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, 2019

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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes 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 x	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, 2019 was 2,684,672.

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

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

TABLE OF CONTENTS

			PAGE
PART I - FINANCIAL INFORMATION
	Item 1 - Financial Statements
		Condensed Consolidated Statements of Operations and Comprehensive Income	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5
		Condensed Consolidated Statements of Shareholders’ Equity	6
		Condensed Notes to Consolidated Financial Statements	7-17
	Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations		18-22
	Item 3 - Quantitative and Qualitative Disclosures About Market Risk		22
	Item 4 - Controls and Procedures		22
PART II - OTHER INFORMATION
	Item 1 - Legal Proceedings		23
	Item 1A. - Risk Factors		23
	Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds		23
	Item 3 - Defaults on Senior Securities		23
	Item 4 - Mine Safety Disclosures		23
	Item 5 - Other Information		23
	Item 6 - Exhibits		23
SIGNATURES			25

2

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,
	2019			2018
Net Sales	$	28,165		$	26,447
Cost of Goods Sold	25,204			23,419
Gross Profit	2,961			3,028
Operating Expenses
Selling Expenses	761			1,039
General and Administrative Expenses	2,304			2,109
Total Operating Expenses	3,065			3,148
Loss From Operations	(104		)	(120		)
Other Expense
Interest Expense	(245		)	(172		)
Loss Before Income Taxes	(349		)	(292		)
Income Tax Expense	14			99
Net Loss	$	(363	)	$	(391	)
Loss Per Common Share - Basic and Diluted	$	(0.14	)	$	(0.14	)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted	2,659,859			2,720,609
Other comprehensive loss
Foreign currency translation	56			72
Comprehensive loss, net of tax	$	(307	)	$	(319	)

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	MARCH 31,			DECEMBER 31,
	2019			2018 (1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	310		$	480
Restricted Cash	427			467
Accounts Receivable, less allowances of $246 and $222	23,092			20,093
Inventories	15,984			17,004
Contract Assets	8,584			6,431
Prepaid Expenses and Other Current Assets	2,133			1,381
Total Current Assets	50,530			45,856
Property and Equipment, Net	9,886			10,178
Operating Lease Assets	5,388			—
Goodwill	2,375			2,375
Other Intangible Assets, Net	1,469			1,523
Other Non Current Assets	28			28
Total Assets	$	69,676		$	59,960
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	586		$	780
Current Portion of Finance Lease Obligations	359			337
Current Portion of Operating Lease Obligations	811			—
Accounts Payable	21,140			18,142
Accrued Payroll and Commissions	2,136			2,747
Other Accrued Liabilities	3,112			2,886
Total Current Liabilities	28,144			24,892
Long-Term Liabilities
Long Term Line of Credit	11,294			9,264
Long-Term Debt, Net	3,513			3,624
Long-Term Finance Lease Obligation, Net	864			951
Long-Term Operating Lease Liabilities, Net	4,813			—
Other Long-Term Liabilities	118			139
Total Long-Term Liabilities	20,602			13,978
Total Liabilities	48,746			38,870
Commitments and Contingencies
Shareholders’ Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250			250
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,684,672 and 2,663,049 Shares Issued and Outstanding, respectively	27			27
Additional Paid-In Capital	15,757			15,610
Accumulated Other Comprehensive Loss	(177		)	(233		)
Retained Earnings	5,073			5,436
Total Shareholders’ Equity	20,930			21,090
Total Liabilities and Shareholders’ Equity	$	69,676		$	59,960

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

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

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	THREE MONTHS ENDED
	MARCH 31,
	2019			2018
Cash Flows From Operating Activities
Net Loss	$	(363	)	$	(391	)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities
Depreciation and Amortization	570			561
Compensation on Stock-Based Awards	160			20
Deferred Taxes	—			(1		)
Change in Accounts Receivable Allowance	24			—
Change in Inventory Reserves	51			183
Changes in Current Operating Items
Accounts Receivable	(3,001		)	(762		)
Inventories	985			229
Contract Assets	(2,154		)	308
Prepaid Expenses and Other Current Assets	(819		)	81
Accounts Payable	3,209			317
Accrued Payroll and Commissions	(611		)	(579		)
Other Accrued Liabilities	511			576
Net Cash (Used in) Provided by Operating Activities	(1,438		)	542
Cash Flows from Investing Activities
Purchase of Intangible Asset	—			(4		)
Purchases of Property and Equipment	(396		)	(288		)
Net Cash Used in Investing Activities	(396		)	(292		)
Cash Flows from Financing Activities
Net Change in Line of Credit	2,030			146
Principal Payments on Long-Term Debt	(328		)	(222		)
Principal Payments on Finance Leases	(65		)	(82		)
Share Repurchases	(13		)	(126		)
Net Cash Provided by (Used in) Financing Activities	1,624			(284		)
Effect of Exchange Rate Changes on Cash	—			46
Net Change in Cash	(210		)	12
Cash - Beginning of Period	947			779
Cash - Ending of Period	$	737		$	791
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	310		$	466
Restricted Cash	427			325
Total restricted cash reported in the condensed consolidated statements of cash flows	$	737		$	791
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	224		$	139
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	78			68

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS)

								Accumulated
					Additional			Other						Total
	Preferred		Common		Paid-In			Comprehensive			Retained Income			Shareholders’
BALANCE DECEMBER 31, 2017	250		27		15,760			(101		)	3,889			19,825
Net loss	—		—		—			—			(391		)	(391		)
Cumulative Adjustment	—		—		—			—			1,382			1,382
Foreign currency translation adjustment	—		—		—			72			—			72
Compensation on stock-based awards	—		—		20			—			—			20
Share repurchases	—		—		(126		)	—			—			(126		)
BALANCE MARCH 31, 2018	$	250	$	27	$	15,654		$	(29	)	$	4,880		$	20,782
BALANCE DECEMBER 31, 2018	$	250	$	27	$	15,610		$	(233	)	$	5,436		$	21,090
Net loss	—		—		—			—			(363		)	(363		)
Foreign currency translation adjustment	—		—		—			56			—			56
Compensation on stock-based awards	—		—		160			—			—			160
Share repurchases	—		—		(13		)	—			—			(13		)
BALANCE MARCH 31, 2019	$	250	$	27	$	15,757		$	(177	)	$	5,073		$	20,930

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

Principles of Consolidation

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

Revenue Recognition

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

7

Stock-Based Awards

Following is the status of all stock options as of March 31, 2019:

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2019	224,750		$	3.44
Granted	137,500		4.53
Exercised	—		—
Cancelled	(23,250	)	3.85
Outstanding - March 31, 2019	339,000		$	3.85	9.12	$	298
Exercisable - March 31, 2019	36,166		$	3.46	7.71	$	46

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 137,500 stock options granted during the three months ended March 31, 2019.

