10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from            to          

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

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

Telephone number: (952) 345-2244

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

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

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

Large Accelerated Filer ☐	Accelerated Filer ☐
Non-accelerated Filer ☒	Smaller Reporting Company ☒
Emerging growth company ☐

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

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

Number of shares of $.01 par value common stock outstanding at May 11, 2020 was 2,657,530.

1

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
			PAGE
	Item 1	-     Financial Statements
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5
		Condensed Consolidated Statements of Shareholders’ Equity	6
		Condensed Notes to Consolidated Financial Statements	7-16
	Item 2	-     Management's Discussion and Analysis of Financial Condition And Results of Operations	17-22
	Item 3	-     Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4	-     Controls and Procedures	23
PART II - OTHER INFORMATION
	Item 1	-     Legal Proceedings	24
	Item 1A.	-     Risk Factors	24
	Item 2	-     Unregistered Sales of Equity Securities, Use of Proceeds	24
	Item 3	-     Defaults on Senior Securities	24
	Item 4	-     Mine Safety Disclosures	24
	Item 5	-     Other Information	24
	Item 6	-     Exhibits	25
SIGNATURES			26

2

PART

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	THREE MONTHS ENDED
	MARCH 31,
	2020			2019
Net Sales	$	27,440		$	28,165
Cost of Goods Sold		24,435			25,204
Gross Profit		3,005			2,961
Operating Expenses
Selling Expenses		621			761
General and Administrative Expenses		1,993			2,304
Total Operating Expenses		2,614			3,065
Income (Loss) From Operations		391			(104	)
Other Expense
Interest Expense		(224	)		(245	)
Income (Loss) Before Income Taxes		167			(349	)
Income Tax Expense		30			14
Net Income (Loss)	$	137		$	(363	)
Net Income (Loss) Per Common Share:
Basic (in dollars per share)	$	0.05		$	(0.14	)
Weighted Average Number of Common Shares Outstanding - Basic (in shares)		2,657,530			2,659,859
Diluted (in dollars per share)	$	0.05		$	(0.14	)
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)		2,668,590			2,659,859
Other comprehensive income (loss)
Foreign currency translation		(61	)		56
Comprehensive income (loss), net of tax	$	76		$	(307	)

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,
	2020			2019(1)
ASSETS	(Unaudited)
Current Assets
Cash	$	730		$	351
Restricted Cash		244			309
Accounts Receivable, less allowances of $325 and $335		20,226			18,558
Inventories		15,363			14,279
Contract Assets		6,774			7,659
Prepaid Expenses and Other Current Assets		2,119			2,128
Total Current Assets		45,456			43,284
Property and Equipment, Net		9,338			9,581
Operating Lease Assets		4,637			4,827
Goodwill		2,375			2,375
Other Intangible Assets, Net		1,297			1,343
Total Assets	$	63,103		$	61,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	444		$	444
Current Portion of Finance Lease Obligation		611			557
Current Portion of Operating Lease Obligations		825			858
Accounts Payable		16,369			14,014
Accrued Payroll and Commissions		2,800			3,493
Other Accrued Liabilities		2,738			2,866
Total Current Liabilities		23,787			22,232
Long-Term Liabilities
Long Term Line of Credit		10,255			10,088
Long-Term Debt, Net		3,069			3,179
Long Term Finance Lease Obligation, Net		1,537			1,451
Long-Term Operating Lease Obligation, Net		4,252			4,366
Other Long-Term Liabilities		112			118
Total Long-Term Liabilities		19,225			19,202
Total Liabilities		43,012			41,434
Commitments and Contingencies
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding		250			250
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		15,787			15,748
Accumulated Other Comprehensive Loss		(318	)		(257	)
Retained Earnings		4,345			4,208
Total Shareholders' Equity		20,091			19,976
Total Liabilities and Shareholders' Equity	$	63,103		$	61,410

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

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

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	THREE MONTHS ENDED
	MARCH 31,
	2020			2019
Cash Flows From Operating Activities
Net Income (Loss)	$	137		$	(363	)
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by (Used In) Operating Activities
Depreciation and Amortization		567			570
Compensation on Stock-Based Awards		39			160
Change in Accounts Receivable Allowance		(10	)		24
Change in Inventory Reserves		93			51
Changes in Current Operating Items
Accounts Receivable		(1,644	)		(3,001	)
Inventories		(1,165	)		985
Contract Assets		885			(2,154	)
Prepaid Expenses and Other Current Assets		11			(749	)
Income Taxes		(88	)		(70	)
Accounts Payable		2,336			3,209
Accrued Payroll and Commissions		(691	)		(611	)
Other Accrued Liabilities		(4	)		511
Net Cash Provided by (Used in) Operating Activities		466			(1,438	)
Cash Flows from Investing Activities
Purchase of Intangible Asset		(6	)		-
Purchases of Property and Equipment		(65	)		(396	)
Net Cash Used in Investing Activities		(71	)		(396	)
Cash Flows from Financing Activities
Net Change in Line of Credit		167			2,030
Principal Payments on Long-Term Debt		(124	)		(328	)
Principal Payments on Financing Leases		(123	)		(65	)
Share Repurchases		-			(13	)
Net Cash (Used In) Provided By Financing Activities		(80	)		1,624
Effect of Exchange Rate Changes on Cash		(1	)		-
Net Change in Cash		314			(210	)
Cash - Beginning of Period		660			947
Cash - Ending of Period	$	974		$	737
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	730		$	310
Restricted Cash		244			427
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	974		$	737
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	222		$	224
Cash Paid (Refunded) During the Period for Income Taxes		40			-
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		23			78
Equipment Acquired under Finance Lease		262			-

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						Total
					Additional			Other			Retained			Shareholders'
	Preferred		Common		Paid-In			Comprehensive			Income			Equity
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
BALANCE DECEMBER 31, 2019		250		27		15,748			(257	)		4,208			19,976
Net Income		-		-		-			-			137			137
Foreign currency translation adjustment		-		-		-			(61	)		-			(61	)
Compensation on stock-based awards		-		-		39			-			-			39
BALANCE MARCH 31, 2020	$	250	$	27	$	15,787		$	(318	)	$	4,345		$	20,091

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

6

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

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

Revenue Recognition

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

7

Stock-Based Awards

Following is the status of all stock options as of March 31, 2020:

	Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised
Cancelled		(3,200	)		3.29
Outstanding - March 31, 2020		380,300		$	3.83		8.37	$	24,285
Exercisable - March 31, 2020		107,557		$	4.06		7.44	$	8,095

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares, an additional 50,000 shares were authorized in March 2020. There were 11,300 stock options granted during the three months ended March 31, 2020.

