XML 23 R13.htm IDEA: XBRL DOCUMENT v3.5.0.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 6 Months Ended
Jun. 30, 2016
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Basis of Presentation

 

Basis of Presentation

 

The accompanying unaudited 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 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 fiscal year ended December 31, 2015. 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 consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the 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

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

 

Revenue Recognition

 

We recognize manufacturing revenue when we ship goods or the goods are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is generally recognized on a time and material basis or upon completion of the engineering process. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the consolidated statement of operations. 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 Options

 

Stock Options

 

Following is the status of all stock options as of June 30, 2016, including changes during the six-month period then ended:

 

 

 

Shares

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term
(in years)

 

Aggregate
Intrinsic Value

 

Outstanding - January 1, 2016

 
139,750

 

$
6.66

 

 

 

 

 

Exercised

 
(1,507

)
3.20

 

 

 

 

 

Cancelled

 
(59,493

)
7.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding - June 30, 2016

 
78,750

 

$
6.33

 
2.44

 

$
7,685

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable - June 30, 2016

 
78,750

 

$
6.33

 
2.44

 

$
7,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The total intrinsic value of options exercised during the three and six months ended June 30, 2016 and 2015 was $964 and $8,166, respectively. Cash received from options exercised during the three and six months ended June 30, 2016 and 2015 was $4,822 and $10,333, respectively. There were no stock options granted during the three and six months ended June 30, 2016 and 2015.

 

Total compensation expense (income) related to stock options for the three months ended June 30, 2016 and 2015 was $0 and ($4,338), respectively. Total compensation expense (income) related to stock options for the six months ended June 30, 2016 and 2015 was $994 and ($669), respectively. As of June 30, 2016, there was no remaining unrecognized compensation.

 

Equity Appreciation Rights Plan

 

Equity Appreciation Rights Plan

 

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

 

During the three and six months ended June 30, 2016, no additional Units were granted.

 

Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $3,300 and ($46,000) for the three months ended June 30, 2016 and 2015, respectively and ($6,400) and ($58,000) for the six months ended June 30, 2016 and 2015, respectively. The income for the six months ended June 30, 2016 and the three and six months ended June 30, 2015 was the result of a change in the estimate of the appreciation of book value per share of common stock.

 

As of June 30, 2016 and December 31, 2015, approximately $75,000 and $143,000 is accrued under this plan, respectively. As of June 30, 2016, approximately $50,000 of this balance is included in other accrued liabilities and the remaining $25,000 balance was included in other long-term liabilities. As of December 31, 2015, approximately $61,000 of this balance is included in other accrued liabilities and the remaining $82,000 balance was included in other long-term liabilities.

 

Earnings per Common Share

 

Earnings per Common Share

 

For the three and six months ended June 30, 2016 and 2015, the effect of all stock options is antidilutive due to the net loss incurred and, therefore, were not included in the computation of per-share amounts.

 

Segment Reporting Information

 

Segment Reporting Information

 

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts Receivable and Allowance for Doubtful Accounts

 

We grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts was approximately $371,000 and $320,000 at June 30, 2016 and December 31, 2015, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.

 

Inventories

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value). Costs include material, labor, and overhead required in the 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:

 

 

 

June 30

 

December 31

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Raw Materials

 

$
14,504,054

 

$
13,782,411

 

Work in Process

 
4,941,600

 
4,674,223

 

Finished Goods

 
2,868,189

 
2,478,423

 

Reserve

 
(793,409

)
(749,612

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$
21,520,434

 

$
20,185,445

 

 

 

 

 

 

 

 

 

 

Other Intangible Assets

 

Other Intangible Assets

 

Other intangible assets at June 30, 2016 and December 31, 2015 are as follows:

 

 

 

June 30, 2016

 

 

 

Remaining

 

Gross

 

 

 

 

 

 

 

Lives

 

Carrying

 

Accumulated

 

Net Book

 

 

 

(Years)

 

Amount

 

Amortization

 

Value

 

Customer Relationships

 
8 

 

$
1,302,000 

 

$
144,665 

 

$
1,157,335 

 

Trade Names

 
19 

 

$
814,000 

 

$
40,700 

 

$
773,300 

 

Bond Issue Costs

 
5 

 

$
79,373 

 

$
52,916 

 

$
26,457 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

 

 

$
2,195,373 

 

$
238,281 

 

$
1,957,092 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

Remaining

 

Gross

 

 

 

 

 

 

 

Lives

 

Carrying

 

Accumulated

 

Net Book

 

 

 

(Years)

 

Amount

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships

 
9 

 

$
1,302,000 

 

$
72,333 

 

$
1,229,667 

 

Trade Names

 
20 

 

$
814,000 

 

$
20,350 

 

$
793,650 

 

Bond Issue Costs

 
6 

 

$
79,373 

 

$
50,270 

 

$
29,103 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

 

 

$
2,195,373 

 

$
142,953 

 

$
2,052,420 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the three and six months ended June 30, 2016 was $47,666 and $95,329, respectively. Amortization expense for the three and six months ended June 30, 2015 was $1,323 and $2,646, respectively.

 

Estimated future amortization expense related to these assets is approximately as follows:

 

Remainder of 2016

 

$
95,000 

 

2017

 
191,000 

 

2018

 
191,000 

 

2019

 
191,000 

 

2020

 
191,000 

 

Thereafter

 
1,098,092 

 

 

 

 

 

Total

 

$
1,957,092 

 

 

 

 

 

 

 

Impairment of Goodwill and Other Intangible Assets

 

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 1st. No events were identified during the three and six months ended June 30, 2016 that would require us to test for impairment.

 

Impairment Analysis

 

Impairment Analysis

 

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. 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, 2016.

 

Recent Accounting Pronouncements

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for our financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.

 

During February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. We are currently assessing the effect that ASU No. 2016-02 will have on its results of operations, financial position and cash flows.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, with no early adoption permitted, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. We have not yet selected a transition method and are currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.