Total compensation expense related to stock options for the three months ended March 31, 2019 and 2018 was $43 and $20, respectively. As of March 31, 2019, there was $402 of unrecognized compensation which will vest over the next 3.29 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, 2019, there were 100,000 Units granted.  Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of $116.

Net Loss per Common Share

For both the three months ended March 31, 2019 and 2018, 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, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 3,377 shares in open market transactions totaling $13 for the three months ended March 31, 2019.  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.

8

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, 2019 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, 2019, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2019 and December 31, 2018 have been reduced by an allowance for doubtful accounts of $246 and $222, respectively.

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:

	March 31,			December 31,
	2019			2018
Raw Materials	$	16,197		$	16,769
Work in Process	698			1,015
Finished Goods	252			332
Reserves	(1,163		)	(1,112		)
Total	$	15,984		$	17,004

9

Other Intangible Assets

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

		March 31, 2019
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	542	$	760
Intellectual Property	3	100		69		31
Trade Names	20	814		153		661
Patents	7	17		—		17
Totals		$	2,233	$	764	$	1,469

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

Amortization expense for the three months ended March 31, 2019 and March 31, 2018 was $54 and $55, respectively.

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

Year	Amount
Remainder of 2019	$	165
2020	191
2021	185
2022	185
2023	185
Thereafter	541
Total	$	1,452

10

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st. No events were identified during the three months ended March 31, 2019 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than 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, 2019 or 2018.

Recently Adopted Accounting Standards

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

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

11

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 $310 in cash at March 31, 2019, approximately $276 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, 2019 and 2018. One division accounted for approximately 23% and 19% of net sales for the three months ended March 31, 2019 and 2018, respectively. The other division accounted for approximately 3% and 1% of net sales for the three months ended March 31, 2019 and 2018, respectively.  Together they accounted for approximately 26% and 20% of net sales for the three months ended March 31, 2019 and 2018, respectively.  Accounts receivable from the customer at March 31, 2019 and December 31, 2018 represented approximately 25% and 16% of our total accounts receivable, respectively.

Export sales represented approximately 19% of net sales for the three months ended March 31, 2019 and 2018.

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, 2019 and 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.

12

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time.  Significant changes in the contract assets balance during the three months ended March 31, 2019 was as follows (in thousands):

Outstanding at January 1, 2019	$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized	(4,012		)
Product transferred over time	6,165
Outstanding at the end of period	$	8,584

We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2019, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following table summarizes our net sales by market for the three months ended March 31, 2019:

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	4,103	$	20	$	122	$	4,245
Medical	14,495		35		409		$	14,939
Industrial	8,140		597		244		8,981
Total net sales	$	26,738	$	652	$	775	$	28,165

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

	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

13

NOTE 4. FINANCING ARRANGEMENTS

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

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.6% and 3.0% as of March 31, 2019 and 2018, respectively. We had borrowings on our line of credit of $11,294 and $9,264 outstanding as of March 31, 2019 and December 31, 2018. 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.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2019, we had unused availability under our line of credit of $4,706, 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.

14

Long-term debt at March 31, 2019 and December 31, 2018 consisted of the following:

	March 31,			December 31,
	2019			2018
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.8% as of March 31, 2019 and December 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	4,129		$	4,253
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	67			156
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019	87			203
	4,283			4,612
Discount on Devicix Notes Payable	(13		)	(23		)
Debt issuance Costs	(172		)	(185		)
Total long-term debt	4,098			4,404
Current maturities of long-term debt	(586		)	(780		)
Long-term debt - net of current maturities	$	3,512		$	3,624

NOTE 5.  LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At March 31, 2019, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

	Three Months Ended March 31,
Lease Cost	2019
Operating lease cost	$	274
Finance lease interest cost	17
Finance lease amortization expense	65
Total lease cost	$	356

15

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	March 31, 2019
Assets
Operating lease assets	Operating lease assets	$	5,387
Finance lease assets	Property, Plant and Equipment	1,358
Total leased assets		6,745
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations	811
Current finance lease liabilities	Current Portion of Finance Lease Obligations	359
Noncurrent
Long-term operating lease liabilities	L-T Operating Lease Liabilities, Net	4,813
Long term finance lease liabilities	L-T Finance Lease Obligations, Net	864
Total lease liabilities		$	6,847

Supplemental cash flow information related to leases was as follows:

	Three Months Ended March 31,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	107
Right-of-use assets obtained in exchange for lease obligations	$	—

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2019	$	671		$	320		$	991
2020	858			398			1,256
2021	722			398			1,120
2022	726			223			949
2023	738			2			740
Thereafter	3,380			—			3,380
Total lease payments	$	7,095		$	1,341		$	8,436
Less: Interest	(1,471		)	(118		)	(1,589		)
Present value of lease liabilities	$	5,624		$	1,223		$	6,847

16

The lease term and discount rate at March 31, 2019 were as follows:

	March 31,
	2019
Weighted-average remaining lease term (years)
Operating leases	8.3
Finance leases	3.7
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Rent expense for our operating leases the three months ended March 31, 2018 as accounted under ASC 840, Leases, was $335.

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

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

NOTE 6.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three months ended March 31, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018.  The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).

NOTE 7.  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 and who resigned from the Company on October 5, 2018. For the three months ended March 31, 2019 and 2018, expenses were incurred in the amounts of $0, and $12 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, formerly an independent director of the Company.  Mr. Murray resigned from this position in May 2018. The term of the Consulting Agreement was three months and ended in the second quarter of 2018. The Company is paying severance benefits per his employment and separation agreements of $235 over 12 months, to be paid in full during 2019, which was fully expensed in the fourth quarter of 2018.