Total compensation expense was $39 and $44 for the three ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was $341 of unrecognized compensation which will vest over the next 2.78 years.

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. During the three months ended March 31, 2019, there were 137,500 units granted. There were no units granted during the three months ended March 31, 2020.

During the three months ended March 31, 2019, there were 132,500 shares awarded that vested immediately that had expense of $116 during the first quarter.

Net Income (Loss) per Common Share

For the three months ended March 31, 2020 there were 2,668,590 diluted shares with $0.05 earnings per diluted share. For the three months ended March 31, 2019, all stock options are deemed to be antidilutive as there was a net loss and, therefore, were not included in the computation of income per common share amount.

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The March 31, 2020 balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of March 31, 2020, we had no outstanding letters of credit.

8

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable have been reduced by an allowance for doubtful accounts of $325 at March 31, 2020 and $335 at December 31, 2019.

Inventories

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

Inventories are as follows:

	March 31,			December 31,
	2020			2019
Raw Materials	$	15,798		$	15,245
Work in Process		588			479
Finished Goods		556			41
Reserves		(1,579	)		(1,486	)
Total	$	15,363		$	14,279

9

Other Intangible Assets

Other intangible assets at March 31, 2020 and December 31, 2019 are as follows:

			March 31, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	687	$	615
Intellectual Property		3		100		100		-
Trade Names		20		814		193		621
Patents		7		61		-		61
Totals			$	2,277	$	980	$	1,297

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

Amortization expense for the three months ended March 31, 2020 and 2019 was $51 and $54, respectively.

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

Year	Amount
Remainder of 2020		139
2021		185
2022		185
2023		185
Thereafter		542
Total	$	1,236

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1^st. No events were identified during the three months ended March 31, 2020 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

10

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No impairment expense was recorded during the three ended March 31, 2020 and 2019, respectively.

Accounting Pronouncements Issued But Not Yet Adopted

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

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $974 in cash at March 31, 2020, approximately $703 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 month period ended and March 31, 2020 and 2019. One division accounted for approximately 24% and 23% of net sales for the three March 31, 2020 and 2019, respectively. The other division accounted for approximately 2% of net sales for the three month period ended March 31, 2020 and , and approximately 3% net sales for the three month period ended March 31, 2019. Together they accounted for approximately 26% and 26% of net sales for the three March 31, 2020 and 2019, respectively. Accounts receivable from the customer at March 31, 2020 and December 31, 2019 represented approximately 42% and 36% of our total accounts receivable, respectively.

Export sales represented approximately 12% and 19% of net sales for the three months ended March 31, 2020 and 2019, respectively.

11

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 88 % and 95% of our revenue for both the three months ended March 31, 2020 and 2019, respectively. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

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

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

12

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance 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, 2020 was as follows (in thousands):

Three Months Ended March 31, 2020
Outstanding at January 1, 2020	$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(5,712	)
Product transferred over time		4,827
Outstanding at March 31, 2020	$	6,774

We expect substantially all the remaining performance obligations for the contract assets recorded as of March 31, 2020, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the three ended March 31, 2020 (in thousands):

	Three Months Ended March 31, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,703	$	1,061	$	697	$	15,461
Industrial		6,016		970		323		7,309
Aerospace and Defense		4,317		134		219		4,670
Total net sales	$	24,036	$	2,165	$	1,239	$	27,440

	Three Months Ended March 31, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,495	$	35	$	409	$	14,939
Industrial		8,140		597		244		8,981
Aerospace and Defense		4,103		20		122		4,245
Total net sales	$	26,738	$	652	$	775	$	28,165

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 4.8% and 5.6% as of March 31, 2020 and 2019, respectively. We had borrowings on our line of credit of $10,255 and $10,088 outstanding as of March 31, 2020 and December 31, 2019, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

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

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

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2020, we had unused availability under our line of credit of $4,115, supported by our borrowing base. The line is secured by substantially all of our assets.

Long-term debt at March 31, 2020 and December 30, 2019 consisted of following:

	March 31,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.3% and 4.1% as of March 31, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,631		$	3,755
		3,631			3,755
Debt issuance Costs		(118	)		(132	)
Total long-term debt		3,513			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	3,069		$	3,179

14

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

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	March 31, 2020
Assets
Operating lease assets	Operating lease assets	$	4,637
Finance lease assets	Property, Plant and Equipment		2,709
Total leased assets			7,346
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		825
Current finance lease liabilities	Current Portion of Finance Lease Obligations		611
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,252
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,537
Total lease liabilities		$	7,225

Supplemental cash flow information related to leases was as follows:

	Three Months Ended March 31,
	2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	210
Right-of-use assets obtained in exchange for lease obligations	$	0

15

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2020	$	645		$	531		$	1,176
2021		722			708			1,430
2022		726			557			1,283
2023		738			302			1,040
2024		798			250			1,048
Thereafter		2,582			16			2,598
Total lease payments	$	6,211		$	2,364		$	8,575
Less: Interest		(1,134	)		(216	)		(1,350	)
Present value of lease liabilities	$	5,077		$	2,148		$	7,225

The lease term and discount rate at March 31, 2020 were as follows:

Weighted-average remaining lease term (years)
Operating leases	7.7
Finance leases	3.7
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.2	%

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 ended March 31, 2020 and 2019 was 18% and (4%), respectively.

NOTE 7. RELATED PARTY TRANSACTIONS

During three months ended March 31, 2020, we did business with Printed Circuits, Inc. which is 90% owned by the Kunin family, of which, owns a majority of our stock. We had expenses incurred totaling $14 and $51 during the three months ended March 31, 2020 and 2019, respectively to Printed Circuits, Inc.

