10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

oTRANSITION 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

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x No o

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 o	Accelerated Filer o
Non-accelerated Filer o	Smaller Reporting Company x
Emerging growth company o

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. o

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

Number of shares of $.01 par value common stock outstanding at May 2, 2018 was 2,703,582

TABLE OF CONTENTS

				PAGE
PART I - FINANCIAL INFORMATION
Item 1	-	Financial Statements
			Condensed Consolidated Statements of Operations and Comprehensive Loss	3
			Condensed Consolidated Balance Sheets	4
			Condensed Consolidated Statements of Cash Flows	5
			Condensed Notes to Consolidated Financial Statements	6-16
Item 2	-	Management’s Discussion and Analysis of Financial Condition And Results of Operations		17-22
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4	-	Controls and Procedures		22
PART II - OTHER INFORMATION
Item 1	-	Legal Proceedings		24
Item 2	-	Unregistered Sales of Equity Securities, Use of Proceeds		24
Item 3	-	Defaults on Senior Securities		24
Item 4	-	Mine Safety Disclosures		24
Item 5	-	Other Information		24
Item 6	-	Exhibits		24
SIGNATURES				26

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PART 1

ITEM 1.  FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	THREE MONTHS ENDED
	MARCH 31,
	2018			2017
Net Sales	$	26,447		$	28,318
Cost of Goods Sold	23,419			25,226
Gross Profit	3,028			3,092
Operating Expenses
Selling Expenses	1,039			1,205
General and Administrative Expenses	2,109			2,120
Gain on Sale of Property and Equipment	—			(354		)
Total Operating Expenses	3,148			2,971
Income (Loss) From Operations	(120		)	121
Other Expense
Interest Expense	(172		)	(140		)
Loss Before Income Taxes	(292		)	(19		)
Income Tax Expense (Benefit)	99			(4		)
Net Loss	$	(391	)	$	(15	)
Loss Per Common Share - Basic and Diluted	$	(0.14	)	$	(0.01	)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted	2,720,609			2,747,831
Other comprehensive income (loss)
Foreign currency translation	72			(3		)
Comprehensive loss, net of tax	$	(319	)	$	(18	)

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	MARCH 31,			DECEMBER 31,
	2018			2017(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	466		$	473
Restricted Cash	325			306
Accounts Receivable, less allowances of $209 and $209	18,179			17,417
Inventories	13,037			18,527
Contract Assets	6,151			—
Prepaid Expenses and Other Current Assets	984			1,044
Total Current Assets	39,142			37,767
Property and Equipment, Net	10,096			10,176
Goodwill	2,375			2,375
Other Intangible Assets, Net	1,687			1,739
Other Non Current Assets	30			28
Total Assets	$	53,330		$	52,085
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	1,007		$	1,003
Current Portion of Capital Lease Obligation	325			295
Accounts Payable	12,056			11,699
Accrued Payroll and Commissions	2,321			2,900
Other Accrued Liabilities	2,735			2,148
Total Current Liabilities	18,444			18,045
Long-Term Liabilities
Long Term Line of Credit	8,649			8,503
Long-Term Debt, Net	4,150			4,353
Long-Term Capital Lease Obligation, Net	1,160			1,222
Other Long-Term Liabilities	145			137
Total Long-Term Liabilities	14,104			14,215
Total Liabilities	32,548			32,260
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: 2,704,823 and 2,739,250 Shares Issued and Outstanding, respectively	27			27
Additional Paid-In Capital	15,654			15,760
Accumulated Other Comprehensive Loss	(29		)	(101		)
Retained Earnings	4,880			3,889
Total Shareholders’ Equity	20,782			19,825
Total Liabilities and Shareholders’ Equity	$	53,330		$	52,085

(1) The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	THREE MONTHS ENDED
	MARCH 31,
	2018			2017
Cash Flows From Operating Activities
Net Loss	$	(391	)	$	(15	)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization	561			595
Compensation on Stock-Based Awards	20			7
Deferred Taxes	(1		)	—
Change in Contingent Consideration	—			(58		)
Change in Accounts Receivable Allowance	—			(355		)
Change in Inventory Reserves	183			142
Gain on Disposal of Property and Equipment	—			(354		)
Changes in Current Operating Items
Accounts Receivable	(762		)	380
Inventories	229			(1,161		)
Contract Assets	308			—
Prepaid Expenses and Other Current Assets	81			91
Accounts Payable	317			1,452
Accrued Payroll and Commissions	(579		)	(957		)
Other Accrued Liabilities	576			(22		)
Net Cash Provided by (Used in) Operating Activities	542			(255		)
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment	—			668
Purchase of Intangible Asset	(4		)	(100		)
Purchases of Property and Equipment	(288		)	(198		)
Net Cash Provided by (Used in) Investing Activities	(292		)	370
Cash Flows from Financing Activities
Net Change in Line of Credit	146			735
Proceeds from Long-Term Debt	—			123
Principal Payments on Long-Term Debt	(222		)	(1,026		)
Principal Payments on Capital Leases	(82		)	—
Share Repurchases	(126		)	—
Net Cash Used in Financing Activities	(284		)	(168		)
Effect of Exchange Rate Changes on Cash	46			(10		)
Net Change in Cash	12			(63		)
Cash - Beginning of Period	779			268
Cash - Ending of Period	$	791		$	205
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	466		$	205
Restricted Cash	325			—
Total restricted cash reported in the condensed consolidated statements of cash flows	$	791		$	205
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	139		$	119
Cash Refunded During the Period for Income Taxes	—			227
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	68			91
Equipment Acquired under Capital Lease	51			—

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

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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, 2017. 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.

Reclassifications

Certain reclassifications have been made to the prior year Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017 to conform to the current year presentation. In the current year we revised our presentation of non-cash changes in the accounts receivable allowance and changes in inventory reserves on the Condensed Consolidated Statements of Cash Flows to show these amounts separately. Prior year amounts were reclassified to conform with current year presentation. There was no change in total net cash used in operating activities for the three months ended March 31, 2017. These changes have no impact on the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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 Loss. Sales, value add, and other taxes collected from customers and remitted to

6

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.

Effective January 1, 2018, we adopted the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the provisions of ASU 2014-09 using the modified retrospective approach with application to contracts that were not completed as of January 1, 2018. The adoption of ASU 2014-09 had a significant impact to the Company’s results of operations, cash flow and financial position, and as a result we now recognize the majority of our revenue over time rather than upon shipment resulting in an adjustment to retained earnings of $1,381 on January 1, 2018. The Company has presented the disclosures required by this new standard, refer to Note 3.

Stock-Based Awards

Following is the status of all stock options as of March 31, 2018:

	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2018	187,750	$	3.70
Granted	20,000	3.77
Exercised	—	—
Cancelled	—	—
Outstanding - March 31, 2018	207,750	$	3.70	8.31	$	—
Exercisable - March 31, 2018	37,750	$	4.75	—	$	—

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 20,000 stock options granted during the three months ended March 31, 2018.

Total compensation expense related to stock options for the three months ended March 31, 2018 and 2017 was $20 and $0, respectively. As of March 31, 2018, there was $175 of unrecognized compensation which will vest over the next 2.23 years.

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

7

Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.  The Units are adjusted to market value for each reporting period.

During the three months ended March 31, 2018 and 2017, 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 $0 and $7 for the three months ended March 31, 2018 and 2017, respectively.

As of both March 31, 2018 and December 31, 2017, no amounts were accrued under this plan.

Net Loss per Common Share

For both the three months ended March 31, 2018 and 2017, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

Share Repurchase Program

As of March 31, 2018, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 34,427 shares in open market transactions totaling $129 for the three months ended March 31, 2018.  As of March 31, 2018, we had $90 remaining under this authorization. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.

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.

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 March 31, 2018 balance included cash collateral required to be held against our corporate employee purchasing card program and 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 March 31, 2018, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2018 and December 31, 2017 have been reduced by an allowance for doubtful accounts of $209.

