member]
Remaining lives (Year)	9 years	9 years
Gross carrying amount	$ 1,302	$ 1,302
Accumulated amortization	723	651
Net book value	$ 579	$ 651
Trade Names [Member]
Remaining lives (Year)	3 years	20 years
Gross carrying amount	$ 100	$ 814
Accumulated amortization	100	183
Net book value		$ 631
Intellectual Property [Member]
Remaining lives (Year)	20 years	3 years
Gross carrying amount	$ 814	$ 100
Accumulated amortization	203	95
Net book value	$ 611	$ 5
Patents [Member]
Remaining lives (Year)	7 years	7 years
Gross carrying amount	$ 47	$ 56
Accumulated amortization
Net book value	$ 47	$ 56

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Estimated Future Annual Amortization Expense (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	[1]
Total	$ 1,237	$ 1,343
Finite-lived Intangible Assets, Excluding Projects in Process [Member]
Remainder of 2020	93
2021	186
2022	185
2023	185
2024	113
Thereafter	428
Total	$ 1,190

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 2 - Concentration of Credit Risk and Major Customers (Details Textual) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2020 USD ($)	Jun. 30, 2019	Jun. 30, 2020 USD ($)	Jun. 30, 2019	Dec. 31, 2019
Excess Cash Balances, Number of High Credit Quality Financial Institutions			2
Cash, Ending Balance	$ 754		$ 754
Concentration Risk, Number of Divisions			2	2
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Division One of Largest Customer [Member]
Concentration Risk, Percentage	20.00%	21.00%	22.00%	22.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Division Two of Largest Customer [Member]
Concentration Risk, Percentage	3.00%	2.00%	2.00%	2.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage	23.00%	23.00%	24.00%	24.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Largest Customer [Member]
Concentration Risk, Percentage			40.00%		36.00%
Geographic Concentration Risk [Member] | Revenue Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage	9.00%	17.00%	11.00%	18.00%
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	$ 318		$ 318

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Note 3 - Revenue 1 (Details Textual)	3 Months Ended	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2020
Percentage of Revenue Transferred to Customers	84.60%	86.10%
Revenue Remaining Performance Obligation, Customers Upon Shipment With Payment Terms (Day)		120 days

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Note 3 - Revenue 2 (Details Textual)	Jun. 30, 2020
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-07-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period (Day)	180 days

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Note 3 - Revenue - Contract Assets (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2020 USD ($)
Outstanding at January 1, 2020	$ 7,659
Transferred to receivables from contract assets recognized	(6,277)
Product transferred over time	5,017
Outstanding at June 30, 2020	$ 6,399

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Note 3 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Net sales	$ 26,461	$ 27,292	$ 53,901	$ 55,457
Medical [Member]
Net sales	13,371	14,024	28,733	28,963
Aerospace and Defense [Member]
Net sales	4,906	4,582	9,690	8,827
Industrial [Member]
Net sales	8,184	8,686	15,478	17,667
Transferred over Time [Member]
Net sales	22,381	24,728	46,418	51,466
Transferred over Time [Member] | Medical [Member]
Net sales	11,464	13,145	25,084	27,640
Transferred over Time [Member] | Aerospace and Defense [Member]
Net sales	4,522	4,155	8,944	8,258
Transferred over Time [Member] | Industrial [Member]
Net sales	6,395	7,428	12,390	15,568
Transferred at Point in Time [Member]
Net sales	3,379	1,318	5,543	1,970
Transferred at Point in Time [Member] | Medical [Member]
Net sales	1,540	218	2,601	253
Transferred at Point in Time [Member] | Aerospace and Defense [Member]
Net sales	246	222	379	242
Transferred at Point in Time [Member] | Industrial [Member]
Net sales	1,593	878	2,563	1,475
Noncash Consideration [Member]
Net sales	701	1,246	1,940	2,021
Noncash Consideration [Member] | Medical [Member]
Net sales	367	661	1,048	1,070
Noncash Consideration [Member] | Aerospace and Defense [Member]
Net sales	138	205	367	327
Noncash Consideration [Member] | Industrial [Member]
Net sales	$ 196	$ 380	$ 525	$ 624

