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 September 30, 2022

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

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

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

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 November 4, 2022 was 2,690,634.

1

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
			PAGE
	Item 1     -     Financial Statements
		Condensed Consolidated Statements of Operations and Comprehensive Income	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5-6
		Condensed Consolidated Statements of Shareholders’ Equity	7
		Condensed Notes to Consolidated Financial Statements	8-19
	Item 2     -     Management's Discussion and Analysis of Financial Condition And Results of Operations		20-26
	Item 3     -     Quantitative and Qualitative Disclosures About Market Risk		27
	Item 4     -     Controls and Procedures		27
PART II - OTHER INFORMATION
	Item 1     -     Legal Proceedings		28
	Item 1A. -     Risk Factors		28
	Item 2     -     Unregistered Sales of Equity Securities, Use of Proceeds		28
	Item 3     -     Defaults on Senior Securities		28
	Item 4     -     Mine Safety Disclosures		28
	Item 5     -     Other Information		28
	Item 6     -     Exhibits		29
SIGNATURES			30

2

PART I

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
	2022			2021			2022			2021
Net Sales	$	35,276		$	29,452		$	98,505		$	81,706
Cost of Goods Sold		28,948			21,411			83,129			68,519
Gross Profit		6,328			8,041			15,376			13,187
Operating Expenses
Selling Expenses		959			449			2,752			1,741
General and Administrative Expenses		2,949			2,045			8,346			7,247
Research and Development Expenses		475			141			1,154			348
Restructuring Charges		-			23			-			319
Loss on Abandonment of Intangible Assets		-			560			-			560
Gain on Sale of Assets		-			(93	)		(15	)		(176	)
Total Operating Expenses		4,383			3,125			12,237			10,039
Income From Operations		1,945			4,916			3,139			3,148
Other Expense
Interest Expense		(122	)		(112	)		(337	)		(314	)
Income Before Income Taxes		1,823			4,804			2,802			2,834
Income Tax Expense		289			1,247			411			646
Net Income	$	1,534		$	3,557		$	2,391		$	2,188
Net Income Per Common Share:
Basic (in dollars per share)	$	0.57		$	1.33		$	0.89		$	0.82
Weighted Average Number of Common Shares Outstanding - Basic (in shares)		2,686,884			2,665,682			2,683,594			2,662,066
Diluted (in dollars per share)	$	0.53		$	1.24		$	0.83		$	0.78
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)		2,899,526			2,880,073			2,886,073			2,806,958
Other comprehensive income
Foreign currency translation		(365	)		(5	)		(604	)		20
Comprehensive income, net of tax	$	1,169		$	3,552		$	1,787		$	2,208

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

(IN THOUSANDS, EXCEPT SHARE DATA)

	SEPTEMBER 30,			DECEMBER 31,
	2022				2021(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	1,300		$	643
Restricted Cash		792			1,582
Accounts Receivable, less allowances of $257 and $328		15,497			14,548
Employee Retention Credit Receivable		5,209			5,209
Inventories, Net		23,610			19,434
Contract Assets		9,886			8,698
Prepaid Expenses and Other Current Assets		1,851			1,660
Total Current Assets		58,145			51,774
Property and Equipment, Net		6,457			5,833
Operating Lease Assets		8,079			8,983
Other Intangible Assets, Net		433			501
Total Assets	$	73,114		$	67,091
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Finance Lease Obligations	$	390		$	601
Current Portion of Operating Lease Obligations		1,113			1,043
Accounts Payable		14,701			12,710
Accrued Payroll and Commissions		5,116			4,045
Customer Deposits		3,870			2,936
Other Accrued Liabilities		1,380			971
Total Current Liabilities		26,570			22,306
Long-Term Liabilities
Long Term Line of Credit		9,826			8,959
Long Term Finance Lease Obligations, Net		639			916
Long-Term Operating Lease Obligations, Net		7,797			8,695
Other Long-Term Liabilities		99			104
Total Long-Term Liabilities		18,361			18,674
Total Liabilities		44,931			40,980
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: 2,683,513 and 2,672,064 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		16,247			15,962
Accumulated Other Comprehensive (Income) Loss		(548	)		56
Retained Earnings		12,207			9,816
Total Shareholders' Equity		28,183			26,111
Total Liabilities and Shareholders' Equity	$	73,114		$	67,091

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

⁽¹⁾ The condensed consolidated balance sheet at December 31, 2021 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)