17

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

Overview

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

Results of Operations

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

	Three Months Ended
	March 31,
	2019		2018
Net Sales	100.0	%	100.0	%
Cost of Goods Sold	89.5		88.5
Gross Profit	10.5		11.5
Selling Expenses	2.7		3.9
General and Administrative Expenses	8.1		8.0
Loss from Operations	(0.3	)	(0.4	)
Other Expenses	(0.9	)	(0.7	)
Loss Before Income Taxes	(1.2	)	(1.1	)
Income Tax Expense (Benefit)	0.1		0.4
Net Loss	(1.3	)%	(1.5	)%

Net Sales

Net sales were $28.2 million in the first quarter of 2019, as compared to $26.4 million in the first quarter of the prior year, an increase of $1.8 million or 6.5%. Net sales results were varied by markets, the medical market increased by $4.6 million or 44.7% with medical component products accounting for 60% of the increase and medical devices the remaining 40%. The industrial market sector was down $2.3 million or 20.2% in the first quarter of 2019 as compared to the same quarter of 2018. Net sales from the aerospace and defense markets decreased by $0.6 million or 12.8% in the first quarter of 2019 as compared to the first quarter of 2018.

18

Net sales by our major EMS industry markets for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

	March 31,				%
	2019		2018		Change
Aerospace and Defense	$	4,245	$	4,866	(12.8	)
Medical	14,939		10,321		44.7
Industrial	8,981		11,260		(20.2	)
Total Net Sales	$	28,165	$	26,447	6.5

Net sales by timing of transfer of goods and services for the three months ended March 31, 2019 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	$	4,103	20		122		$	4,245
Medical	14,495		35		409		14,939
Industrial	8,140		597		244		8,981
Total Net sales	$	26,738	$	652	$	775	$	28,165

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, 2019 was $31.4 million, a 14.8% increase from the beginning of the quarter and a 43.2% increase as compared to the prior year. Backlog for our medical customers has increased 20.8% from the beginning of the quarter and increased 80.6% compared to the prior year. The aerospace and defense backlog increased 0.6% from the beginning of the quarter and increased 15.5% from the prior year.   Our industrial customers’ backlog increased 14.7% from the beginning of the quarter and increased 13.5% 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.

19

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,
	2019		2018		2018
Aerospace and Defense	$	6,027	$	5,993	$	5,220
Medical	17,256		14,285		9,556
Industrial	8,130		7,088		7,166
Total Backlog	$	31,413	$	27,366	$	21,942

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 10.5%  and 11.5% for the three months ended March 31, 2019 and 2018, respectively.  This decline in gross profit as a percent of net sales is mainly due to product and customer mix.

Selling Expense

Selling expenses for the three months ended March 31, 2019 and 2018 was $0.8 million or 2.7% of sales and $1.0 million or 3.9% of sales, respectively. The decrease in selling expenses for 2019 is due to lower sales incentives.

General and Administrative Expense

General and administrative expenses for the three months ended March 31, 2019 and 2018, were $2.3 million or 8.1% of sales and $2.1 million or 8.0% of sales, respectively.

Loss from Operations

First quarter 2019 loss from operations was less than $0.1 million compared to a loss of $0.1 million for the first quarter in 2018.

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, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018.  The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).

20

Net Loss

Net loss for the three months ended March 31, 2019 and 2018 was $0.4 million or $0.14 per basic and diluted common share.

Liquidity and Capital Resources

Net cash used by operating activities for the three months ended March 31, 2019 was $1.4 million. The increase in accounts receivable and contract assets negatively impacted cash flows, partially offset by an increase in accounts payable and decrease in inventory.

Net cash used in investing activities of $0.4 million for the three months ended March 31, 2019, 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, 2019, we had outstanding advances of $11.3 million under the line of credit and unused availability of $4.7 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $22.4 million and $20.7 million as of March 31, 2019 and December 31, 2018, 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.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.

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

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

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

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

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

·Risks related to availability of labor;

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

·Commodity and energy cost instability;

·Risks related to quality, regulatory, securities laws and debt covenant noncompliance;

·Loss of a major customer or changes to customer orders;

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

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

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

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), there was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

22

PART II

ITEM 1.    LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I — Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.

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

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

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
January 1 - January 31, 2019	3,377	$	3.87	3,377	$	153,148
February 1 - February 28, 2019	—	$	—	—	$	153,148
March 1 - March 31, 2019	—	$	—	—	$	153,148
Total	3,377	$	3.87	3,377	$	153,148

As of March 31, 2019, we had a $250,000 share repurchase program with $153,148 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.

23

101* Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

*Filed herewith

24

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 15, 2019	by	/s/ Jay D. Miller
	Jay D. Miller
	Chief Executive Officer and President
	Nortech Systems Incorporated
Date: May 15, 2019	by	/s/ Constance M. Beck
	Constance M. Beck
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

25

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

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

I, Jay D. Miller, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 15, 2019	By:	/s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

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

I, Constance M. Beck, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 15, 2019	By:	/s/ Constance M. Beck
		Constance M. Beck
		Vice President and Chief Financial Officer
		Nortech Systems Incorporated

1

EX-32

Exhibit 32

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Jay D. Miller, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  May 15, 2019

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

1

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, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  May 15, 2019

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

2

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2019	May 02, 2019
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, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		2,684,672
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Net Sales	$ 28,165	$ 26,447
Cost of Goods Sold	25,204	23,419
Gross Profit	2,961	3,028
Operating Expenses
Selling Expenses	761	1,039
General and Administrative Expenses	2,304	2,109
Total Operating Expenses	3,065	3,148
Loss From Operations	(104)	(120)
Other Expense
Interest Expense	(245)	(172)
Loss Before Income Taxes	(349)	(292)
Income Tax Expense	14	99
Net Loss	$ (363)	$ (391)
Loss Per Common Share - Basic and Diluted	$ (0.14)	$ (0.14)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted	2,659,859	2,720,609
Other comprehensive loss
Foreign currency translation	$ 56	$ 72
Comprehensive loss, net of tax	$ (307)	$ (319)