NOTE 8. SUBSEQUENT EVENTS

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

16

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

Overview

We are a Maple Grove, Minnesota based leading provider of design and manufacturing solutions for complex electromechanical systems, assemblies and components. We primarily serve the medical aerospace and defense, and industrial markets. Our design services span concept development to commercial design, and include software, electrical, mechanical, and biomedical engineering. Our manufacturing and supply chain capabilities are vertically integrated around wire, cable and interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration and final test. We maintain facilities in Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

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,
	2020			2019
Net Sales		100.0	%		100.0	%
Cost of Goods Sold		89.0			89.5
Gross Profit		11.0			10.5
Selling Expenses		2.3			2.7
General and Administrative Expenses		7.3			8.1
Income (Loss) from Operations		1.4			(0.3	)
Interest Expense		(0.8	)		(0.9	)
Income (Loss) Before Income Taxes		0.6			(1.2	)
Income Tax Expense		0.1			0.1
Net Income (Loss)		0.5	%		(1.3	%)

17

Net Sales

Net sales were $27.4 million in the first quarter of 2020, as compared to $28.2 million in the first quarter of the prior year, a decrease of $0.8 million or 2.6%. Net sales results were varied by markets, the medical market increased by $0.5 million or 3.5% with medical devices accounting for the increase. The industrial market sector was down $1.7 million or 18.6% in the first quarter of 2020 as compared to the same quarter of 2019. Net sales from the aerospace and defense markets increased by $0.4 million or 10.0% in the first quarter of 2020 as compared to the first quarter of 2019.

Net sales by our major industry markets for the three months ended March 31, 2020 and 2019 were as follows (in thousands):

	Three months Ended March 31,
	2020		2019		%
	$		$		Change
Medical		15,461		14,939		3.5
Industrial		7,309		8,981		(18.6	)
Aerospace and Defense		4,670		4,245		10.0
Total Net Sales		27,440		28,165		(2.6	)

Net sales by timing of transfer of goods and services for the three ended March 31, 2020 is as follows (in thousands):

	Three Months Ended March 31, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,703	$	1,061	$	697	$	15,461
Industrial		6,016		970		323		7,309
Aerospace and Defense		4,317		134		219		4,670
Total net sales	$	24,036	$	2,165	$	1,239	$	27,440

18

Net sales by timing of transfer of goods and services for the three ended March 31, 2019 is as follows (in thousands):

	Three Months Ended March 31, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,495	$	35	$	409	$	14,939
Industrial		8,140		597		244		8,981
Aerospace and Defense		4,103		20		122		4,245
Total net sales	$	26,738	$	652	$	775	$	28,165

Backlog

Our 90-day shipment backlog as of March 31, 2020 was $27.5 million, a 0.8% increase from the beginning of the quarter and a 12.5% decrease from the prior year. Backlog for our medical customers has decreased 1.6% from the beginning of the quarter and decreased 17.0% from the prior year. Our industrial customers’ backlog increased 11.1% from the beginning of the quarter and decreased 21.9% from the prior year. The aerospace and defense backlog decreased 2.6% from the beginning of the quarter and increased 13.0% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

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

	Shipment Backlog as of the Period Ended
	March 31,		December 31,		March 31,
	2020		2019		2019
Medical	$	14,330	$	14,564	$	17,256
Industrial		6,352		5,716		8,130
Aerospace and Defense		6,812		6,994		6,027
Total 90-Day Backlog	$	27,494	$	27,274	$	31,413

Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $53.0 million for both periods ended March 31, 2020 and March 31, 2019.

Gross Profit

Gross profit as a percent of net sales 11.0% and 10.5% for the three months ended March 31, 2020 and 2019, respectively. This increase in gross profit as a percent of net sales is mainly due to product and customer mix.

19

Selling Expense

Selling expenses for the three months ended March 31, 2020 and 2019 was $0.6 million or 2.3% of sales and $0.8 million or 2.7% of sales, respectively. The decrease in selling expenses for 2020 is due to lower headcount and consulting costs.

General and Administrative Expense

General and administrative expenses for the three months ended March 31, 2020 and 2019, were $2.0 million or 7.3% of sales and $2.3 million or 8.1% of sales, respectively. This decrease is due to lower headcount and consulting costs.

Income (Loss) before Income Taxes

First quarter 2020 income from operations was $0.2 million compared to a loss of $0.3 million for the first quarter in 2019.

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, 2020 and 2019 was 18% and (4%), respectively.

Net Income (Loss)

Net income for the three months ended March 31, 2020 was $0.1 million or $0.05 per basic and diluted common share and a net loss for the three months ended March 31, 2019 of $0.4 million or $(0.14) per basic and diluted common share.

Liquidity and Capital Resources

Net cash provided by operating activities for the three months ended March 31, 2020 was $0.5 million. The increase in accounts payable positively impacted cash flows, partially offset by an increase in accounts receivable. Net cash used in investing of $0.1 million for the three months ended March 31, 2020.

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.

20

On March 31, 2020, we had outstanding advances of $10.3 million under the line of credit and unused availability of $4.1 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $21.7 million and $21.1 million as of March 31, 2020 and December 31, 2019, respectively.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter. The Company met the covenants for the three months ended March 31.2020.

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

21

Forward-Looking Statements

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

♦	Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;
♦	Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;
♦	Changes in the reliability and efficiency of our operating facilities or those of third parties;
♦	Risks related to availability of labor;
♦	Increases in certain raw material costs such as copper and oil;
♦	Commodity and energy cost instability;
♦	Risks related to FDA noncompliance;
♦	The loss of a major customer;
♦	General economic, financial and business conditions that could affect our financial condition and results of operations;
♦	Increased or unanticipated costs related to compliance with securities and environmental regulation;
♦	Disruption of global or local information management systems due to natural disaster or cyber-security incident;
♦	Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

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

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

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable. 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

23

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.

Paycheck Protection Program Promisorry Note

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

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

As of March 31, 2020, our share repurchase program has expired, and no additional amounts are available for repurchase.

ITEM 3. DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

24

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.

101* Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

*Filed herewith

25

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 13, 2020	by /s/ Jay D. Miller
	Jay D. Miller Chief Executive Officer and President Nortech Systems Incorporated
Date: May 13, 2020	by /s/ Constance M. Beck
	Constance M. Beck Vice President and Chief Financial Officer Nortech Systems Incorporated

26

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

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

I, 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 13, 2020	By:	/s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

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

I, Constance M. Beck, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: May 13, 2020	By:	/s/ Constance M. Beck
		Constance M. Beck
		Vice President and Chief Financial Officer
		Nortech Systems Incorporated

EX-32

Exhibit 32

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Jay D. Miller, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 13, 2020

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

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Constance M. Beck, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 13, 2020

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

XML

Note 1 - Summary of Significant Accounting Policies - Other Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Gross carrying amount	$ 2,277	$ 2,272
Accumulated amortization	980	929
Other Intangible Assets, Net	$ 1,297	$ 1,343	[1]
Customer Relationships [Member]
Remaining lives (Year)	9 years	9 years
Gross carrying amount	$ 1,302	$ 1,302
Accumulated amortization	687	651
Other Intangible Assets, Net	$ 615	$ 651
Intellectual Property [Member]
Remaining lives (Year)	3 years	3 years
Gross carrying amount	$ 100	$ 100
Accumulated amortization	100	95
Other Intangible Assets, Net		$ 5
Trade Names [Member]
Remaining lives (Year)	20 years	20 years
Gross carrying amount	$ 814	$ 814
Accumulated amortization	193	183
Other Intangible Assets, Net	$ 621	$ 631
Patents [Member]
Remaining lives (Year)	7 years	7 years
Gross carrying amount	$ 61	$ 56
Accumulated amortization
Other Intangible Assets, Net	$ 61	$ 56

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

XML

Note 3 - Revenue 2 (Details Textual)	Mar. 31, 2020
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-04-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period (Day)	180 days

XML

Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($) $ in Thousands	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member]	Total
BALANCE at Dec. 31, 2018	$ 250	$ 27	$ 15,610	$ (233)	$ 5,436	$ 21,090
Net Income (Loss)					(363)	(363)
Foreign currency translation adjustment				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
BALANCE at Dec. 31, 2019	250	27	15,748	(257)	4,208	19,976	[1]
Net Income (Loss)					137	137
Foreign currency translation adjustment				(61)		(61)
Compensation on stock-based awards			39			39
BALANCE at Mar. 31, 2020	$ 250	$ 27	$ 15,787	$ (318)	$ 4,345	$ 20,091

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

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net sales	$ 27,440	$ 28,165
Cost of Goods Sold	24,435	25,204
Gross Profit	3,005	2,961
Operating Expenses
Selling Expenses	621	761
General and Administrative Expenses	1,993	2,304
Total Operating Expenses	2,614	3,065
Income (Loss) From Operations	391	(104)
Other Expense
Interest Expense	(224)	(245)
Income (Loss) Before Income Taxes	167	(349)
Income Tax Expense	30	14
Net Income (Loss)	$ 137	$ (363)
Net Income (Loss) Per Common Share:
Basic (in dollars per share) (in dollars per share)	$ 0.05	$ (0.14)
Weighted Average Number of Common Shares Outstanding - Basic (in shares) (in shares)	2,657,530	2,659,859
Diluted (in dollars per share) (in dollars per share)	$ 0.05	$ (0.14)
Weighted Average Number of Common Shares Outstanding - Diluted (in shares) (in shares)	2,668,590	2,659,859
Other comprehensive income (loss)
Foreign currency translation	$ (61)	$ 56
Comprehensive income (loss), net of tax	$ 76	$ (307)

XML

Note 5 - Leases - Maturity of Lease Liabilities (Details) $ in Thousands	Mar. 31, 2020 USD ($)
Operating leases, Remaining 2020	$ 645
Finance leases, Remaining 2020	531
Remaining 2020	1,176
Operating leases, 2021	722
Finance leases, 2021	708
Total, 2021	1,430
Operating leases, 2022	726
Finance leases, 2022	557
Total, 2022	1,283
Operating leases, 2023	738
Finance leases, 2023	302
Total, 2023	1,040
Operating leases, 2024	798
Finance leases, 2024	250
Total, 2024	1,048
Operating leases, thereafter	2,582
Finance leases, thereafter	16
Total, thereafter	2,598
Operating leases, total lease payments	6,211
Finance leases, total lease payments	2,364
Total, total lease payments	8,575
Operating leases, less: Interest	(1,134)
Finance leases, less: Interest	(216)
Total, less: Interest	(1,350)
Operating leases, present value of lease liabilities	5,077
Finance leases, present value of lease liabilities	2,148
Total, present value of lease liabilities	$ 7,225

XML

Note 4 - Financing Arrangements - Long-term Debt (Details) (Parentheticals) - Real Estate Term Note [Member] - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Interest rate	3.30%	4.10%
Monthly payments	$ 41	$ 41
London Interbank Offered Rate (LIBOR) [Member]
Variable rate basis	2.25%	2.25%

XML

Note 5 - Leases

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Lease Disclosure [Text Block]

NOTE

5.

LEASES

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

one

to

five

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

not

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

March 31, 2020,

we do

not

have material lease commitments that have

not

commenced.

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	March 31, 2020
Assets
Operating lease assets	Operating lease assets	$	4,637
Finance lease assets	Property, Plant and Equipment		2,709
Total leased assets			7,346
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		825
Current finance lease liabilities	Current Portion of Finance Lease Obligations		611
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,252
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,537
Total lease liabilities		$	7,225

Supplemental cash flow information related to leases was as follows:

	T hree Months Ended March 3 1 ,
	2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	210
Right-of-use assets obtained in exchange for lease obligations	$	0

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2020	$	645		$	531		$	1,176
2021		722			708			1,430
2022		726			557			1,283
2023		738			302			1,040
2024		798			250			1,048
Thereafter		2,582			16			2,598
Total lease payments	$	6,211		$	2,364		$	8,575
Less: Interest		(1,134	)		(216	)		(1,350	)
Present value of lease liabilities	$	5,077		$	2,148		$	7,225

The lease term and discount rate at

March 31, 2020

were as follows:

Weighted-average remaining lease term (years)
Operating leases	7.7
Finance leases	3.7
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.2	%

XML

Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

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

not

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

not

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

10

-K for the year ended

December 31, 2019.

The operating results for the interim periods presented are

not

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

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

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

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

Revenue [Policy Text Block]

Revenue Recognition

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

10%

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

Share-based Payment Arrangement [Policy Text Block]

Stock-Based Awards

Following is the status of all stock options as of

March 31, 2020:

	Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised
Cancelled		(3,200	)		3.29
Outstanding - March 31, 2020		380,300		$	3.83		8.37	$	24,285
Exercisable - March 31, 2020		107,557		$	4.06		7.44	$	8,095

In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

400,000

shares, an additional

50,000

shares were authorized in

March 2020.

There were

11,300

stock options granted during the

three

months ended

March 31, 2020.

Total compensation expense was

$39

and

$44

for the

three

ended

March 31, 2020

and

2019,

respectively. As of

March 31, 2020,

there was

$341

of unrecognized compensation which will vest over the next

2.78

years.