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.

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Inventories are as follows (in thousands):

	March 31,			December 31,
	2018			2017
Raw Materials	$	13,489		$	13,870
Work in Process	401			3,112
Finished Goods	174			2,389
Reserves	(1,027		)	(844		)
Total	$	13,037		$	18,527

The primary decrease in work in process and finished goods inventory as of March 31, 2018 as compared to December 31, 2017 relates to the adoption of ASU 2014-09 and the recognition of revenue over time rather than upon shipment of inventory. Refer to Note 3 for further information.

Other Intangible Assets

Other intangible assets at March 31, 2018 and December 31, 2017 are as follows (in thousands):

		March 31, 2018
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	398	$	904
Trade Names	3	100		36		64
Intellectual Property	20	814		112		702
Patents	7	17		—		17
Totals		$	2,233	$	546	$	1,687

		December 31, 2017
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	361	$	941
Intellectual Property	3	100		28		72
Trade Names	20	814		102		712
Patents	7	14		—		14
Totals		$	2,230	$	491	$	1,739

Amortization expense for both of the three months ended March 31, 2018 and March 31, 2017 was $55 and $50, respectively.

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

Year	Amount
Remainder of 2018	$	164
2019	219
2020	191
2021	185
2022	185
Thereafter	726
Total	$	1,670

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 months ended March 31, 2018 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 its 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 months ended March 31, 2018.

Recently Issued Accounting Standards

During February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 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 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 on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements.

In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the Securities and Exchange Commission (‘SEC’) interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the ‘Tax Act’) was signed into law. Additional information regarding the adoption of this standard is contained in Note 5, ‘Income Taxes’.

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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 $466 in cash at March 31, 2018, approximately $392 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 months ended March 31, 2018 and 2017. One division accounted for approximately 19% and 24% of net sales for the three months ended March 31, 2018 and 2017, respectively. The other division accounted for approximately 1% and 2% of net sales for the three months ended March 31, 2018 and 2017, respectively.  Together they accounted for approximately 20% and 26% of net sales for the three months ended March 31, 2018 and 2017, respectively.  Accounts receivable from the customer at March 31, 2018 and December 31, 2017 represented approximately 17% and 16% of our total accounts receivable, respectively.

Export sales represented approximately 19% and 13% of net sales for the three months ended March 31, 2018 and 2017, respectively.

NOTE 3. REVENUE

Revenue recognition

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

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

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced.  If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for the three months ended March 31, 2018. 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

11

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 judgments 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 three months ended March 31, 2018 was as follows (in thousands):

Outstanding at January 1, 2018	$	6,459
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized	(5,611		)
Product transferred over time	5,303
Outstanding at the end of period	$	6,151

We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2018, 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 table summarizes our net sales by market for the three months ended March 31, 2018 (in thousands):

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	4,623	$	48	$	195	$	4,866
Medical	9,434		482		405		10,321
Industrial	9,992		843		425		11,260
Total net sales	$	24,049	$	1,373	$	1,025	$	26,447

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the reported condensed consolidated statement of operations and comprehensive loss, balance sheet and cash flows, as of and for the three months ended March 31, 2018, to the pro-forma amounts had the previous guidance been in effect (in thousands):

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	Three Months Ended March 31, 2018
	As Reported			Pro forma as if the previous accounting guidance was in effect
Statement of Operations
Net Sales	$	26,447		$	25,730
Cost of Goods Sold	23,419			22,731
Gross Profit	3,028			2,999
Loss from Operations	(120		)	(149		)
Loss Before Income Taxes	(292		)	(321		)
Income Tax Expense	99			99
Net Loss	$	(391	)	$	(420	)
Loss Per Common Share Basic and Diluted	$	(0.14	)	$	(0.15	)
Consolidated Balance Sheet
Assets
Inventories	$	13,037		$	17,778
Contract Assets	6,151			$	—
Shareholders’ Equity
Retained Earnings	$	4,880		$	3,470
Consolidated Statement of Cash Flows
Net Loss	$	(391	)	$	(420	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities
Change in Current Operating Items
Inventories	229			566
Contract Asset	308			—
Net Cash Provided by Operating Activities	$	542		$	542

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. The Bank of America credit agreement replaced our previous credit agreement with Wells Fargo Bank which terminated on June 20, 2017 and resulted in a loss on the extinguishment of debt of $175 primarily related to legal and terminations fees.

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Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 3% as of March 31, 2018. We had borrowings on our line of credit of $8,649 and $8,503 outstanding as of March 31, 2018 and December 31, 2017. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

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

The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. In addition, the agreement requires that the Company comply with certain minimum levels of cumulative EBITDA for measurement periods during fiscal 2018, including cumulative EBITDA of $1,970 for the twelve months ending December 31, 2018.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2018, we had unused availability under our line of credit of $3,920, supported by our borrowing base. The line is secured by substantially all of our assets.

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300. The $1,000 promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $23 and is subject to offsets if certain revenue levels are not met. The $1,300 promissory note has a four-year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29 and is not subject to offset.

Long-term debt at March 31, 2018 and December 31, 2017 consisted of the following (in thousands):

	March 31,			December 31,
	2018			2017
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.1% as of March 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	4,627		$	4,751
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	351			394
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	457			512
	5,435			5,657
Discount on Devicix Notes Payable	(53		)	(63		)
Debt issuance Costs	(225		)	(238		)
Total long-term debt	5,157			5,356
Current maturities of long-term debt	(1,007		)	(1,003		)
Long-term debt - net of current maturities	$	4,150		$	4,353

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The Company has lease financing facilities for property and equipment. The obligations are collateralized by the property underlying lease. Total cost of the leased equipment was $1,574 at March 31, 2018 and $1,524 at December 31, 2017.

Current maturities of capital leases were $325 at March 31, 2018 and $295 at December 31, 2017.

Interest expense related to the leased assets was $26 and $0 for the three months ended March 31, 2018 and 2017, respectively. Depreciation expense related to the leased assets was $39 and $0 for the three months ended March 31, 2018 and 2017, respectively.

Approximate future minimum lease payments under non-cancelable capital leases subsequent to March 31, 2018 are as follows (in thousands):

Year	Amount
Remainder of 2018	$	286
2019	394
2020	394
2021	394
2022	255
Total noncancelable future lease commitments	$	1,723
Less: interest	(204		)
Present value of obligations under capital leases	$	1,519

The above table includes the future minimum lease payments related to a portion of a lease that has not been received as of March 31, 2018 for $34 which is expected to be received during 2018.

NOTE 5.  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 months ended March 31, 2018 and 2017 was (34%) and 23%, respectively. Our effective tax rate for the year ended December 31, 2018 is expected to be 56% compared to (18%) for the year ended December 31, 2017.  The increase is due mainly to the effects of the tax reform changes that were enacted on December 22, 2017, and the increase in the effective tax rate expected in China.

The $52 of unrecognized tax benefits as of both March 31, 2018 and December 31, 2017, includes amounts which, if ultimately recognized, will reduce our annual effective tax rate. The amount has been netted against the applicable deferred tax asset as any adjustment would reduce the recorded asset.

The adoption of ASC 606 primarily resulted in an acceleration of revenue as of January 1, 2018, which in turn generated additional deferred tax liabilities of $305, that ultimately reduced the Company’s net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance.

NOTE 6.  COMMITMENTS AND CONTINGENCIES

We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on various dates through 2028.

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Rent expense for the three months ended March 31, 2018 and 2017 amounted to approximately $335 and $297 respectively.

Approximate future minimum lease payments under non-cancelable leases subsequent to March 31, 2018 are as follows (in thousands):

Years Ending
December 31,	Amount
2018	661
2019	882
2020	713
2021	566
2022	591
Thereafter	3,640
Total	$	7,053

NOTE 7.  PLANT CLOSURE

On January 31, 2017 the Company closed its manufacturing operations in Augusta, Wisconsin. On March 31, 2017, the Company closed on the sale of the Augusta building and building improvements for $715. The Augusta building and building improvements had a net book value of $314, recognizing a gain on the sale, net of related expenses, of $354, and applied the net proceeds of $668 towards the outstanding real estate term note.