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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands		Mar. 31, 2019	Dec. 31, 2018
Current Assets
Cash		$ 310	$ 480	[1]
Restricted Cash		427	467	[1]
Accounts Receivable, less allowances of $246 and $222		23,092	20,093	[1]
Inventories		15,984	17,004	[1]
Contract Assets		8,584	6,431	[1]
Prepaid Expenses and Other Current Assets		2,133	1,381	[1]
Total Current Assets		50,530	45,856	[1]
Property and Equipment, Net		9,886	10,178	[1]
Operating Lease Assets		5,388
Goodwill		2,375	2,375	[1]
Other Intangible Assets, Net		1,469	1,523	[1]
Other Non Current Assets		28	28	[1]
Total Assets		69,676	59,960	[1]
Current Liabilities
Current Maturities of Long-Term Debt		586	780	[1]
Current Portion of Finance Lease Obligations		359
Current Portion of Finance Lease Obligations	[1]		337
Current Portion of Operating Lease Obligations		811
Accounts Payable		21,140	18,142	[1]
Accrued Payroll and Commissions		2,136	2,747	[1]
Other Accrued Liabilities		3,112	2,886	[1]
Total Current Liabilities		28,144	24,892	[1]
Long-Term Liabilities
Long-Term Line of Credit		11,294	9,264	[1]
Long-Term Debt, Net		3,513	3,624	[1]
Long-Term Capital Lease Obligation, Net		864
Long-Term Finance Lease Obligation, Net	[1]		951
Long-Term Operating Lease Liabilities, Net		4,813
Other Long-Term Liabilities		118	139	[1]
Total Long-Term Liabilities		20,602	13,978	[1]
Total Liabilities		48,746	38,870	[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: 2,684,672 and 2,663,049 Shares Issued and Outstanding, respectively		27	27	[1]
Additional Paid-In Capital		15,757	15,610	[1]
Accumulated Other Comprehensive Loss		(177)	(233)	[1]
Retained Earnings		5,073	5,436	[1]
Total Shareholders' Equity		20,930	21,090	[1]
Total Liabilities and Shareholders' Equity		$ 69,676	$ 59,960	[1]

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts Receivable Allowances	$ 246	$ 222
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	2,684,672	2,663,049
Common Stock - Shares Outstanding	2,684,672	2,663,049

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Cash Flows From Operating Activities
Net Loss	$ (363)	$ (391)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities
Depreciation and Amortization	570	561
Compensation on Stock-Based Awards	160	20
Deferred Taxes		(1)
Change in Accounts Receivable Allowance	24
Change in Inventory Reserves	51	183
Changes in Current Operating Items
Accounts Receivable	(3,001)	(762)
Inventories	985	229
Contract Assets	(2,154)	308
Prepaid Expenses and Other Current Assets	(819)	81
Accounts Payable	3,209	317
Accrued Payroll and Commissions	(611)	(579)
Other Accrued Liabilities	511	576
Net Cash (Used in) Provided by Operating Activities	(1,438)	542
Cash Flows from Investing Activities
Purchase of Intangible Asset		(4)
Purchases of Property and Equipment	(396)	(288)
Net Cash Used in Investing Activities	(396)	(292)
Cash Flows from Financing Activities
Net Change in Line of Credit	2,030	146
Principal Payments on Long-Term Debt	(328)	(222)
Principal Payments on Finance Leases	(65)
Principal Payments on Finance Leases		(82)
Share Repurchases	(13)	(126)
Net Cash Provided by (Used in) Financing Activities	1,624	(284)
Effect of Exchange Rate Changes on Cash		46
Net Change in Cash	(210)	12
Cash - Beginning of Period	947	779
Cash - Ending of Period	737	791
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	310	466
Restricted Cash	427	325
Cash - Ending of Period	737	791
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	224	139
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	$ 78	$ 68

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($) $ in Thousands	Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Other Comprehensive Loss	Retained Income	Total
Balance at Dec. 31, 2017	$ 250	$ 27	$ 15,760	$ (101)	$ 3,889	$ 19,825
Increase (Decrease) in Shareholders' Equity
Net loss					(391)	(391)
Cumulative adjustment					1,382	1,382
Foreign currency translation				72		72
Compensation on stock-based awards			20			20
Share repurchases			(126)			(126)
Balance at Mar. 31, 2018	250	27	15,654	(29)	4,880	20,782
Balance at Dec. 31, 2018	250	27	15,610	(233)	5,436	21,090	[1]
Increase (Decrease) in Shareholders' Equity
Net loss					(363)	(363)
Foreign currency translation				56		56
Compensation on stock-based awards			160			160
Share repurchases			(13)			(13)
Balance at Mar. 31, 2019	$ 250	$ 27	$ 15,757	$ (177)	$ 5,073	$ 20,930

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2019

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, 2018. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

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

Revenue Recognition

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

Stock-Based Awards

Following is the status of all stock options as of March 31, 2019:

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual
		Price Per		Term	Aggregate
	Shares	Share		(in years)	Intrinsic Value
Outstanding - January 1, 2019	224,750	$	3.44
Granted	137,500		4.53
Exercised	—		—
Cancelled	(23,250)		3.85
Outstanding - March 31, 2019	339,000	$	3.85	9.12	$	298
Exercisable - March 31, 2019	36,166	$	3.46	7.71	$	46

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares.  There were 137,500 stock options granted during the three months ended March 31, 2019.

Total compensation expense related to stock options for the three months ended March 31, 2019 and 2018 was $43 and $20, respectively. As of March 31, 2019, there was $402 of unrecognized compensation which will vest over the next 3.29 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, 2019, there were 100,000 Units granted. Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of $116.

Net Loss per Common Share

For both the three months ended March 31, 2019 and 2018, 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, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 3,377 shares in open market transactions totaling $13 for the three months ended March 31, 2019. 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, 2019 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, 2019, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2019 and December 31, 2018 have been reduced by an allowance for doubtful accounts of $246 and $222,respectively.

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:

	March 31,		December31,
	2019		2018
Raw Materials	$	16,197	$	16,769
Work in Process		698		1,015
Finished Goods		252		332
Reserves		(1,163)		(1,112)
Total	$	15,984	$	17,004

Other Intangible Assets

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

		March 31, 2019
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	542	$	760
Intellectual Property	3		100		69		31
Trade Names	20		814		153		661
Patents	7		17		—		17
Totals		$	2,233	$	764	$	1,469

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

Amortization expense for the three months ended March 31, 2019 and March 31, 2018 was $54 and $55, respectively.