In

November 2010,

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

“2010

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

2010

Plan shall

not

exceed an aggregate of

1,000,000

Units as amended and restated on

March 11, 2015.

During the

three

months ended

March 31, 2019,

there were

137,500

units granted. There were

no

units granted during the

three

months ended

March 31, 2020.

During the

three

months ended

March 31, 2019,

there were

132,500

shares awarded that vested immediately that had expense of

$116

during the

first

quarter.

Earnings Per Share, Policy [Policy Text Block]

Net Income (Loss) per Common Share

For the

three

months ended

March 31, 2020

there were

2,668,590

diluted shares with

$0.05

earnings per diluted share. For the

three

months ended

March 31, 2019,

all stock options are deemed to be antidilutive as there was a net loss and, therefore, were

not

included in the computation of income per common share amount.

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

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The

March 31, 2020

balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of

March 31, 2020,

we had

no

outstanding letters of credit.

Accounts Receivable [Policy Text Block]

Accounts Receivable and Allowance for Doubtful Accounts

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

not

required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable have been reduced by an allowance for doubtful accounts of

$325

at

March 31, 2020

and

$335

at

December 31, 2019.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost (

first

-in,

first

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

may

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

Inventories are as follows:

	March 31,			December 31,
	2020			2019
Raw Materials	$	15,798		$	15,245
Work in Process		588			479
Finished Goods		556			41
Reserves		(1,579	)		(1,486	)
Total	$	15,363		$	14,279

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

Other Intangible Assets

Other intangible assets at

March 31, 2020

and

December 31, 2019

are as follows:

			March 31, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	687	$	615
Intellectual Property		3		100		100		-
Trade Names		20		814		193		621
Patents		7		61		-		61
Totals			$	2,277	$	980	$	1,297

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

Amortization expense for the

three

months ended

March 31, 2020

and

2019

was

$51

and

$54,

respectively.

Estimated future annual amortization expense (

not

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

Year	Amount
Remainder of 2020		139
2021		185
2022		185
2023		185
Thereafter		542
Total	$	1,236

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

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC

350,

Goodwill and Other Intangible Assets

, goodwill is

not

amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value

may

exceed fair value. We test impairment annually as of

October 1

st

.

No

events were identified during the

three

months ended

March 31, 2020

that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

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

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group

may

not

be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are

not

sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

No

impairment expense was recorded during the

three

ended

March 31, 2020

and

2019,

respectively.

New Accounting Pronouncements, Policy [Policy Text Block]

Accounting Pronouncements Issued But

Not

Yet Adopted

In

June 2016,

the FASB issued ASU

No.

 

2016

-

13,

“Financial Instruments - Credit Losses (ASC

326

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

December 15, 2022;

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

XML

Note 5 - Leases (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

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

	Balance Sheet Location	March 31, 2020
Assets
Operating lease assets	Operating lease assets	$	4,637
Finance lease assets	Property, Plant and Equipment		2,709
Total leased assets			7,346
Liabilities
Current
Current operating lease liabilities	Current Portion of Operating Lease Obligations		825
Current finance lease liabilities	Current Portion of Finance Lease Obligations		611
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4,252
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		1,537
Total lease liabilities		$	7,225

Lease, Cost [Table Text Block]

	T hree Months Ended March 3 1 ,
	2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	210
Right-of-use assets obtained in exchange for lease obligations	$	0

Weighted-average remaining lease term (years)
Operating leases	7.7
Finance leases	3.7
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.2	%

Schedule of Lease Liability Maturity [Table Text Block]

	Operating Leases			Finance Leases			Total
Remaining 2020	$	645		$	531		$	1,176
2021		722			708			1,430
2022		726			557			1,283
2023		738			302			1,040
2024		798			250			1,048
Thereafter		2,582			16			2,598
Total lease payments	$	6,211		$	2,364		$	8,575
Less: Interest		(1,134	)		(216	)		(1,350	)
Present value of lease liabilities	$	5,077		$	2,148		$	7,225

XML

Note 1 - Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

NOTE

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

not

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

not

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

10

-K for the year ended

December 31, 2019.

The operating results for the interim periods presented are

not

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

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

Principles of Consolidation

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

Revenue Recognition

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

10%

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

Stock-Based Awards

Following is the status of all stock options as of

March 31, 2020:

	Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised
Cancelled		(3,200	)		3.29
Outstanding - March 31, 2020		380,300		$	3.83		8.37	$	24,285
Exercisable - March 31, 2020		107,557		$	4.06		7.44	$	8,095

In

May 2017,

the shareholders approved the

2017

Stock Incentive Plan which authorized the issuance of

400,000

shares, an additional

50,000

shares were authorized in

March 2020.

There were

11,300

stock options granted during the

three

months ended

March 31, 2020.

Total compensation expense was

$39

and

$44

for the

three

ended

March 31, 2020

and

2019,

respectively. As of

March 31, 2020,

there was

$341

of unrecognized compensation which will vest over the next

2.78

years.

In

November 2010,

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

“2010

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

2010

Plan shall

not

exceed an aggregate of

1,000,000

Units as amended and restated on

March 11, 2015.

During the

three

months ended

March 31, 2019,

there were

137,500

units granted. There were

no

units granted during the

three

months ended

March 31, 2020.

During the

three

months ended

March 31, 2019,

there were

132,500

shares awarded that vested immediately that had expense of

$116

during the

first

quarter.

Net Income (Loss) per Common Share

For the

three

months ended

March 31, 2020

there were

2,668,590

diluted shares with

$0.05

earnings per diluted share. For the

three

months ended

March 31, 2019,

all stock options are deemed to be antidilutive as there was a net loss and, therefore, were

not

included in the computation of income per common share amount.

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The

March 31, 2020

balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of

March 31, 2020,

we had

no

outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts

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

not

required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable have been reduced by an allowance for doubtful accounts of

$325

at

March 31, 2020

and

$335

at

December 31, 2019.

Inventories

Inventories are stated at the lower of cost (

first

-in,

first

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

may

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

Inventories are as follows:

	March 31,			December 31,
	2020			2019
Raw Materials	$	15,798		$	15,245
Work in Process		588			479
Finished Goods		556			41
Reserves		(1,579	)		(1,486	)
Total	$	15,363		$	14,279

Other Intangible Assets

Other intangible assets at

March 31, 2020

and

December 31, 2019

are as follows:

			March 31, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	687	$	615
Intellectual Property		3		100		100		-
Trade Names		20		814		193		621
Patents		7		61		-		61
Totals			$	2,277	$	980	$	1,297

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

Amortization expense for the

three

months ended

March 31, 2020

and

2019

was

$51

and

$54,

respectively.

