Note 1 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2022

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, 2021. 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

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. An additional 50,000 and 175,000 shares were authorized by the shareholders in March 2020 and May 2022, respectively.

We granted 0 and 21,000 market condition options to our Chief Executive Officer during the three and six months ended June 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 13,000 and 66,000 service-based options during the three and six months ended June 30, 2022, respectively. Total option grants for the three and six months ended June 30, 2022 were 13,000 and 108,000, respectively. There were 3,000 stock options granted during the six months ended June 30, 2021.

Total compensation expense related to stock options was $64 and $106 for the three and six months ended June 30, 2022, respectively. Total compensation expense related to stock options was $25 and $46 for the three and six months ended June 30, 2021. As of June 30, 2022, there was $851 of unrecognized compensation which will vest over the next 3.90 years.

Following is the status of all stock options as of June 30, 2022:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2022		387,500		$	4.57
Granted		87,000			11.10
Exercised		(12,000	)		3.41
Cancelled		(4,400	)		3.36
Outstanding - June 30, 2022		458,100		$	5.82		6.97	$	3,326
Exercisable - June 30, 2022		222,700		$	3.93		6.12	$	2,038

Restricted Stock Units

During the three and six months ended June 30, 2022, we granted 3,000 and 21,000 restricted stock units (“RSUs”), respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. There were no RSUs outstanding prior to the six months ended June 30, 2022. Total compensation expense related to the RSUs were $29 and $35 for the three and six months ended June 30, 2022, respectively. There was no compensation expense related to RSUs for the three and six months ended June 30, 2021. Total unrecognized compensation expense related to the RSUs was $218, which will vest over the next 1.74 years. The RSUs granted in the six months ended June 30, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.73 years. No RSUs vested during the six months ended June 30, 2022.

Equity Appreciation Rights Plan

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. There were no units granted during the six months ended June 30, 2022 or June 30, 2021.

The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. As of June 30, 2022, there are no units outstanding. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $100 and $114 for the three and six months ended June 30, 2021, respectively.

Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net income (loss) per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding, unless their effect is antidilutive. All stock options and restricted stock units, while outstanding, are considered common stock equivalents.

For the three and six months ended June 30, 2022, stock options of 203,625 and 197,285, respectively were included in the computation of diluted net income per common share as their impact were dilutive. For the three months ended June 30, 2021, stock options of 109,065 were included in the computation of diluted net income per common share. 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 net income per common share amount.

We had outstanding stock options totaling 45,878 and RSUs totaling 19,114 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended June 30, 2022. We had average outstanding stock options totaling 48,895 and RSUs totaling 20,057 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the six months ended June 30, 2022. Outstanding stock options totaling 622 are not considered in the computation of diluted net income per share for the three months ended June 30, 2021.

Restricted Cash

Cash and cash equivalents classified as restricted cash on our consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. As of June 30, 2022 we had outstanding letters of credit for $400. Restricted cash as of June 30, 2022 was $231. The June 30, 2022 restricted cash 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. Trade accounts receivable have been reduced by an allowance for doubtful accounts of $297 at June 30, 2022 and $328 at December 31, 2021.

Inventories

Inventories are stated at the lower of average cost (which approximates first-in, first out) 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,
	2022			2021
Raw Materials	$	21,764		$	18,492
Work in Process		1,793			1,678
Finished Goods		608			562
Reserves		(1,195	)		(1,298	)
Total	$	22,970		$	19,434

Other Intangible Assets

Other intangible assets at June 30, 2022 and December 31, 2021 are as follows:

	Customer Relationships		Trade Names		Patents		Total
Balance at January 1, 2021	$	507	$	589	$	77	$	1,173
Additions		-		-		64		64
Amortization		147		29		-		176
Abandonment Loss		-		560		-		560
Balance at December 31, 2021		360		-		141		501
Additions		-		-		41		41
Amortization		71		-		-		71
Balance at June 30, 2022	$	289	$	-	$	182	$	471

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted-average remaining amortization period of our in-use intangible asset is 2.0 years. Patents are not being amortized as they are in process and a patent has not yet been received.

Amortization expense of finite life intangible assets for the three and six months ended June 30, 2022 was $35 and $71, respectively. Amortization expense for the three and six months ended June 30, 2021 was $46 and $92, respectively.

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

Year	Amount
Remainder of 2022	$	72
2023		145
2024		72
Total	$	289

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The ASU also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements. The new guidance is effective for public business entities that meet the definition of a Smaller Reporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.