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

Year	Amount
Remainder of 2019	$	165
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,452

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, 2019 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than 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, 2019 or 2018.

Recently Adopted Accounting Standards

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

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

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

3 Months Ended

Mar. 31, 2019

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 $310 in cash at March 31, 2019, approximately $276 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, 2019 and 2018. One division accounted for approximately 23% and 19% of net sales for the three months ended March 31, 2019 and 2018, respectively. The other division accounted for approximately 3% and 1% of net sales for the three months ended March 31, 2019 and 2018, respectively.  Together they accounted for approximately 26% and 20%  of net sales for the three months ended March 31, 2019 and 2018, respectively. Accounts receivable from the customer at March 31, 2019 and December 31, 2018 represented approximately 25% and 16% of our total accounts receivable, respectively.

Export sales represented approximately 19% of net sales for the three months ended March 31, 2019 and 2018.

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REVENUE

3 Months Ended

Mar. 31, 2019

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, 2019 and 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 Sheets, consist of unbilled amounts related to revenue recognized over time.  Significant changes in the contract assets balance during the three months ended March 31, 2019 was as follows (in thousands):

Outstanding at January 1, 2019	$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(4,012)
Product transferred over time		6,165
Outstanding at the end of period	$	8,584

We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2019, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following table summarizes our net sales by market for the three months ended March 31, 2019:

	Product/Service		Product
	TransferredOver		Transferredat		Noncash		Total NetSales
	Time		PointinTime		Consideration		by Market
Aerospace and Defense	$	4,103	$	20	$	122	$	4,245
Medical		14,495		35		409	$	14,939
Industrial		8,140		597		244		8,981
Total net sales	$	26,738	$	652	$	775	$	28,165

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

	Product/Service		Product
	Transferred Over		Transferred at		Noncash		Total Net Sales
	Time		Point in Time		Consideration		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

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FINANCING ARRANGEMENTS

3 Months Ended

Mar. 31, 2019

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.

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.6% and 3.0% as of March 31, 2019 and 2018, respectively. We had borrowings on our line of credit of $11,294 and $9,264 outstanding as of March 31, 2019 and December 31, 2018. 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.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2019, we had unused availability under our line of credit of $4,706,  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, 2019 and December 31, 2018 consisted of the following:

	March 31,		December 31,
	2019		2018
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.8% as of March 31, 2019 and December 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	4,129	$	4,253
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		67		156
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		87		203
		4,283		4,612
Discount on Devicix Notes Payable		(13)		(23)
Debt issuance Costs		(172)		(185)
Total long-term debt		4,098		4,404
Current maturities of long-term debt		(586)		(780)
Long-term debt - net of current maturities	$	3,513	$	3,624

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LEASES

3 Months Ended

Mar. 31, 2019

LEASES

LEASES

NOTE 5.  LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At March 31, 2019, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

	Three Months Ended March 31,
Lease Cost	2019
Operating lease cost	$	274
Finance lease interest cost		17
Finance lease amortization expense		65
Total lease cost	$	356

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	March 31, 2019
Assets
Operating lease assets	Operating lease assets	$	5,388
Finance lease assets	Property, Plant and Equipment		1,358
Total leased assets			6,745
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		811
Current finance lease liabilities	Current Portion of Finance Lease Obligations		359
Noncurrent
Long-term operating lease liabilities	L-T Operating Lease Liabilities, Net		4,813
Long term finance lease liabilities	L-T Finance Lease Obligations, Net		864
Total lease liabilities		$	6,847

Supplemental cash flow information related to leases was as follows:

	ThreeMonths Ended March 31,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	107
Right-of-use assets obtained in exchange for lease obligations	$	—

Maturities of lease liabilities were as follows:

	Operating Leases		Finance Leases		Total
Remaining 2019	$	671	$	320	$	991
2020		858		398		1,256
2021		722		398		1,120
2022		726		223		949
2023		738		2		740
Thereafter		3,380		—		3,380
Total lease payments	$	7,095	$	1,341	$	8,436
Less: Interest		(1,471)		(118)		(1,589)
Present value of lease liabilities	$	5,624	$	1,223	$	6,847

The lease term and discount rate at March 31, 2019 were as follows:

	March 31,
	2019
Weighted-average remaining lease term (years)
Operating leases	8.3
Finance leases	3.7
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Rent expense for our operating leases the three months ended March 31, 2018 as accounted under ASC 840, Leases, was $335.

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

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

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INCOME TAXES

3 Months Ended

Mar. 31, 2019

INCOME TAXES

INCOME TAXES

NOTE 6.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three months ended March 31, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018. The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).

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RELATED PARTY TRANSACTIONS

3 Months Ended

Mar. 31, 2019

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 7.  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 and who resigned from the Company on October 5, 2018. For the three months ended March 31, 2019 and 2018, expenses were incurred in the amounts of $0, and $12 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, formerly an independent director of the Company. Mr. Murray resigned from this position in May 2018. The term of the Consulting Agreement was three months and ended in the second quarter of 2018. The Company is paying severance benefits per his employment and separation agreements of $235 over 12 months, to be paid in full during 2019, which was fully expensed in the fourth quarter of 2018.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2019

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, 2018. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

Principles of Consolidation

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

Revenue Recognition

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.

Stock-Based Awards

Stock-Based Awards

Following is the status of all stock options as of March 31, 2019:

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual
		Price Per		Term	Aggregate
	Shares	Share		(in years)	Intrinsic Value
Outstanding - January 1, 2019	224,750	$	3.44
Granted	137,500		4.53
Exercised	—		—
Cancelled	(23,250)		3.85
Outstanding - March 31, 2019	339,000	$	3.85	9.12	$	298
Exercisable - March 31, 2019	36,166	$	3.46	7.71	$	46

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares.  There were 137,500 stock options granted during the three months ended March 31, 2019.

Total compensation expense related to stock options for the three months ended March 31, 2019 and 2018 was $43 and $20, respectively. As of March 31, 2019, there was $402 of unrecognized compensation which will vest over the next 3.29 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, 2019, there were 100,000 Units granted. Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of $116.