NOTE 8.  RELATED PARTY TRANSACTIONS

During 2016, the Company entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became the Chief Operating Officer of the Company on May 20, 2017. For the three months ended March 31, 2018 and 2017, expenses were incurred in the amounts of $12, and $45 respectively.

On February 22, 2018, the Company entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, an independent director of the Company.  The term of the Consulting Agreement is three months.  Under the Consulting Agreement, Mr. Murray will receive $250 per hour for performing consulting services with a maximum daily fee of $2.  For the three months ended March 31, 2018, expenses were incurred in the amount of $36.

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

Overview

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

Results of Operations

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

	March 31,
	2018		2017
Net Sales	100.0	%	100.0	%
Cost of Goods Sold	88.5		89.1
Gross Profit	11.5		10.9
Selling Expenses	3.9		4.3
General and Administrative Expenses	8.0		7.5
Gain on Sale of Property and Equipment	0.0		(1.3	)
Income (Loss) from Operations	(0.4	)	0.4
Other Expenses	(0.7	)	(0.5	)
Loss Before Income Taxes	(1.1	)	(0.1	)
Income Tax Expense (Benefit)	0.4		0.0
Net Loss	(1.5	)%	(0.1	)%

Net Sales

Net sales were $26.4 million in the first quarter of 2018, as compared to $28.3 million in the first quarter of the prior year, a decrease of $1.9 million or 6.7%. Our 2018 amounts include $0.7 million of additional sales related to the change in the revenue recognition policy. Net sales results were varied by markets, the medical market decreased by $3.5 million or 25.5% with medical component products accounting for 50% of the decrease and medical devices the remaining 50%. The industrial market sector was up $0.2 million or 1.4% of sales in the first quarter of 2018 as compared to the same quarter of 2017. Net sales from the aerospace and defense markets increased by $1.5 million or 45.2% in the first quarter of 2018 as compared to the first quarter of 2017.

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Net sales by our major EMS industry markets for the three months ended March 31, 2018 and 2017 were as follows (in thousands):

	As Reported				%
	2018		2017		Change
Aerospace and Defense	$	4,866	$	3,351	45.2
Medical	10,321		13,858		(25.5	)
Industrial	11,260		11,109		1.4
Total Net Sales	$	26,447	$	28,318	(6.6	)

Net sales by our major EMS industry markets for the three months ended March 31, 2018, to the pro-forma amounts for the same period had the previous guidance been in effect (in thousands):

	As Reported 2018		Pro forma as if the previous accounting guidance was in effect		% Change
Aerospace and Defense	$	4,866	$	4,679	4.0
Medical	10,321		10,108		2.1
Industrial	11,260		10,943		2.9
Total Net Sales	$	26,447	$	25,730	2.8

Net sales by timing of transfer of goods and services for the three months ended March 31, 2018 is as follows (in thousands):

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	4,623	$	48	$	195	$	4,866
Medical	9,434		482		405		10,321
Industrial	9,992		843		425		11,260
Total Net sales	$	24,049	$	1,373	$	1,025	$	26,447

Backlog

Our 90-day shipment backlog as of March 31, 2018 was $21.9 million, a 12.9% increase from the beginning of the quarter and a 6.5% decrease as compared to the prior year. Backlog for our medical customers has increased 51.7% from the beginning of the quarter and decreased 19.8% compared to the prior year. The aerospace and defense backlog increased 5.1% from the beginning of the quarter and increased 26.6% from the prior year.   Our industrial customers’ backlog decreased 12.2% from the beginning of the quarter and decreased 3.4% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

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

	Shipment Backlog as of the Quarter Ended
	March 31,		December 31,		March 31,
	2018		2017		2017
Aerospace and Defense	$	5,220	$	4,968	$	4,122
Medical	9,556		6,302		11,917
Industrial	7,166		8,165		7,418
Total Backlog	$	21,942	$	19,435	$	23,457

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.

Gross Profit

Gross profit as a percent of net sales for the three months ended March 31, 2018 and 2017, was 11.5% and 10.9%, respectively. The improvement in gross profit in the first quarter of 2018 was driven by product mix and cost improvements as we adjusted to current revenue levels. In addition, we recognized revenue of $1.0 million related to the noncash consideration recorded at zero margin as a result of implementing revenue recognition.

Selling Expense

Selling expenses for the three months ended March 31, 2018 and 2017 was $1.0 million or 3.9% of sales and $1.2 million or 4.3% of sales, respectively. The decrease in selling expenses for 2018 is due to budget reductions and lower sales incentives.

General and Administrative Expense

General and administrative expenses for the three months ended March 31, 2018 and 2017, were $2.1 million or 8.0% of sales and $2.1 million or 7.5% of sales, respectively.

Gain from Sale of Property and Equipment

There was no sales of property and equipment recorded for the three months ended March 31, 2018. Net gain from sale of property and equipment for the quarter ended March 31, 2017 was $0.4 million from the sale of the Augusta building and building improvements (see Note 7).

Loss from Operations

First quarter 2018 loss from operations was $0.1 million compared to income of $0.1 million for the first quarter in 2017 after the $0.4 million gain from the sale of the Augusta building.

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 months ended March 31, 2018 and 2017 was (34%) and 23%, respectively. The effective tax rate for the year ended December 31, 2018 is expected to be 56% compared to (18%) for the year ended December 31, 2017. The increase is due mainly to the effects of the tax reform changes that were enacted on December 22, 2017, and the increase in the effective tax rate expected in China.

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Net Loss

Net loss for the three months ended March 31, 2018 was $0.4 million or ($0.14) per basic and diluted common share, compared to a net loss for the three months ended March 31, 2017 of $15,000 or ($0.01) per basic and diluted common share.

Liquidity and Capital Resources

Net cash provided by operating activities for the three months ended March 31, 2018 was $0.5 million. The noncash addback of depreciation and amortization, along with an increase in accrued liabilities and a decrease in inventory and contract assets, has positively impacted cash flows, offset by an increase in accounts receivable.

Net cash used in investing activities of $0.3 million for the three months ended March 31, 2018, was the result of property and equipment purchases to support the business.

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

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

On March 31, 2018, we had outstanding advances of $8.6 million under the line of credit and unused availability of $3.9 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 $20.7 million and $19.7 million as of March 31, 2018 and December 31, 2017, respectively.

The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. In addition, the agreement requires that the Company comply with certain minimum levels of cumulative EBITDA for measurement periods during fiscal 2018, including cumulative EBITDA of $2.0 million for the twelve months ending December 31, 2018.

Cash conversion cycle:

	Three Months Ended
	March 31, 2018		March 31, 2017
Days in trade accounts receivable	58		54
Days in inventory	53		78
Days in accounts payable	(45	)	(54	)
Cash conversion cycle	66		78
Cash conversion cycle without adoption of ASU 2014-09	88		78

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We calculate days in accounts receivable as accounts receivable for the respective quarter divided by annualized sales for the respective quarter by day. We calculate days in inventory and accounts payable as each balance sheet line item for the respective quarter divided by annualized cost of sales for the respective quarter by day. We calculate cash conversion cycle as the sum of days in receivable and inventory less days in accounts payable. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms and the timing of revenue recognition and inventory purchases within the period. Days in inventory for the three months ended March 31, 2018 decreased as compared to the three months ended March 31, 2017 primarily related to the adoption of ASU 2014-09 and the recognition of revenue over time rather than upon shipment of inventory.  The increase in days in accounts receivable related to increased payment terms requested by our customers and a decrease in days in accounts payable, as a result of the timing of payments.

