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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.