Net Loss per Common Share

Net Loss per Common Share

For both the three months ended March 31, 2019 and 2018, 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, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 3,377 shares in open market transactions totaling $13 for the three months ended March 31, 2019. 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, 2019 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, 2019, 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, 2019 and December 31, 2018 have been reduced by an allowance for doubtful accounts of $246 and $222,respectively.

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:

	March 31,		December31,
	2019		2018
Raw Materials	$	16,197	$	16,769
Work in Process		698		1,015
Finished Goods		252		332
Reserves		(1,163)		(1,112)
Total	$	15,984	$	17,004

Other Intangible Assets

Other Intangible Assets

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

		March 31, 2019
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	542	$	760
Intellectual Property	3		100		69		31
Trade Names	20		814		153		661
Patents	7		17		—		17
Totals		$	2,233	$	764	$	1,469

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

Amortization expense for the three months ended March 31, 2019 and March 31, 2018 was $54 and $55, respectively.

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

Year	Amount
Remainder of 2019	$	165
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,452

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, 2019 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than 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, 2019 or 2018.

Recently Adopted Accounting Standards

Recently Adopted Accounting Standards

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

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

3 Months Ended

Mar. 31, 2019

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of option activity

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual
		Price Per		Term	Aggregate
	Shares	Share		(in years)	Intrinsic Value
Outstanding - January 1, 2019	224,750	$	3.44
Granted	137,500		4.53
Exercised	—		—
Cancelled	(23,250)		3.85
Outstanding - March 31, 2019	339,000	$	3.85	9.12	$	298
Exercisable - March 31, 2019	36,166	$	3.46	7.71	$	46

Schedule of inventories

	March 31,		December31,
	2019		2018
Raw Materials	$	16,197	$	16,769
Work in Process		698		1,015
Finished Goods		252		332
Reserves		(1,163)		(1,112)
Total	$	15,984	$	17,004

Schedule of other intangible assets

		March 31, 2019
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	542	$	760
Intellectual Property	3		100		69		31
Trade Names	20		814		153		661
Patents	7		17		—		17
Totals		$	2,233	$	764	$	1,469

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

Schedule of estimated future annual amortization expense

Year	Amount
Remainder of 2019	$	165
2020		191
2021		185
2022		185
2023		185
Thereafter		541
Total	$	1,452

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REVENUE (Tables)

3 Months Ended

Mar. 31, 2019

REVENUE

Schedule of significant changes in the contract assets

Significant changes in the contract assets balance during the three months ended March 31, 2019 was as follows (in thousands):

Outstanding at January 1, 2019	$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(4,012)
Product transferred over time		6,165
Outstanding at the end of period	$	8,584

Schedule of net sales by market

The following table summarizes our net sales by market for the three months ended March 31, 2019:

	Product/Service		Product
	TransferredOver		Transferredat		Noncash		Total NetSales
	Time		PointinTime		Consideration		by Market
Aerospace and Defense	$	4,103	$	20	$	122	$	4,245
Medical		14,495		35		409	$	14,939
Industrial		8,140		597		244		8,981
Total net sales	$	26,738	$	652	$	775	$	28,165

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

	Product/Service		Product
	Transferred Over		Transferred at		Noncash		Total Net Sales
	Time		Point in Time		Consideration		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

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FINANCING ARRANGEMENTS (Tables)

3 Months Ended

Mar. 31, 2019

FINANCING ARRANGEMENTS

Summary of long-term debt balances

	March 31,		December 31,
	2019		2018
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.8% as of March 31, 2019 and December 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	4,129	$	4,253
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		67		156
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019		87		203
		4,283		4,612
Discount on Devicix Notes Payable		(13)		(23)
Debt issuance Costs		(172)		(185)
Total long-term debt		4,098		4,404
Current maturities of long-term debt		(586)		(780)
Long-term debt - net of current maturities	$	3,513	$	3,624

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LEASES (Tables)

3 Months Ended

Mar. 31, 2019

LEASES

Schedule of lease expense

	Three Months Ended March 31,
Lease Cost	2019
Operating lease cost	$	274
Finance lease interest cost		17
Finance lease amortization expense		65
Total lease cost	$	356

Schedule of supplemental balance sheet information related to leases

	Balance Sheet Location	March 31, 2019
Assets
Operating lease assets	Operating lease assets	$	5,388
Finance lease assets	Property, Plant and Equipment		1,358
Total leased assets			6,745
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		811
Current finance lease liabilities	Current Portion of Finance Lease Obligations		359
Noncurrent
Long-term operating lease liabilities	L-T Operating Lease Liabilities, Net		4,813
Long term finance lease liabilities	L-T Finance Lease Obligations, Net		864
Total lease liabilities		$	6,847

Schedule of supplemental cash flow information related to leases

	ThreeMonths Ended March 31,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	107
Right-of-use assets obtained in exchange for lease obligations	$	—

Schedule of maturities of lease liabilities

	Operating Leases		Finance Leases		Total
Remaining 2019	$	671	$	320	$	991
2020		858		398		1,256
2021		722		398		1,120
2022		726		223		949
2023		738		2		740
Thereafter		3,380		—		3,380
Total lease payments	$	7,095	$	1,341	$	8,436
Less: Interest		(1,471)		(118)		(1,589)
Present value of lease liabilities	$	5,624	$	1,223	$	6,847

Schedule of weighted-average remaining lease term and weighted-average discount rate

	March 31,
	2019
Weighted-average remaining lease term (years)
Operating leases	8.3
Finance leases	3.7
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Schedule of future minimum lease commitments