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Note 4 - Financing Arrangements (Details Textual) $ in Thousands		6 Months Ended
	Apr. 15, 2020 USD ($)	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)	Dec. 31, 2019 USD ($)	Jun. 15, 2017 USD ($)
Proceeds from Issuance of Long-term Debt, Total		$ 6,077
Paycheck Protection Program CARES Act [Member]
Proceeds from Issuance of Long-term Debt, Total	$ 6,077
Bank of America [Member] | Credit Agreement [Member]
Long-term Line of Credit, Total		$ 4,392		$ 10,088
Line of Credit, Minimum Fixed Charge Coverage Ratio During the Period		1
Line of Credit Facility, Remaining Borrowing Capacity		$ 8,311
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		3.20%	5.80%

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Note 4 - Financing Arrangements - Long-term Debt (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Long-term debt gross	$ 9,595	$ 3,755
Debt issuance Costs	(105)	(132)
Total long-term debt	9,490	3,623
Current maturities of long-term debt	(444)	(444)	[1]
Long-term debt - net of current maturities	9,046	3,179
Paycheck Protection Program CARES Act [Member]
Long-term debt gross	6,077
Real Estate Term Note [Member]
Long-term debt gross	$ 3,518	$ 3,755

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 4 - Financing Arrangements - Long-term Debt (Details) (Parentheticals) - Real Estate Term Note [Member] - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Interest rate	3.00%	4.10%
Monthly payments	$ 41	$ 41
London Interbank Offered Rate (LIBOR) [Member]
Variable rate basis	2.25%	2.25%

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Note 5 - Leases (Details Textual)	Jun. 30, 2020
Minimum [Member]
Lessee, Operating Lease, Renewal Term (Year)	1 year
Maximum [Member]
Lessee, Operating Lease, Renewal Term (Year)	5 years

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Note 5 - Leases - Supplemental Balance Sheet Information (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	[1]
Operating lease assets	$ 4,446	$ 4,827
Finance lease assets	2,842
Total leased assets	7,288
Current operating lease liabilities	791	858
Current finance lease liabilities	643	557
Long-term operating lease liabilities	4,132	4,366
Long term finance lease liabilities	1,486	$ 1,451
Total lease liabilities	$ 7,052

[1] The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

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Note 5 - Leases - Lease Cost (Details) $ in Thousands	3 Months Ended
	Jun. 30, 2020 USD ($)
Cash paid for amounts included in the measurement of lease liabilities	$ 215
Right-of-use assets obtained in exchange for lease obligations
Operating leases (Year)	7 years 182 days
Finance leases (Year)	3 years 73 days
Operating leases	4.80%
Finance leases	4.90%

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Note 5 - Leases - Maturity of Lease Liabilities (Details) $ in Thousands	Jun. 30, 2020 USD ($)
Operating leases, Remaining 2020	$ 435
Finance leases, Remaining 2020	391
Total, Remaining 2020	826
Operating leases, 2021	722
Finance leases, 2021	738
Total, 2021	1,460
Operating leases, 2022	726
Finance leases, 2022	575
Total, 2022	1,301
Operating leases, 2023	738
Finance leases, 2023	333
Total, 2023	1,071
Operating leases, 2024	798
Finance leases, 2024	277
Total, 2024	1,075
Operating leases, Thereafter	2,582
Finance leases, Thereafter	20
Total, Thereafter	2,602
Operating leases, total lease payments	6,001
Finance leases, total lease payments	2,334
Total, total lease payments	8,335
Operating leases, less: Interest	(1,078)
Finance leases, less: Interest	(205)
Total, less: Interest	(1,283)
Operating leases, present value of lease liabilities	4,923
Finance leases, present value of lease liabilities	2,129
Total, present value of lease liabilities	$ 7,052

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Note 6 - Income Taxes (Details Textual)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Effective Income Tax Rate Reconciliation, Percent, Total	(3.20%)	(4.00%)	65.00%	(4.00%)

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Note 7 - Related Party Transactions (Details Textual) - Subsidiary of Common Parent [Member] - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Nature of Common Ownership or Management Control Relationships	90%		90%
Related Party Transaction, Expenses from Transactions with Related Party	$ 14	$ 0	$ 28	$ 51

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Note 8 - Subsequent Events (Details Textual) - Forecast [Member] $ in Millions	3 Months Ended
	Sep. 30, 2020 USD ($)
Bemidji and Mankato, Minnesota Facilities [Member]
Lessee, Operating Lease, Term of Contract (Year)	15 years
Manufacturing Facilities in Bemidji and Mankato, Minnesota [Member]
Expected Proceeds from Divestiture of Businesses	$ 5