Estimated future annual amortization expense (

not

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

Year	Amount
Remainder of 2020		139
2021		185
2022		185
2023		185
Thereafter		542
Total	$	1,236

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC

350,

Goodwill and Other Intangible Assets

, goodwill is

not

amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value

may

exceed fair value. We test impairment annually as of

October 1

st

.

No

events were identified during the

three

months ended

March 31, 2020

that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group

may

not

be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are

not

sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

No

impairment expense was recorded during the

three

ended

March 31, 2020

and

2019,

respectively.

Accounting Pronouncements Issued But

Not

Yet Adopted

In

June 2016,

the FASB issued ASU

No.

 

2016

-

13,

“Financial Instruments - Credit Losses (ASC

326

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

December 15, 2022;

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

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Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	[1]
Cash	$ 730	$ 351
Restricted Cash	244	309
Accounts Receivable, less allowances of $325 and $335	20,226	18,558
Inventories	15,363	14,279
Contract Assets	6,774	7,659
Prepaid Expenses and Other Current Assets	2,119	2,128
Total Current Assets	45,456	43,284
Property and Equipment, Net	9,338	9,581
Operating Lease Assets	4,637	4,827
Goodwill	2,375	2,375
Other Intangible Assets, Net	1,297	1,343
Total Assets	63,103	61,410
Current Liabilities
Current Maturities of Long-Term Debt	444	444
Current Portion of Finance Lease Obligation	611	557
Current Portion of Operating Lease Obligations	825	858
Accounts Payable	16,369	14,014
Accrued Payroll and Commissions	2,800	3,493
Other Accrued Liabilities	2,738	2,866
Total Current Liabilities	23,787	22,232
Long-Term Liabilities
Long Term Line of Credit	10,255	10,088
Long-Term Debt, Net	3,069	3,179
Long Term Finance Lease Obligation, Net	1,537	1,451
Long-Term Operating Lease Obligation, Net	4,252	4,366
Other Long-Term Liabilities	112	118
Total Long-Term Liabilities	19,225	19,202
Total Liabilities	43,012	41,434
Commitments and Contingencies
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250	250
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively	27	27
Additional Paid-In Capital	15,787	15,748
Accumulated Other Comprehensive Loss	(318)	(257)
Retained Earnings	4,345	4,208
Total Shareholders' Equity	20,091	19,976
Total Liabilities and Shareholders' Equity	$ 63,103	$ 61,410

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

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Note 6 - Income Taxes (Details Textual)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Effective Income Tax Rate Reconciliation, Percent, Total	18.00%	(4.00%)

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Note 5 - Leases (Details Textual)	Mar. 31, 2020
Minimum [Member]
Lessee, Operating Lease, Renewal Term (Year)	1 year
Maximum [Member]
Lessee, Operating Lease, Renewal Term (Year)	5 years

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Note 4 - Financing Arrangements (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

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

	March 31,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.3% and 4.1% as of March 31, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,631		$	3,755
		3,631			3,755
Debt issuance Costs		(118	)		(132	)
Total long-term debt		3,513			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	3,069		$	3,179

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Note 4 - Financing Arrangements

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Debt Disclosure [Text Block]

NOTE

4.

FINANCING ARRANGEMENTS

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

June 15, 2017

and amended effective

December 29, 2017

and provides for a line of credit arrangement of

$16,000

that expires on

June 

15,

2022.

The credit arrangement also has a

$5,000

real estate term note outstanding with a maturity date of

June 15, 2022.

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of

4.8%

and

5.6%

as of

March 31, 2020

and

2019,

respectively. We had borrowings on our line of credit of

$10,255

and

$10,088

outstanding as of

March 31, 2020

and

December 31, 2019,

respectively. There are

no

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

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

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

not

less than (i) 

1.0

to

1.0,

for the

three

months ending

December 31, 2019,

six

months ending

March 31, 2020,

nine

months ending

June 30, 2020

and

twelve

months ending

September 30, 2020

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

three

months ended

March 31, 2020.

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

March 31, 2020,

we had unused availability under our line of credit of

$4,115,

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

Long-term debt at

March 31, 2020

and

December 30, 2019

consisted of following:

	March 31,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.3% and 4.1% as of March 31, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,631		$	3,755
		3,631			3,755
Debt issuance Costs		(118	)		(132	)
Total long-term debt		3,513			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	3,069		$	3,179

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Note 8 - Subsequent Events

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Subsequent Events [Text Block]

NOTE

8.

SUBSEQUENT EVENTS

On

April 15, 2020,

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

$6.1

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

April 22, 2020.

The Promissory Note has a term of

2

years with a

1%

per annum interest rate. Payments are deferred for

6

months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after

60

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

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Note 1 - Summary of Significant Accounting Policies - Inventories (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Raw Materials	$ 15,798	$ 15,245
Work in Process	588	479
Finished Goods	556	41
Reserves	(1,579)	(1,486)
Total	$ 15,363	$ 14,279	[1]

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

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Note 3 - Revenue 1 (Details Textual)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Percentage of Revenue Transferred to Customers	88.00%	95.00%
Revenue Remaining Performance Obligation, Customers Upon Shipment With Payment Terms (Day)	120 days

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash Flows From Operating Activities
Net Income (Loss)	$ 137	$ (363)
Adjustments to Reconcile Net (Loss) Income to Net Cash
Depreciation and Amortization	567	570
Compensation on Stock-Based Awards	39	160
Change in Accounts Receivable Allowance	(10)	24
Change in Inventory Reserves	93	51
Changes in Current Operating Items
Accounts Receivable	(1,644)	(3,001)
Inventories	(1,165)	985
Contract Assets	885	(2,154)
Prepaid Expenses and Other Current Assets	11	(749)
Income Taxes	(88)	(70)
Accounts Payable	2,336	3,209
Accrued Payroll and Commissions	(691)	(611)
Other Accrued Liabilities	(4)	511
Net Cash Provided by (Used in) Operating Activities	466	(1,438)
Cash Flows from Investing Activities
Purchase of Intangible Asset	(6)
Purchases of Property and Equipment	(65)	(396)
Net Cash Used in Investing Activities	(71)	(396)
Cash Flows from Financing Activities
Net Change in Line of Credit	167	2,030
Principal Payments on Long-Term Debt	(124)	(328)
Principal Payments on Financing Leases	(123)	(65)
Share Repurchases		(13)
Net Cash (Used In) Provided By Financing Activities	(80)	1,624
Effect of Exchange Rate Changes on Cash	(1)
Net Change in Cash	314	(210)
Cash - Beginning of Period	660	947
Cash - Ending of Period	974	737
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	730	310
Restricted Cash	244	427
Cash - Ending of Period	974	737
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	222	224
Cash Paid (Refunded) During the Period for Income Taxes	40
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	23	78
Equipment Acquired under Finance Lease	$ 262