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, 2017. There has been significant changes to our critical accounting policies since December 31, 2017, related to the implementation of the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), refer to Note 1 and Note 3. The adoption of the new revenue standard had a significant impact on our results of operations, cash flows, and financial position. 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. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

21

·Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;

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

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

·Risks related to availability of labor;

·Increase in certain raw material costs such as copper and oil;

·Commodity and energy cost instability;

·Risks related to FDA noncompliance;

·Loss of a major customer;

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

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

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

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

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

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

Beginning January 1, 2018, we implemented the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The adoption of the new revenue standard had a significant impact on our results of operations, cash flows, and financial position, requiring us to implement changes to our controls related to revenue (see Note 1). These included the development of new policies based on the five-step model provided in the new revenue standard, enhanced contract review

22

requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our condensed consolidated financial statements and related disclosures. There was no other 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 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
January 1 - January 31, 2018	16,934	$	3.74	16,934	$	153,931
February 1 - February 28, 2018	17,493	$	3.59	17,493	$	89,684
March 1 - March 31, 2018	—	$	—	—	$	89,684
Total	34,427	$	3.59	34,427	$	89,684

As of March 31, 2018 we had a $250,000 share repurchase program with $89,684 remaining under this program.

ITEM 3.  DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits

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.

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101* Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2018, 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: May 11, 2018	by	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Incorporated
Date: May 11, 2018	by	/s/ Constance M. Beck
	Constance M. Beck
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

26

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, Richard G. Wasielewski, 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: May 11, 2018	By:	/s/ Richard G. Wasielewski
			Richard G. Wasielewski
			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: May 11, 2018	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 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 March 31, 2018 (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:  May 11, 2018

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

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 Richard G. Wasielewski, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2018 (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:  May 11, 2018

By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Incorporated

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2018	May 02, 2018
Document and Entity Information
Entity Registrant Name	NORTECH SYSTEMS INC
Entity Central Index Key	0000722313
Document Type	10-Q
Document Period End Date	Mar. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,703,582
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q1

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Net Sales	$ 26,447	$ 28,318
Cost of Goods Sold	23,419	25,226
Gross Profit	3,028	3,092
Operating Expenses
Selling Expenses	1,039	1,205
General and Administrative Expenses	2,109	2,120
Gain on Sale of Property and Equipment		(354)
Total Operating Expenses	3,148	2,971
Income (Loss) From Operations	(120)	121
Other Expense
Interest Expense	(172)	(140)
Loss Before Income Taxes	(292)	(19)
Income Tax Expense (Benefit)	99	(4)
Net Loss	$ (391)	$ (15)
Loss Per Common Share - Basic and Diluted	$ (0.14)	$ (0.01)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted	2,720,609	2,747,831
Other comprehensive income (loss)
Foreign currency translation	$ 72	$ (3)
Comprehensive loss, net of tax	$ (319)	$ (18)

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Current Assets
Cash	$ 466	$ 473	[1]
Restricted Cash	325	306	[1]
Accounts Receivable, less allowances of $209 and $209	18,179	17,417	[1]
Inventories	13,037	18,527	[1]
Contract Assets	6,151	6,459
Prepaid Expenses and Other Current Assets	984	1,044	[1]
Total Current Assets	39,142	37,767	[1]
Property and Equipment, Net	10,096	10,176	[1]
Goodwill	2,375	2,375	[1]
Other Intangible Assets, Net	1,687	1,739	[1]
Other Non Current Assets	30	28	[1]
Total Assets	53,330	52,085	[1]
Current Liabilities
Current Maturities of Long-Term Debt	1,007	1,003	[1]
Current Portion of Capital Lease Obligation	325	295	[1]
Accounts Payable	12,056	11,699	[1]
Accrued Payroll and Commissions	2,321	2,900	[1]
Other Accrued Liabilities	2,735	2,148	[1]
Total Current Liabilities	18,444	18,045	[1]
Long-Term Liabilities
Long Term Line of Credit	8,649	8,503	[1]
Long-Term Debt, Net	4,150	4,353	[1]
Long-Term Capital Lease Obligation, Net	1,160	1,222	[1]
Other Long-Term Liabilities	145	137	[1]
Total Long-Term Liabilities	14,104	14,215	[1]
Total Liabilities	32,548	32,260	[1]
Commitments and Contingencies			[1]
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: 2,704,823 and 2,739,250 Shares Issued and Outstanding, respectively	27	27	[1]
Additional Paid-In Capital	15,654	15,760	[1]
Accumulated Other Comprehensive Loss	(29)	(101)	[1]
Retained Earnings	4,880	3,889	[1]
Total Shareholders' Equity	20,782	19,825	[1]
Total Liabilities and Shareholders' Equity	$ 53,330	$ 52,085	[1]

[1] The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts Receivable Allowances	$ 209	$ 209
Preferred Stock, par value (in dollars per share)	$ 1	$ 1
Preferred Stock, Shares Authorized	1,000,000	1,000,000
Preferred Stock, Shares Issued	250,000	250,000
Preferred Stock, Shares Outstanding	250,000	250,000
Common Stock - par value (in dollars per share)	$ 0.01	$ 0.01
Common Stock - Shares Authorized	9,000,000	9,000,000
Common Stock - Shares Issued	2,704,823	2,739,250
Common Stock - Shares Outstanding	2,704,823	2,739,250

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Cash Flows From Operating Activities
Net Loss	$ (391)	$ (15)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities
Depreciation and Amortization	561	595
Compensation on Stock-Based Awards	20	7
Deferred Taxes	(1)
Change in Contingent Consideration		(58)
Change in Accounts Receivable Allowance		(355)
Change in Inventory Reserves	183	142
Gain on Disposal of Property and Equipment		(354)
Changes in Current Operating Items
Accounts Receivable	(762)	380
Inventories	229	(1,161)
Contract Assets	308
Prepaid Expenses and Other Current Assets	81	91
Accounts Payable	317	1,452
Accrued Payroll and Commissions	(579)	(957)
Other Accrued Liabilities	576	(22)
Net Cash Provided by (Used in) Operating Activities	542	(255)
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment		668
Purchase of Intangible Asset	(4)	(100)
Purchases of Property and Equipment	(288)	(198)
Net Cash Provided by (Used in) Investing Activities	(292)	370
Cash Flows from Financing Activities
Net Change in Line of Credit	146	735
Proceeds from Long-Term Debt		123
Principal Payments on Long-Term Debt	(222)	(1,026)
Principal Payments on Capital Leases	(82)
Share Repurchases	(126)
Net Cash Used in Financing Activities	(284)	(168)
Effect of Exchange Rate Changes on Cash	46	(10)
Net Change in Cash	12	(63)
Cash - Beginning of Period	779	268
Cash - Ending of Period	791	205
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Total restricted cash reported in the condensed consolidated statements of cash flows	779	268
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	139	119
Cash Refunded During the Period for Income Taxes		227
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	68	$ 91
Equipment Acquired under Capital Lease	$ 51

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2017. 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.

Reclassifications

Certain reclassifications have been made to the prior year Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017 to conform to the current year presentation. In the current year we revised our presentation of non-cash changes in the accounts receivable allowance and changes in inventory reserves on the Condensed Consolidated Statements of Cash Flows to show these amounts separately. Prior year amounts were reclassified to conform with current year presentation. There was no change in total net cash used in operating activities for the three months ended March 31, 2017. These changes have no impact on the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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 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.

Effective January 1, 2018, we adopted the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the provisions of ASU 2014-09 using the modified retrospective approach with application to contracts that were not completed as of January 1, 2018. The adoption of ASU 2014-09 had a significant impact to the Company’s results of operations, cash flow and financial position, and as a result we now recognize the majority of our revenue over time rather than upon shipment resulting in an adjustment to retained earnings of $1,381 on January 1, 2018. The Company has presented the disclosures required by this new standard, refer to Note 3.

