Note 1 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2021

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, 2020. 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 June 30, 2021:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2021		362,640		$	3.96
Granted		3,000			5.76
Exercised		(1,000	)		3.70
Cancelled		(9,140	)		3.41
Outstanding - June 30, 2021		355,500		$	3.99		7.30	$	1,422
Exercisable - June 30, 2021		194,100		$	3.71		6.77	$	827

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares. There were additional shares authorized in March 2020 totaling 50,000 and in May 2021 totaling 75,000. There were 3,000 stock options granted during the six months ended June 30, 2021.

Total compensation expense related to stock options for the three months ended June 30, 2021 and 2020 was $25 and $36, respectively and $46 and $75 for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was $283 of unrecognized compensation which will vest over the next 2.99 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 six months ended June 30, 2021 and 2020, there were no units granted. We recognized $100 and $114 of compensation expense in the three and six months ended June 30, 2021, respectively. We had no amounts expensed in the comparable periods in 2020.

Net Income (Loss) per Common Share 

For the three months ended June 30, 2021, stock options of 109,065 were included in the computation of diluted income per common share amount as their impact were dilutive. For the six months ended June 30, 2021, all stock options are deemed to be antidilutive and therefore, were not included in the computation of incomer per common share amount. For the three months ended June 30, 2020, all stock options are deemed to be antidilutive and therefore, were not included in the computation of income per common share amount. For the six months ended June 30, 2020, stock options of 9,002 were included in the computation of diluted income per common share amount as their impact was dilutive. 

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 June 30, 2021 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.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $459 at June 30, 2021 and $343 at December 31, 2020.

Inventories, Net

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:

	June 30,			December 31,
	2021			2020
Raw Materials	$	17,993		$	14,865
Work in Process		1,369			969
Finished Goods		442			242
Reserves		(1,504	)		(2,159	)
Total	$	18,301		$	13,917

Other Intangible Assets

Other intangible assets at June 30, 2021 and December 31, 2020 are as follows:

			June 30, 2021
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	868	$	434
Intellectual Property		3		100		100		-
Trade Names		20		814		244		570
Patents		7		126		-		126
Totals			$	2,342	$	1,212	$	1,130

			December 31, 2020
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	795	$	507
Intellectual Property		3		100		100		-
Trade Names		20		814		225		589
Patents		7		77		-		77
Totals			$	2,293	$	1,120	$	1,173

Amortization expense for the three and six months ended June 30, 2021 was $46 and $92, respectively.

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

Year	Amount
Remainder of 2021	$	93
2022		186
2023		185
2024		113
2025		41
Thereafter		386
Total	$	1,004

Reclassification

Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements. As a result, certain line items have been amended in the statement of operations. Comparative figures have been adjusted to conform to the current year’s presentation.

The items were reclassified as follows:

	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Previously		After		Previously		After
	Reported		Reclassification		Reported		Reclassification
Cost of Goods Sold	$	24,020	$	23,736	$	48,455	$	47,936
General and Administrative Expenses		1,662		1,946		3,655		4,174

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.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. We do not currently have any contracts that have been changed to a new reference rate, but we will continue to evaluate our contracts and the effects of this standard on our condensed consolidated financial statements prior to adoption.