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Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 11, 2020
Document Information [Line Items]
Entity Registrant Name	NORTECH SYSTEMS INC
Entity Central Index Key	0000722313
Trading Symbol	nsys
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		2,657,530
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Amendment Flag	false
Title of 12(b) Security	Common Stock, par value $.01 per share

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Note 3 - Revenue

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

NOTE

3.

REVENUE

Revenue recognition

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

not

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

not

distinct.

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

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

no

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

not

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

88

% and

95%

of our revenue for both the

three

months ended

March 31, 2020

and

2019,

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

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

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

no

impact on overall profitability.

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance 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, 2020

was as follows (in thousands):

Three Months Ended March 31, 2020
Outstanding at January 1, 2020	$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(5,712	)
Product transferred over time		4,827
Outstanding at March 31, 2020	$	6,774

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

March 31, 2020,

to be transferred to receivables within

90

days, with any remaining amounts to be transferred within

180

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

120

days.

The following tables summarize our net sales by market for the

three

ended

March 31, 2020 (

in thousands):

	Three Months Ended March 31, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,703	$	1,061	$	697	$	15,461
Industrial		6,016		970		323		7,309
Aerospace and Defense		4,317		134		219		4,670
Total net sales	$	24,036	$	2,165	$	1,239	$	27,440

	Three Months Ended March 31, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,495	$	35	$	409	$	14,939
Industrial		8,140		597		244		8,981
Aerospace and Defense		4,103		20		122		4,245
Total net sales	$	26,738	$	652	$	775	$	28,165

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Note 6 - Income Taxes

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

6.

INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full 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

ended

March 31, 2020

and

2019

was

18%

and (

4%

), respectively.

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Note 1 - Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

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

	Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2020		372,200		$	3.85
Granted		11,300			2.95
Exercised
Cancelled		(3,200	)		3.29
Outstanding - March 31, 2020		380,300		$	3.83		8.37	$	24,285
Exercisable - March 31, 2020		107,557		$	4.06		7.44	$	8,095

Schedule of Inventory, Current [Table Text Block]

	March 31,			December 31,
	2020			2019
Raw Materials	$	15,798		$	15,245
Work in Process		588			479
Finished Goods		556			41
Reserves		(1,579	)		(1,486	)
Total	$	15,363		$	14,279

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

			March 31, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	687	$	615
Intellectual Property		3		100		100		-
Trade Names		20		814		193		621
Patents		7		61		-		61
Totals			$	2,277	$	980	$	1,297

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

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

Year	Amount
Remainder of 2020		139
2021		185
2022		185
2023		185
Thereafter		542
Total	$	1,236

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Note 8 - Subsequent Events (Details Textual) $ in Millions	Apr. 15, 2020 USD ($)
Subsequent Event [Member]
Proceeds from Paycheck Protection Program Under CARES Act	$ 6.1

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Note 5 - Leases - Lease Cost (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($)
Cash paid for amounts included in the measurement of lease liabilities	$ 210
Right-of-use assets obtained in exchange for lease obligations	$ 0
Operating leases (Year)	7 years 255 days
Finance leases (Year)	3 years 255 days
Operating leases	4.80%
Finance leases	5.20%

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Note 4 - Financing Arrangements - Long-term Debt (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.3% and 4.1% as of March 31, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$ 3,631	$ 3,755
Debt issuance Costs	(118)	(132)
Total long-term debt	3,513	3,623
Current maturities of long-term debt	(444)	(444)	[1]
Long-term debt - net of current maturities	3,069	3,179
Real Estate Term Note [Member]
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.3% and 4.1% as of March 31, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$ 3,631	$ 3,755

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

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Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019	[1]	May 31, 2017	Nov. 30, 2010
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in shares)		11,300
Weighted Average Number of Shares Outstanding, Diluted, Total (in shares)		2,668,590	2,659,859
Earnings Per Share, Diluted, Total (in dollars per share)		$ 0.05	$ (0.14)
Letters of Credit Outstanding, Amount	$ 0	$ 0
Accounts Receivable, Allowance for Credit Loss, Current	325	325		$ 335
Amortization of Intangible Assets, Total		51	$ 54
Impairment of Long-Lived Assets to be Disposed of		0	0
Share-based Payment Arrangement, Option [Member]
Share-based Payment Arrangement, Expense		39	44
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 341	$ 341
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year)		2 years 284 days
Stock Incentive Plan 2017 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)						400,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized (in shares)	50,000
Equity Appreciation Rights Plan 2010 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)							1,000,000
Share-based Payment Arrangement, Expense			$ 116
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period (in shares)		0	137,500
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period (in shares)			132,500

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

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Note 1 - Summary of Significant Accounting Policies - Estimated Future Annual Amortization Expense (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	[1]
Total	$ 1,297	$ 1,343
Finite-lived Intangible Assets, Excluding Projects in Process [Member]
Remainder of 2020	139
2021	185
2022	185
2023	185
Thereafter	542
Total	$ 1,236

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

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Note 3 - Revenue - Contract Assets (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($)
Outstanding at January 1, 2020	$ 7,659
Transferred to receivables from contract assets recognized	(5,712)
Product transferred over time	4,827
Outstanding at March 31, 2020	$ 6,774