Stock-Based Awards

Following is the status of all stock options as of March 31, 2018:

	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2018	187,750	$	3.70
Granted	20,000	3.77
Exercised	—	—
Cancelled	—	—
Outstanding - March 31, 2018	207,750	$	3.70	8.31	$	—
Exercisable - March 31, 2018	37,750	$	4.75	—	$	—

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 20,000 stock options granted during the three months ended March 31, 2018.

Total compensation expense related to stock options for the three months ended March 31, 2018 and 2017 was $20 and $0, respectively. As of March 31, 2018, there was $175 of unrecognized compensation which will vest over the next 2.23 years.

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

Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.  The Units are adjusted to market value for each reporting period.

During the three months ended March 31, 2018 and 2017, 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 $0 and $7 for the three months ended March 31, 2018 and 2017, respectively.

As of both March 31, 2018 and December 31, 2017, no amounts were accrued under this plan.

Net Loss per Common Share

For both the three months ended March 31, 2018 and 2017, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

Share Repurchase Program

As of March 31, 2018, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 34,427 shares in open market transactions totaling $129 for the three months ended March 31, 2018.  As of March 31, 2018, we had $90 remaining under this authorization. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.

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.

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 March 31, 2018 balance included cash collateral required to be held against our corporate employee purchasing card program and 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 March 31, 2018, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2018 and December 31, 2017 have been reduced by an allowance for doubtful accounts of $209.

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):

	March 31,			December 31,
	2018			2017
Raw Materials	$	13,489		$	13,870
Work in Process	401			3,112
Finished Goods	174			2,389
Reserves	(1,027		)	(844		)
Total	$	13,037		$	18,527

The primary decrease in work in process and finished goods inventory as of March 31, 2018 as compared to December 31, 2017 relates to the adoption of ASU 2014-09 and the recognition of revenue over time rather than upon shipment of inventory. Refer to Note 3 for further information.

Other Intangible Assets

Other intangible assets at March 31, 2018 and December 31, 2017 are as follows (in thousands):

		March 31, 2018
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	398	$	904
Trade Names	3	100		36		64
Intellectual Property	20	814		112		702
Patents	7	17		—		17
Totals		$	2,233	$	546	$	1,687

		December 31, 2017
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	361	$	941
Intellectual Property	3	100		28		72
Trade Names	20	814		102		712
Patents	7	14		—		14
Totals		$	2,230	$	491	$	1,739

Amortization expense for both of the three months ended March 31, 2018 and March 31, 2017 was $55 and $50, 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 2018	$	164
2019	219
2020	191
2021	185
2022	185
Thereafter	726
Total	$	1,670

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 months ended March 31, 2018 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 its 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 months ended March 31, 2018.

Recently Issued Accounting Standards

During February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 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 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 on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements.

In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the Securities and Exchange Commission (‘SEC’) interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the ‘Tax Act’) was signed into law. Additional information regarding the adoption of this standard is contained in Note 5, ‘Income Taxes’.

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

3 Months Ended

Mar. 31, 2018

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

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 $466 in cash at March 31, 2018, approximately $392 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 months ended March 31, 2018 and 2017. One division accounted for approximately 19% and 24% of net sales for the three months ended March 31, 2018 and 2017, respectively. The other division accounted for approximately 1% and 2% of net sales for the three months ended March 31, 2018 and 2017, respectively.  Together they accounted for approximately 20% and 26% of net sales for the three months ended March 31, 2018 and 2017, respectively.  Accounts receivable from the customer at March 31, 2018 and December 31, 2017 represented approximately 17% and 16% of our total accounts receivable, respectively.

Export sales represented approximately 19% and 13% of net sales for the three months ended March 31, 2018 and 2017, respectively.

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REVENUE

3 Months Ended

Mar. 31, 2018

REVENUE

REVENUE

NOTE 3. REVENUE

Revenue recognition

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

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

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced.  If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for the three months ended March 31, 2018. 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 judgments 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 three months ended March 31, 2018 was as follows (in thousands):

Outstanding at January 1, 2018	$	6,459
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized	(5,611		)
Product transferred over time	5,303
Outstanding at the end of period	$	6,151

We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2018, 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 table summarizes our net sales by market for the three months ended March 31, 2018 (in thousands):

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	4,623	$	48	$	195	$	4,866
Medical	9,434		482		405		10,321
Industrial	9,992		843		425		11,260
Total net sales	$	24,049	$	1,373	$	1,025	$	26,447

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the reported condensed consolidated statement of operations and comprehensive loss, balance sheet and cash flows, as of and for the three months ended March 31, 2018, to the pro-forma amounts had the previous guidance been in effect (in thousands):

	Three Months Ended March 31, 2018
	As Reported			Pro forma as if the previous accounting guidance was in effect
Statement of Operations
Net Sales	$	26,447		$	25,730
Cost of Goods Sold	23,419			22,731
Gross Profit	3,028			2,999
Loss from Operations	(120		)	(149		)
Loss Before Income Taxes	(292		)	(321		)
Income Tax Expense	99			99
Net Loss	$	(391	)	$	(420	)
Loss Per Common Share Basic and Diluted	$	(0.14	)	$	(0.15	)
Consolidated Balance Sheet
Assets
Inventories	$	13,037		$	17,778
Contract Assets	6,151			$	—
Shareholders’ Equity
Retained Earnings	$	4,880		$	3,470
Consolidated Statement of Cash Flows
Net Loss	$	(391	)	$	(420	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities
Change in Current Operating Items
Inventories	229			566
Contract Asset	308			—
Net Cash Provided by Operating Activities	$	542		$	542

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FINANCING ARRANGEMENTS

3 Months Ended

Mar. 31, 2018

FINANCING ARRANGEMENTS

FINANCING ARRANGEMENTS

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. The Bank of America credit agreement replaced our previous credit agreement with Wells Fargo Bank which terminated on June 20, 2017 and resulted in a loss on the extinguishment of debt of $175 primarily related to legal and terminations fees.

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% as of March 31, 2018. We had borrowings on our line of credit of $8,649 and $8,503 outstanding as of March 31, 2018 and December 31, 2017. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

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

The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. In addition, the agreement requires that the Company comply with certain minimum levels of cumulative EBITDA for measurement periods during fiscal 2018, including cumulative EBITDA of $1,970 for the twelve months ending December 31, 2018.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2018, we had unused availability under our line of credit of $3,920, supported by our borrowing base. The line is secured by substantially all of our assets.

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300. The $1,000 promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $23 and is subject to offsets if certain revenue levels are not met. The $1,300 promissory note has a four-year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29 and is not subject to offset.

Long-term debt at March 31, 2018 and December 31, 2017 consisted of the following (in thousands):

	March 31,			December 31,
	2018			2017
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.1% as of March 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	4,627		$	4,751
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	351			394
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	457			512
	5,435			5,657
Discount on Devicix Notes Payable	(53		)	(63		)
Debt issuance Costs	(225		)	(238		)
Total long-term debt	5,157			5,356
Current maturities of long-term debt	(1,007		)	(1,003		)
Long-term debt - net of current maturities	$	4,150		$	4,353

The Company has lease financing facilities for property and equipment. The obligations are collateralized by the property underlying lease. Total cost of the leased equipment was $1,574 at March 31, 2018 and $1,524 at December 31, 2017.

Current maturities of capital leases were $325 at March 31, 2018 and $295 at December 31, 2017.

Interest expense related to the leased assets was $26 and $0 for the three months ended March 31, 2018 and 2017, respectively. Depreciation expense related to the leased assets was $39 and $0 for the three months ended March 31, 2018 and 2017, respectively.

Approximate future minimum lease payments under non-cancelable capital leases subsequent to March 31, 2018 are as follows (in thousands):

Year	Amount
Remainder of 2018	$	286
2019	394
2020	394
2021	394
2022	255
Total noncancelable future lease commitments	$	1,723
Less: interest	(204		)
Present value of obligations under capital leases	$	1,519

The above table includes the future minimum lease payments related to a portion of a lease that has not been received as of March 31, 2018 for $34 which is expected to be received during 2018.