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

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue Recognition, Share-Based Awards, Share Repurchase Program & Restricted Cash (Details) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended
	Nov. 30, 2010	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018	[1]	May 31, 2017
Retained Earnings		$ 5,073		$ 5,436
Share Repurchase Program
Stock repurchased		13	$ 126
Restricted Cash
Outstanding letters of credit		0
August 2017, Share Repurchase Program
Share Repurchase Program
Share repurchase program authorized amount		$ 250
Stock repurchased (in shares)		3,377
Stock repurchased		$ 13
2005 Plan
Equity Appreciation Rights Plan
Shares granted (in units)		0
Stock Options
Options
Balance at the beginning of the period(in shares)		224,750
Granted (in shares)		137,500
Cancelled (in shares)		(23,250)
Balance at the end of the period (in shares)		339,000
Exercisable at the end of the period (in shares)		36,166
Weighted-Average Exercise Price Per Share
Outstanding at the beginning of the period (in dollars per share)		$ 3.44
Granted (in dollars per share)		4.53
Cancelled (in dollars per share)		3.85
Outstanding at the end of the period (in dollars per share)		3.85
Exercisable at the end of the period (in dollars per share)		$ 3.46
Weighted- Average Remaining Contractual Term (in years)
Outstanding at the end of the period		9 years 1 month 13 days
Exercisable at the end of the period		7 years 8 months 16 days
Aggregate Intrinsic Value
Outstanding at the end of the period		$ 298
Exercisable at the end of the period		46
Additional disclosures
Compensation expense (income)		43	20
Unrecognized compensation related to unvested awards		$ 402
Unrecognized compensation, vesting period		3 years 3 months 15 days
Stock Options | 2017 Plan
Additional disclosures
Number of common shares authorized						350,000
Equity Appreciation Rights Plan | 2010 Plan
Additional disclosures
Compensation expense (income)		$ 0	$ 0
Equity Appreciation Rights Plan
Vesting period from the base date	3 years
Shares granted (in units)		100,000
Equity Appreciation Rights Plan | 2010 Plan | Maximum
Additional disclosures
Number of common shares authorized	1,000,000
Equity Appreciation Rights Plan
Redemption cash payment period	90 days
Restricted Stock
Additional disclosures
Compensation expense (income)		$ 116
Equity Appreciation Rights Plan
Restricted shares awarded (in shares)		25,000

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - A/R, Inventories, and Other Intangibles (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018		Dec. 31, 2017
Accounts Receivable and Allowance for Doubtful Accounts
Accounts Receivable Allowances	$ 246		$ 222		$ 222
Inventories
Raw Materials	16,197		16,769
Work in Process	698		1,015
Finished Goods	252		332
Reserves	(1,163)		(1,112)
Total	15,984		17,004	[1]
Finite-Lived Intangible Assets
Gross Carrying Amount	2,233		2,233
Accumulated Amortization	764		710
Net Book Value	1,469		$ 1,523	[1]
Amortization expense	54	$ 55
Estimated future annual amortization expense
Remainder of 2019	165
2020	191
2021	185
2022	185
2023	185
Thereafter	541
Total	1,452
Impairment Analysis
Impairment charges recognized	$ 0	$ 0
Customer Relationships
Finite-Lived Intangible Assets
Remaining lives	9 years		9 years
Gross Carrying Amount	$ 1,302		$ 1,302
Accumulated Amortization	542		506
Net Book Value	$ 760		$ 796
Intellectual Property
Finite-Lived Intangible Assets
Remaining lives	3 years		3 years
Gross Carrying Amount	$ 100		$ 100
Accumulated Amortization	69		61
Net Book Value	$ 31		$ 39
Trade Names
Finite-Lived Intangible Assets
Remaining lives	20 years		20 years
Gross Carrying Amount	$ 814		$ 814
Accumulated Amortization	153		143
Net Book Value	$ 661		$ 671
Patents
Finite-Lived Intangible Assets
Remaining lives	7 years		7 years
Gross Carrying Amount	$ 17		$ 17
Net Book Value	$ 17		$ 17

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recently Adopted Accounting Standards (Details) - USD ($) $ in Thousands	Jan. 01, 2019	Mar. 31, 2019
Recently Adopted Accounting Standards
Operating lease liabilities		$ 5,624
Operating lease assets		$ 5,388
ASU 2016-02
Recently Adopted Accounting Standards
Lease, Practical Expedients, Package [true/false]	true
Lease, Practical Expedient, Use of Hindsight [true/false]	false
Operating lease liabilities	$ 5,731
Operating lease assets	$ 5,731

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Details) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2019 USD ($) item division	Mar. 31, 2018	Dec. 31, 2018
Major customers and concentration of credit risk
Cash	$ 310
Largest customer
Major customers and concentration of credit risk
Number of divisions | division	2
China
Major customers and concentration of credit risk
Cash	$ 276
Credit concentration risk
Major customers and concentration of credit risk
Excess cash balance, number of high credit quality financial institutions | item	2
Net sales | Customer concentration risk
Major customers and concentration of credit risk
Percentage of export sales to consolidated net sales	19.00%	19.00%
Net sales | Customer concentration risk | Division one of largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	23.00%	19.00%
Net sales | Customer concentration risk | Other division of largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	3.00%	1.00%
Net sales | Customer concentration risk | Divisions one & other
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	26.00%	20.00%
Net sales | Customer concentration risk | Minimum | Largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	10.00%	10.00%
Accounts receivable | Customer concentration risk | Largest customer
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	25.00%		16.00%

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REVENUE - Contract Assets (Details) - USD ($) $ in Thousands		3 Months Ended
		Mar. 31, 2019	Mar. 31, 2018
Increase (decrease) contract assets
Outstanding at the beginning of period	[1]	$ 6,431
Outstanding at the end of period		$ 8,584
Revenue under contract manufacturing agreements (as percentage)		91.00%	91.00%
Remaining performance obligations customers upon shipment with payment terms		120 days
ASU 2014-09
Increase (decrease) contract assets
Outstanding at the beginning of period		$ 6,431
Transferred to receivables from contract assets recognized		(4,012)
Product transferred over time		6,165
Outstanding at the end of period		$ 8,584

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

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REVENUE - Remaining Performance Obligations (Details) - Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-01-01	3 Months Ended
	Mar. 31, 2019
Remaining performance obligations
Remaining performance obligations for the contract assets term	90 days
Remaining performance obligations for the Remaining Amounts Transferred term	180 days