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Note 3 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net sales	$ 27,440	$ 28,165
Medical [Member]
Net sales	15,461	14,939
Industrial [Member]
Net sales	7,309	8,981
Aerospace and Defense [Member]
Net sales	4,670	4,245
Transferred over Time [Member]
Net sales	24,036	26,738
Transferred over Time [Member] | Medical [Member]
Net sales	13,703	14,495
Transferred over Time [Member] | Industrial [Member]
Net sales	6,016	8,140
Transferred over Time [Member] | Aerospace and Defense [Member]
Net sales	4,317	4,103
Transferred at Point in Time [Member]
Net sales	2,165	652
Transferred at Point in Time [Member] | Medical [Member]
Net sales	1,061	35
Transferred at Point in Time [Member] | Industrial [Member]
Net sales	970	597
Transferred at Point in Time [Member] | Aerospace and Defense [Member]
Net sales	134	20
Noncash Consideration [Member]
Net sales	1,239	775
Noncash Consideration [Member] | Medical [Member]
Net sales	697	409
Noncash Consideration [Member] | Industrial [Member]
Net sales	323	244
Noncash Consideration [Member] | Aerospace and Defense [Member]
Net sales	$ 219	$ 122

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Note 1 - Summary of Significant Accounting Policies - Stock Option Activity (Details) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($) $ / shares shares
Outstanding (in shares) | shares	372,200
Outstanding, weighted average exercise price per share (in dollars per share) | $ / shares	$ 3.85
Granted (in shares) | shares	11,300
Granted, weighted average exercise price per share (in dollars per share) | $ / shares	$ 2.95
Cancelled (in shares) | shares	(3,200)
Cancelled, weighted average exercise price per share (in dollars per share) | $ / shares	$ 3.29
Outstanding (in shares) | shares	380,300
Outstanding, weighted average exercise price per share (in dollars per share) | $ / shares	$ 3.83
Outstanding, weighted average remaining contractual term (Year)	8 years 135 days
Outstanding, aggregate intrinsic value | $	$ 24,285
Exercisable (in shares) | shares	107,557
Exercisable, weighted average exercise price per share (in dollars per share) | $ / shares	$ 4.06
Exercisable, weighted average remaining contractual term (Year)	7 years 160 days
Exercisable, aggregate intrinsic value | $	$ 8,095

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Note 2 - Concentration of Credit Risk and Major Customers (Details Textual) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020 USD ($)	Mar. 31, 2019	Dec. 31, 2019
Excess Cash Balances, Number of High Credit Quality Financial Institutions	2
Cash, Ending Balance	$ 974
Concentration Risk, Number of Divisions	2	2
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Division One of Largest Customer [Member]
Concentration Risk, Percentage	24.00%	23.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Division Two of Largest Customer [Member]
Concentration Risk, Percentage	2.00%	3.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage	26.00%	26.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Largest Customer [Member]
Concentration Risk, Percentage	42.00%		36.00%
Geographic Concentration Risk [Member] | Revenue Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage	12.00%	19.00%
UNITED STATES
Excess Cash Balances, Number of High Credit Quality Financial Institutions	1
CHINA
Excess Cash Balances, Number of High Credit Quality Financial Institutions	1
Cash, Ending Balance	$ 703

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Note 2 - Concentration of Credit Risk and Major Customers

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

NOTE

2.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

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

two

financial institutions,

one

in the United States and

one

in China. The account in the United States

may

at times exceed federally insured limits. Of the

$974

in cash at

March 31, 2020,

approximately

$703

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

month period ended and

March 31, 2020

and

2019.

One division accounted for approximately

24%

and

23%

of net sales for the

three

March 31, 2020

and

2019,

respectively. The other division accounted for approximately

2%

of net sales for the

three

month period ended

March 31, 2020

and , and approximately

3%

net sales for the

three

month period ended

March 31, 2019.

Together they accounted for approximately

26%

and

26%

of net sales for the

three

March 31, 2020

and

2019,

respectively. Accounts receivable from the customer at

March 31, 2020

and

December 31, 2019

represented approximately

42%

and

36%

of our total accounts receivable, respectively.

Export sales represented approximately

12%

and

19%

of net sales for the

three

months ended

March 31, 2020

and

2019,

respectively.

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	[1]
Accounts receivable allowance	$ 325	$ 335
Preferred stock, par value (in dollars per share)	$ 1	$ 1
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	250,000	250,000
Preferred stock, shares outstanding (in shares)	250,000	250,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	9,000,000	9,000,000
Common stock, shares issued (in shares)	2,657,530	2,657,530
Common stock, shares outstanding (in shares)	2,657,530	2,657,530

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

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Note 7 - Related Party Transactions

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE

7.

RELATED PARTY TRANSACTIONS

During

three

months ended

March 31, 2020,

we did business with Printed Circuits, Inc. which is

90%

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

$14

and

$51

during the

three

months ended

March 31, 2020

and

2019,

respectively to Printed Circuits, Inc.

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Note 3 - Revenue (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

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

Three Months Ended March 31, 2020
Outstanding at January 1, 2020	$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(5,712	)
Product transferred over time		4,827
Outstanding at March 31, 2020	$	6,774

Disaggregation of Revenue [Table Text Block]

	Three Months Ended March 31, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,703	$	1,061	$	697	$	15,461
Industrial		6,016		970		323		7,309
Aerospace and Defense		4,317		134		219		4,670
Total net sales	$	24,036	$	2,165	$	1,239	$	27,440

	Three Months Ended March 31, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,495	$	35	$	409	$	14,939
Industrial		8,140		597		244		8,981
Aerospace and Defense		4,103		20		122		4,245
Total net sales	$	26,738	$	652	$	775	$	28,165

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Note 5 - Leases - Supplemental Balance Sheet Information (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	[1]
Operating lease assets	$ 4,637	$ 4,827
Finance lease assets	2,709
Total leased assets	7,346
Current operating lease liabilities	825	858
Current finance lease liabilities	611	557
Long-term operating lease liabilities	4,252	4,366
Long term finance lease liabilities	1,537	$ 1,451
Total lease liabilities	$ 7,225

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

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Note 4 - Financing Arrangements (Details Textual) - Bank of America [Member] - Credit Agreement [Member] $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($)	Mar. 31, 2019	Dec. 31, 2019 USD ($)	Jun. 15, 2017 USD ($)
Long-term Line of Credit, Total	$ 10,255		$ 10,088
Line of Credit, Minimum Fixed Charge Coverage Ratio During the Period	1
Line of Credit Facility, Remaining Borrowing Capacity	$ 4,115
Real Estate Term Note [Member]
Debt Instrument, Face Amount				$ 5,000
Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity				$ 16,000
Debt Instrument, Interest Rate During Period	4.80%	5.60%

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Note 7 - Related Party Transactions (Details Textual) - Subsidiary of Common Parent [Member] - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Nature of Common Ownership or Management Control Relationships	90%
Related Party Transaction, Expenses from Transactions with Related Party	$ 14	$ 51