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INCOME TAXES

3 Months Ended

Mar. 31, 2018

INCOME TAXES

INCOME TAXES

NOTE 5.  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 months ended March 31, 2018 and 2017 was (34%) and 23%, respectively. Our effective tax rate for the year ended December 31, 2018 is expected to be 56% compared to (18%) for the year ended December 31, 2017.  The increase is due mainly to the effects of the tax reform changes that were enacted on December 22, 2017, and the increase in the effective tax rate expected in China.

The $52 of unrecognized tax benefits as of both March 31, 2018 and December 31, 2017, includes amounts which, if ultimately recognized, will reduce our annual effective tax rate. The amount has been netted against the applicable deferred tax asset as any adjustment would reduce the recorded asset.

The adoption of ASC 606 primarily resulted in an acceleration of revenue as of January 1, 2018, which in turn generated additional deferred tax liabilities of $305, that ultimately reduced the Company’s net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance.

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2018

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 6.  COMMITMENTS AND CONTINGENCIES

We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on various dates through 2028.

Rent expense for the three months ended March 31, 2018 and 2017 amounted to approximately $335 and $297 respectively.

Approximate future minimum lease payments under non-cancelable leases subsequent to March 31, 2018 are as follows (in thousands):

Years Ending
December 31,	Amount
2018	661
2019	882
2020	713
2021	566
2022	591
Thereafter	3,640
Total	$	7,053

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PLANT CLOSURE

3 Months Ended

Mar. 31, 2018

PLANT CLOSURE

PLANT CLOSURE

NOTE 7.  PLANT CLOSURE

On January 31, 2017 the Company closed its manufacturing operations in Augusta, Wisconsin. On March 31, 2017, the Company closed on the sale of the Augusta building and building improvements for $715. The Augusta building and building improvements had a net book value of $314, recognizing a gain on the sale, net of related expenses, of $354, and applied the net proceeds of $668 towards the outstanding real estate term note.

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RELATED PARTY TRANSACTIONS

3 Months Ended

Mar. 31, 2018

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 8.  RELATED PARTY TRANSACTIONS

During 2016, the Company entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became the Chief Operating Officer of the Company on May 20, 2017. For the three months ended March 31, 2018 and 2017, expenses were incurred in the amounts of $12, and $45 respectively.

On February 22, 2018, the Company entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, an independent director of the Company.  The term of the Consulting Agreement is three months.  Under the Consulting Agreement, Mr. Murray will receive $250 per hour for performing consulting services with a maximum daily fee of $2.  For the three months ended March 31, 2018, expenses were incurred in the amount of $36.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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, 2017. 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

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.

Reclassifications

Reclassifications

Certain reclassifications have been made to the prior year Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017 to conform to the current year presentation. In the current year we revised our presentation of non-cash changes in the accounts receivable allowance and changes in inventory reserves on the Condensed Consolidated Statements of Cash Flows to show these amounts separately. Prior year amounts were reclassified to conform with current year presentation. There was no change in total net cash used in operating activities for the three months ended March 31, 2017. These changes have no impact on the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Revenue Recognition

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 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.

Effective January 1, 2018, we adopted the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the provisions of ASU 2014-09 using the modified retrospective approach with application to contracts that were not completed as of January 1, 2018. The adoption of ASU 2014-09 had a significant impact to the Company’s results of operations, cash flow and financial position, and as a result we now recognize the majority of our revenue over time rather than upon shipment resulting in an adjustment to retained earnings of $1,381 on January 1, 2018. The Company has presented the disclosures required by this new standard, refer to Note 3.

Stock-Based Awards

Stock-Based Awards

Following is the status of all stock options as of March 31, 2018:

	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2018	187,750	$	3.70
Granted	20,000	3.77
Exercised	—	—
Cancelled	—	—
Outstanding - March 31, 2018	207,750	$	3.70	8.31	$	—
Exercisable - March 31, 2018	37,750	$	4.75	—	$	—

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 20,000 stock options granted during the three months ended March 31, 2018.

Total compensation expense related to stock options for the three months ended March 31, 2018 and 2017 was $20 and $0, respectively. As of March 31, 2018, there was $175 of unrecognized compensation which will vest over the next 2.23 years.

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

Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.  The Units are adjusted to market value for each reporting period.

During the three months ended March 31, 2018 and 2017, 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 $0 and $7 for the three months ended March 31, 2018 and 2017, respectively.

As of both March 31, 2018 and December 31, 2017, no amounts were accrued under this plan.

Net Loss per Common Share

Net Loss per Common Share

For both the three months ended March 31, 2018 and 2017, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

Share Repurchase Program

Share Repurchase Program

As of March 31, 2018, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 34,427 shares in open market transactions totaling $129 for the three months ended March 31, 2018.  As of March 31, 2018, we had $90 remaining under this authorization. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.

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.

Restricted cash

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 March 31, 2018 balance included cash collateral required to be held against our corporate employee purchasing card program and 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 March 31, 2018, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2018 and December 31, 2017 have been reduced by an allowance for doubtful accounts of $209.

Inventories

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):

	March 31,			December 31,
	2018			2017
Raw Materials	$	13,489		$	13,870
Work in Process	401			3,112
Finished Goods	174			2,389
Reserves	(1,027		)	(844		)
Total	$	13,037		$	18,527

The primary decrease in work in process and finished goods inventory as of March 31, 2018 as compared to December 31, 2017 relates to the adoption of ASU 2014-09 and the recognition of revenue over time rather than upon shipment of inventory. Refer to Note 3 for further information.

Other Intangible Assets

Other Intangible Assets

Other intangible assets at March 31, 2018 and December 31, 2017 are as follows (in thousands):

		March 31, 2018
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	398	$	904
Trade Names	3	100		36		64
Intellectual Property	20	814		112		702
Patents	7	17		—		17
Totals		$	2,233	$	546	$	1,687

		December 31, 2017
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	361	$	941
Intellectual Property	3	100		28		72
Trade Names	20	814		102		712
Patents	7	14		—		14
Totals		$	2,230	$	491	$	1,739

Amortization expense for both of the three months ended March 31, 2018 and March 31, 2017 was $55 and $50, 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 2018	$	164
2019	219
2020	191
2021	185
2022	185
Thereafter	726
Total	$	1,670

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 months ended March 31, 2018 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 its 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

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 months ended March 31, 2018.

Recently Issued Accounting Standards

Recently Issued Accounting Standards

During February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 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 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 on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements.

In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the Securities and Exchange Commission (‘SEC’) interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the ‘Tax Act’) was signed into law. Additional information regarding the adoption of this standard is contained in Note 5, ‘Income Taxes’.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

3 Months Ended

Mar. 31, 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of option activity

	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2018	187,750	$	3.70
Granted	20,000	3.77
Exercised	—	—
Cancelled	—	—
Outstanding - March 31, 2018	207,750	$	3.70	8.31	$	—
Exercisable - March 31, 2018	37,750	$	4.75	—	$	—

Schedule of inventories

Inventories are as follows (in thousands):

	March 31,			December 31,
	2018			2017
Raw Materials	$	13,489		$	13,870
Work in Process	401			3,112
Finished Goods	174			2,389
Reserves	(1,027		)	(844		)
Total	$	13,037		$	18,527

Schedule of other intangible assets

Other intangible assets at March 31, 2018 and December 31, 2017 are as follows (in thousands):

		March 31, 2018
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	398	$	904
Trade Names	3	100		36		64
Intellectual Property	20	814		112		702
Patents	7	17		—		17
Totals		$	2,233	$	546	$	1,687

		December 31, 2017
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	361	$	941
Intellectual Property	3	100		28		72
Trade Names	20	814		102		712
Patents	7	14		—		14
Totals		$	2,230	$	491	$	1,739