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REVENUE - Net sales by market (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Total Net Sales by Market	$ 28,165	$ 26,447
Noncash Consideration
Total Net Sales by Market	775	1,025
Product/Service Transferred Over Time
Total Net Sales by Market	26,738	24,049
Product Transferred at Point in Time
Total Net Sales by Market	652	1,373
Aerospace and Defense
Total Net Sales by Market	4,245	4,866
Aerospace and Defense | Noncash Consideration
Total Net Sales by Market	122	195
Aerospace and Defense | Product/Service Transferred Over Time
Total Net Sales by Market	4,103	4,623
Aerospace and Defense | Product Transferred at Point in Time
Total Net Sales by Market	20	48
Medical
Total Net Sales by Market	14,939	10,321
Medical | Noncash Consideration
Total Net Sales by Market	409	405
Medical | Product/Service Transferred Over Time
Total Net Sales by Market	14,495	9,434
Medical | Product Transferred at Point in Time
Total Net Sales by Market	35	482
Industrial
Total Net Sales by Market	8,981	11,260
Industrial | Noncash Consideration
Total Net Sales by Market	244	425
Industrial | Product/Service Transferred Over Time
Total Net Sales by Market	8,140	9,992
Industrial | Product Transferred at Point in Time
Total Net Sales by Market	$ 597	$ 843

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FINANCING ARRANGEMENTS (Details) $ in Thousands		3 Months Ended		12 Months Ended
	Jul. 01, 2015 USD ($) item	Mar. 31, 2019 USD ($)	Mar. 31, 2018	Dec. 31, 2018 USD ($)		Jun. 15, 2017 USD ($)
FINANCING ARRANGEMENTS
Total long-term debt		$ 4,283		$ 4,612
Discount on Devicix Notes Payable		(13)		(23)
Debt Issuance Costs		(172)		(185)
Total long-term debt		4,098		4,404
Current maturities of long-term debt		(586)		(780)	[1]
Long-term debt - net of current maturities		$ 3,513		3,624	[1]
Devicix, LLC
FINANCING ARRANGEMENTS
Number of promissory notes | item	2
Line of credit
FINANCING ARRANGEMENTS
Weighted-average interest rate (as a percent)		5.60%	3.00%
Outstanding balance		$ 11,294		9,264
Unused availability supported by entity's borrowing base		$ 4,706
Devicix Acq Note 1, subordinate debt, due July 1, 2019
FINANCING ARRANGEMENTS
Interest rate (as a percent)		4.00%
Total long-term debt		$ 67		156
Devicix Acq Note 2, subordinate debt, due July 1, 2019
FINANCING ARRANGEMENTS
Interest rate (as a percent)		4.00%
Total long-term debt		$ 87		$ 203
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		one-month LIBOR
Interest rate margin on variable rate basis (as a percent)		2.25%		2.25%
Interest rate (as a percent)		4.80%		4.80%
Total long-term debt		$ 4,129		$ 4,253
Principal and interest payments		$ 41
Bank of America | Credit Agreement
FINANCING ARRANGEMENTS
Minimum fixed charge coverage ratio		1.00

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

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LEASES - Lease Terms (Details)	3 Months Ended
	Mar. 31, 2019
LEASES
Lessee, Operating Lease, Existence of Option to Extend [true/false]	true
Lessee, Operating Lease, Existence of Residual Value Guarantee [true/false]	false
Minimum
LEASES
Operating leases, renewal lease term (in years)	1 year
Maximum
LEASES
Operating leases, renewal lease term (in years)	5 years

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LEASES - Lease expense (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
LEASES
Operating lease cost	$ 274
Finance lease interest cost	17
Finance lease amortization expense	65
Total lease cost	$ 356

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LEASES - Balance sheet information related to leases (Details) $ in Thousands	Mar. 31, 2019 USD ($)
LEASES
Operating lease assets	$ 5,388
Operating Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]	Operating lease assets
Finance lease assets	$ 1,358
Finance Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]	Property, Plant and Equipment, Net
Total leased assets	$ 6,745
Current operating lease liabilities	$ 811
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Current operating lease liabilities
Current finance lease liabilities	$ 359
Finance Lease, Liability, Current, Statement of Financial Position [Extensible List]	Current finance lease liabilities
Long-term operating lease liabilities	$ 4,813
Operating Lease, Liability, Noncurrent, Statement of Financial Position [Extensible List]	Long-term operating lease liabilities
Long term finance lease liabilities	$ 864
Finance Lease, Liability, Noncurrent, Statement of Financial Position [Extensible List]	Long term finance lease liabilities
Total lease liabilities	$ 6,847

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LEASES - Supplemental cash flow information (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
LEASES
Cash paid for amounts included in the measurement of lease liabilities	$ 107

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LEASES - Maturities of lease liabilities (Details) $ in Thousands	Mar. 31, 2019 USD ($)
Operating Leases
Remaining 2019	$ 671
2020	858
2021	722
2022	726
2023	738
Thereafter	3,380
Total lease payments	7,095
Less: Interest	(1,471)
Present value of lease liabilities	5,624
Finance Leases
Remaining 2019	320
2020	398
2021	398
2022	223
2023	2
Total lease payments	1,341
Less: Interest	(118)
Present value of lease liabilities	1,223
Operating and Financing Leases
Remaining 2019	991
2020	1,256
2021	1,120
2022	949
2023	740
Thereafter	3,380
Total lease payments	8,436
Less: Interest	(1,589)
Present value of lease liabilities	$ 6,847

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LEASES - Weighted-average remaining lease term and weighted-average discount rate (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Weighted Average Remaining Lease Term (Years)
Operating leases	8 years 3 months 18 days
Finance leases	3 years 8 months 12 days
Weighted Average Discount Rate
Operating leases	4.80%
Finance leases	5.40%
Rent expense	$ 335

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LEASES - Future minimum lease commitments (Details) $ in Thousands	Dec. 31, 2018 USD ($)
LEASES
2019	$ 1,024
2020	858
2021	722
2022	726
2023	738
Thereafter	3,380
Total minimum obligations	$ 7,448

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INCOME TAXES (Details)	3 Months Ended		12 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018
Effective income tax rate (as a percent)	(4.00%)	(34.00%)		64.00%
Forecast
Effective income tax rate (as a percent)			19.00%

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RELATED PARTY TRANSACTIONS (Details) - Consulting arrangement - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
	Feb. 22, 2018	Mar. 31, 2019	Mar. 31, 2018	Jun. 30, 2018
Matt Mahmood
RELATED PARTY TRANSACTIONS
Expenses incurred		$ 0	$ 12
William Murray
RELATED PARTY TRANSACTIONS
Term of consulting agreement				3 months
Severance benefits	$ 235
Term of benefit	12 months