Schedule of estimated future annual amortization expense

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

Year	Amount
Remainder of 2018	$	164
2019	219
2020	191
2021	185
2022	185
Thereafter	726
Total	$	1,670

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REVENUE (Tables)

3 Months Ended

Mar. 31, 2018

REVENUE

Schedule of significant changes in the contract assets

Significant changes in the contract assets balance during the three months ended March 31, 2018 was as follows (in thousands):

Outstanding at January 1, 2018	$	6,459
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized	(5,611		)
Product transferred over time	5,303
Outstanding at the end of period	$	6,151

Schedule of net sales by market

The following table summarizes our net sales by market for the three months ended March 31, 2018 (in thousands):

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	4,623	$	48	$	195	$	4,866
Medical	9,434		482		405		10,321
Industrial	9,992		843		425		11,260
Total net sales	$	24,049	$	1,373	$	1,025	$	26,447

Schedule of consolidated statement of operations and comprehensive loss, balance sheet and cash flows, to the pro-forma amounts had the previous guidance been in effect

The following table compares the reported condensed consolidated statement of operations and comprehensive loss, balance sheet and cash flows, as of and for the three months ended March 31, 2018, to the pro-forma amounts had the previous guidance been in effect (in thousands):

	Three Months Ended March 31, 2018
	As Reported			Pro forma as if the previous accounting guidance was in effect
Statement of Operations
Net Sales	$	26,447		$	25,730
Cost of Goods Sold	23,419			22,731
Gross Profit	3,028			2,999
Loss from Operations	(120		)	(149		)
Loss Before Income Taxes	(292		)	(321		)
Income Tax Expense	99			99
Net Loss	$	(391	)	$	(420	)
Loss Per Common Share Basic and Diluted	$	(0.14	)	$	(0.15	)
Consolidated Balance Sheet
Assets
Inventories	$	13,037		$	17,778
Contract Assets	6,151			$	—
Shareholders’ Equity
Retained Earnings	$	4,880		$	3,470
Consolidated Statement of Cash Flows
Net Loss	$	(391	)	$	(420	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities
Change in Current Operating Items
Inventories	229			566
Contract Asset	308			—
Net Cash Provided by Operating Activities	$	542		$	542

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FINANCING ARRANGEMENTS (Tables)

3 Months Ended

Mar. 31, 2018

FINANCING ARRANGEMENTS

Summary of long-term debt balances

Long-term debt at March 31, 2018 and December 31, 2017 consisted of the following (in thousands):

	March 31,			December 31,
	2018			2017
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.1% as of March 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	4,627		$	4,751
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	351			394
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	457			512
	5,435			5,657
Discount on Devicix Notes Payable	(53		)	(63		)
Debt issuance Costs	(225		)	(238		)
Total long-term debt	5,157			5,356
Current maturities of long-term debt	(1,007		)	(1,003		)
Long-term debt - net of current maturities	$	4,150		$	4,353

Schedule of future minimum non-cancelable capital leases

Approximate future minimum lease payments under non-cancelable capital leases subsequent to March 31, 2018 are as follows (in thousands):

Year	Amount
Remainder of 2018	$	286
2019	394
2020	394
2021	394
2022	255
Total noncancelable future lease commitments	$	1,723
Less: interest	(204		)
Present value of obligations under capital leases	$	1,519

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COMMITMENTS AND CONTINGENCIES (Tables)

3 Months Ended

Mar. 31, 2018

COMMITMENTS AND CONTINGENCIES

Schedule of future minimum lease payments under non-cancelable leases

Approximate future minimum lease payments under non-cancelable leases subsequent to March 31, 2018 are as follows (in thousands):

Years Ending
December 31,	Amount
2018	661
2019	882
2020	713
2021	566
2022	591
Thereafter	3,640
Total	$	7,053

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Reclassifications, Share based Compensation, Earnings per Common Share, Share Repurchase Program & Restricted Cash (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Jan. 01, 2018	Dec. 31, 2017		May 31, 2017	Nov. 30, 2010
Retained Earnings	$ 4,880			$ 3,889	[1]
Share Repurchase Plan
Share repurchase program authorized amount	$ 250
Stock repurchased in open market transactions (in shares)	34,427
Stock repurchased in open market transactions	$ 129
Authorized balance remaining under share repurchase program	90
Restricted Cash
Outstanding letters of credit	$ 0
ASU 2014-09
Retained Earnings			$ 1,381
Stock Options
Options
Balance at the beginning of the period(in shares)	187,750
Granted (in shares)	20,000
Balance at the end of the period (in shares)	207,750
Exercisable at the end of the period (in shares)	37,750
Weighted-Average Exercise Price Per Share
Outstanding at the beginning of the period (in dollars per share)	$ 3.70
Granted (in dollars per share)	3.77
Outstanding at the end of the period (in dollars per share)	3.70
Exercisable at the end of the period (in dollars per share)	$ 4.75
Weighted- Average Remaining Contractual Term (in years)
Outstanding at the end of the period	8 years 3 months 22 days
Additional disclosures
Compensation expense (income)	$ 20	$ 0
Unrecognized compensation related to unvested awards	$ 175
Unrecognized compensation, vesting period	2 years 2 months 23 days
2005 Plan
Equity Appreciation Rights Plan
Shares granted (in units)	0
2017 Plan | Stock Options
Additional disclosures
Number of common shares authorized						350,000
2010 Plan | Equity Appreciation Rights Plan
Additional disclosures
Compensation expense (income)	$ 0	$ 7
Equity Appreciation Rights Plan
Vesting period from the base date	3 years
Shares granted (in units)	0	0
Accrued compensation	$ 0			$ 0
2010 Plan | Equity Appreciation Rights Plan | Maximum
Additional disclosures
Number of common shares authorized							1,000,000
Equity Appreciation Rights Plan
Redemption cash payment period	90 days

[1] The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - A/R, Inventories, and Intangibles (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Accounts Receivable and Allowance for Doubtful Accounts
Accounts Receivable Allowances	$ 209		$ 209
Inventories
Raw Materials	13,489		13,870
Work in Process	401		3,112
Finished Goods	174		2,389
Reserves	(1,027)		(844)
Total	13,037		18,527	[1]
Impairment Analysis
Impairment charges recognized	0
Finite-Lived Intangible Assets
Gross Carrying Amount	2,233		2,230
Accumulated Amortization Amount	546		491
Net Book Value Amount	1,687		$ 1,739	[1]
Amortization expense	55	$ 50
Estimated future annual amortization expense
Remainder of 2018	164
2019	219
2020	191
2021	185
2022	185
Thereafter	726
Total	$ 1,670
Customer Relationships
Finite-Lived Intangible Assets
Remaining lives	9 years		9 years
Gross Carrying Amount	$ 1,302		$ 1,302
Accumulated Amortization Amount	398		361
Net Book Value Amount	$ 904		$ 941
Trade Names
Finite-Lived Intangible Assets
Remaining lives	3 years		20 years
Gross Carrying Amount	$ 100		$ 814
Accumulated Amortization Amount	36		102
Net Book Value Amount	$ 64		$ 712
Intellectual Property
Finite-Lived Intangible Assets
Remaining lives	20 years		3 years
Gross Carrying Amount	$ 814		$ 100
Accumulated Amortization Amount	112		28
Net Book Value Amount	$ 702		$ 72
Patents
Finite-Lived Intangible Assets
Remaining lives	7 years		7 years
Gross Carrying Amount	$ 17		$ 14
Net Book Value Amount	$ 17		$ 14

[1] The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Details) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2018 USD ($) item	Mar. 31, 2017 item	Dec. 31, 2017
Major customers and concentration of credit risk
Cash | $	$ 466
Largest customer
Major customers and concentration of credit risk
Number of divisions | item	2	2
China
Major customers and concentration of credit risk
Cash | $	$ 392
Credit concentration risk
Major customers and concentration of credit risk
Excess cash balance, number of high credit quality financial institution | item	2
Net sales | Customer concentration risk
Major customers and concentration of credit risk
Percentage of export sales to consolidated net sales	19.00%	13.00%
Net sales | Customer concentration risk | Largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	10.00%	10.00%
Net sales | Customer concentration risk | Division one of largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	19.00%	24.00%
Net sales | Customer concentration risk | Other division of largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	1.00%	2.00%
Net sales | Customer concentration risk | Divisions one & other
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	20.00%	26.00%
Accounts receivable | Customer concentration risk | Largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	17.00%		16.00%

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REVENUE - Contract Assets (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2018 USD ($)
REVENUE
Outstanding at January 1, 2018	$ 6,459
Transferred to receivables from contract assets recognized	(5,611)
Product transferred over time	5,303
Outstanding at the end of period	$ 6,151
Revenue under contract manufacturing agreements (as percentage)	91.00%
Remaining performance obligations for the contract assets term	90 days
Remaining performance obligations for the Remaining Amounts Transferred term	180 days
Remaining performance obligations customers upon shipment with payment terms	120 days

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REVENUE - Net sales by market (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2018 USD ($)
Product/Service Transferred Over Time	$ 24,049
Product Transferred at Point in Time	1,373
Noncash Consideration	1,025
Total Net Sales by Market	26,447
Aerospace and Defense
Product/Service Transferred Over Time	4,623
Product Transferred at Point in Time	48
Noncash Consideration	195
Total Net Sales by Market	4,866
Medical
Product/Service Transferred Over Time	9,434
Product Transferred at Point in Time	482
Noncash Consideration	405
Total Net Sales by Market	10,321
Industrial
Product/Service Transferred Over Time	9,992
Product Transferred at Point in Time	843
Noncash Consideration	425
Total Net Sales by Market	$ 11,260

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REVENUE - Impact of New Revenue Guidance on Financial Statement Line Items (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Net Sales	$ 26,447
Cost of Goods Sold	23,419	$ 25,226
Gross Profit	3,028	3,092
Loss from Operations	(120)	121
Loss Before Income Taxes	(292)	(19)
Income tax Expense	99	(4)
Net Loss	$ (391)	$ (15)
Loss Per Common Share Basic and Diluted	$ (0.14)	$ (0.01)
Assets
Inventories	$ 13,037		$ 18,527	[1]
Contract Asset	6,151		6,459
Shareholders' Equity
Retained Earnings	4,880		$ 3,889	[1]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Net Loss	(391)	$ (15)
Change in Current Operating Items
Inventories	229	(1,161)
Contract Assets	308
Net Cash Provided by (Used in) Operating Activities	542	$ (255)
Pro-forma as of the previous accounting guidance was in effect
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Net Sales	25,730
Cost of Goods Sold	22,731
Gross Profit	2,999
Loss from Operations	(149)
Loss Before Income Taxes	(321)
Income tax Expense	99
Net Loss	$ (420)
Loss Per Common Share Basic and Diluted	$ (0.15)
Assets
Inventories	$ 17,778
Shareholders' Equity
Retained Earnings	3,470
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Net Loss	(420)
Change in Current Operating Items
Inventories	566
Net Cash Provided by (Used in) Operating Activities	$ 542

[1] The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

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FINANCING ARRANGEMENTS (Details) $ in Thousands		3 Months Ended	12 Months Ended
	Jul. 01, 2015 USD ($) item	Mar. 31, 2018 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)		Jun. 15, 2017 USD ($)
Financing arrangements
Total long-term debt		$ 5,435		$ 5,657
Discount on Devicix Notes Payable		(53)		(63)
Debt Issuance Costs		(225)		(238)
Long-term Debt		5,157		5,356
Current maturities of long-term debt		(1,007)		(1,003)	[1]
Long-term debt - net of current maturities		$ 4,150		4,353	[1]
Devicix, LLC
Financing arrangements
Number of promissory notes | item	2
Line of credit
Financing arrangements
Weighted-average interest rate (as a percent)		3.00%
Outstanding balance		$ 8,649		8,503
Unused availability supported by entity's borrowing base		$ 3,920
Devicix Acq Note 1, subordinate debt, due July 1, 2019
Financing arrangements
Interest rate (as a percent)		4.00%
Long-term Debt		$ 351		394
Devicix Acq Note 2, subordinate debt, due July 1, 2019
Financing arrangements
Interest rate (as a percent)		4.00%
Long-term Debt		$ 457		512
Promissory note subject to offsets | Devicix, LLC
Financing arrangements
Promissory note liability	$ 1,000
Term of promissory note	4 years
Interest rate per annum	4.00%
Principal and interest payments	$ 23
Promissory note not subject to offsets | Devicix, LLC
Financing arrangements
Promissory note liability	$ 1,300
Term of promissory note	4 years
Interest rate per annum	4.00%
Principal and interest payments	$ 29
Bank of America | Line of credit
Financing arrangements
Maximum borrowing capacity						$ 16,000
Bank of America | Real estate term notes
Financing arrangements
Debt instrument, face amount						$ 5,000
Variable rate basis		one-month LIBOR
Interest rate margin on variable rate basis (as a percent)		2.25%
Interest rate (as a percent)		4.10%
Long-term Debt		$ 4,627		$ 4,751
Principal and interest payments		$ 41
Bank of America | Credit Agreement
Financing arrangements
Minimum fixed charge coverage ratio		1.00
Minimum level of cumulative EBITDA			$ 1,970
Wells Fargo Bank, N.A.
Financing arrangements
Loss on Extinguishment of Debt		$ 175

[1] The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

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FINANCING ARRANGEMENTS - Capital Leases (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Capital Leases
Total cost of the leased equipment	$ 1,574			$ 1,524
Current maturities of capital leases	325			$ 295	[1]
Interest expense related to the leased assets	26	$ 0
Depreciation expense related to the leased assets	39	$ 0
Future minimum lease payments under non-cancelable capital leases
Remainder of 2018	286
2019	394
2020	394
2021	394
2022	255
Total noncancelable future lease commitments	1,723
Less interest	(204)
Present value obligations under capital leases	$ 1,519
Forecast
Future minimum lease payments under non-cancelable capital leases
Total noncancelable future lease commitments			$ 34

[1] The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date

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INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Effective income tax rate (as a percent)	(34.00%)	23.00%		(18.00%)
Reconciliation of federal income taxes and reported income taxes
Income tax expense	$ 99	$ (4)
Unrecognized tax benefits
Net uncertain tax benefit positions that would increase (reduce) effective income tax rate, if recognized	52			$ 52
Deferred Tax Liability	$ 305
Forecast
Effective income tax rate (as a percent)			56.00%

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COMMITMENTS AND CONTINGENCIES - Lease payments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
COMMITMENTS AND CONTINGENCIES
Rent expense	$ 335	$ 297
Operating Leases
2018	661
2019	882
2020	713
2021	566
2022	591
Thereafter	3,640
Total	$ 7,053

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PLANT CLOSURE (Details) - Building and Building Improvements - Augusta - Discontinued Operations, Disposed of by Sale - Plant closing $ in Thousands	Mar. 31, 2017 USD ($)
PLANT CLOSURE
Sale of property	$ 715
Net book value	314
Gain on the sale, net of related expenses	354
Net proceeds used to pay outstanding real estate term note	$ 668

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RELATED PARTY TRANSACTIONS (Details) - Consulting arrangement - USD ($)		3 Months Ended
	Feb. 22, 2018	Mar. 31, 2018	Mar. 31, 2017
Matt Mahmood
RELATED PARTY TRANSACTIONS
Expenses incurred		$ 12,000	$ 45,000
William Murray
RELATED PARTY TRANSACTIONS
Term of consulting agreement	3 months
Consulting fee per hour	$ 250
Maximum daily consulting fee	$ 2,000
Expenses incurred		$ 36,000