	NINE MONTHS ENDED
	SEPTEMBER 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	2,391		$	2,188
Adjustments to Reconcile Net Income to Net Cash
Provided By (Used In) Operating Activities:
Depreciation and Amortization		1,440			1,506
Compensation on Stock-Based Awards		234			201
Change in Accounts Receivable Allowance		(71	)		18
Change in Inventory Reserves		(54	)		(959	)
Loss on Abandonment of Intangible Asset		-			560
Gain on Disposal of Property and Equipment		(15	)		(176	)
Changes in Current Operating Items
Accounts Receivable		(1,115	)		1,686
Employee Retention Credit Receivable		-			(5,209	)
Inventories		(4,402	)		(5,755	)
Contract Assets		(1,188	)		(2,246	)
Prepaid Expenses and other Curent Assets		(213	)		(276	)
Income Taxes		(67	)		708
Accounts Payable		1,659			2,901
Accrued Payroll and Commissions		1,071			1,537
Other Accrued Liabilities		1,330			464
Net Cash Provided By (Used In) Operating Activities		1,000			(2,852	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Property and Equipment		15			626
Purchase of Intangible Asset		(43	)		(49	)
Purchases of Property and Equipment		(1,687	)		(1,198	)
Net Cash Used In Investing Activities		(1,715	)		(621	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Line of Credit		857			2,681
Principal Payments on Long-Term Debt		-			(873	)
Principal Payments on Financing Leases		(336	)		(492	)
Debt Issuance Costs		10			-
Stock Option Excercises		51			36
Net Cash Provided By Financing Activities		582			1,352
Net Change in Cash and Cash Equivalents		(133	)		(2,121	)
Cash and Cash Equivalents - Beginning of Period		2,225			3,564
Cash and Cash Equivalents - End of Period	$	2,092		$	1,443
Reconciliation of cash and restricted cash reported within the consolidated balance sheets
Cash	$	1,300		$	444
Restricted Cash		792			999
Total Cash and restricted cash reported in the consolidated statements of cash flows	$	2,092		$	1,443

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	NINE MONTHS ENDED
	SEPTEMBER 30,
	2022		2021
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	328	$	220
Cash Paid (Refunded) During the Period for Income Taxes		122		(114	)
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		332		-
Property Acquired Under Operating Lease		-		858

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

6

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

							Accumulated
					Additional		Other
	Preferred		Common		Paid-In		Comprehensive			Retained		Total Shareholders'
	Stock		Stock		Capital		Loss			Earnings		Equity
BALANCE JUNE 30, 2021	$	250	$	27	$	15,862	$	(12	)	$	1,293	$	17,420
Net Income		-		-		-		-			3,557		3,557
Foreign currency translation adjustment		-		-		-		(5	)		-		(5	)
Stock option exercises		-		-		36		-			-		36
Compensation on stock-based awards		-		-		28		-			-		28
BALANCE SEPTEMBER 30, 2021	$	250	$	27	$	15,926	$	(17	)	$	4,850	$	21,036
BALANCE DECEMBER 31, 2020	$	250	$	27	$	15,816	$	(37	)	$	2,662	$	18,718
Net Income		-		-		-		-			2,188		2,188
Foreign currency translation adjustment		-		-		-		20			-		20
Stock option exercises		-		-		36		-			-		36
Compensation on stock-based awards		-		-		74		-			-		74
BALANCE SEPTEMBER 30, 2021	$	250	$	27	$	15,926	$	(17	)	$	4,850	$	21,036
BALANCE JUNE 30, 2022	$	250	$	27	$	16,136	$	(183	)	$	10,673	$	26,903
Net Income		-		-		-		-			1,534		1,534
Foreign currency translation adjustment		-		-		-		(365	)		-		(365	)
Stock option exercises		-		-		18		-			-		18
Compensation on stock-based awards		-		-		93		-			-		93
BALANCE SEPTEMBER 30, 2022	$	250	$	27	$	16,247	$	(548	)	$	12,207	$	28,183
BALANCE DECEMBER 31, 2021	$	250	$	27	$	15,962	$	56		$	9,816	$	26,111
Net Income		-		-		-		-			2,391		2,391
Foreign currency translation adjustment		-		-		-		(604	)		-		(604	)
Stock option exercises		-		-		51		-			-		51
Compensation on stock-based awards		-		-		234		-			-		234
BALANCE SEPTEMBER 30, 2022	$	250	$	27	$	16,247	$	(548	)	$	12,207	$	28,183

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

7

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, 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. Customer deposits represent cash received in advance of revenue earned.

8

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 nine months ended September 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 3,000 and 69,000 service-based options during the three and nine months ended September 30, 2022, respectively. Total option grants for the three and nine months ended September 30, 2022 were 3,000 and 90,000, respectively. There were 27,000 stock options granted during the nine months ended September 30, 2021.

Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. Total compensation expense related to stock options was $28 and $74 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $810 of unrecognized compensation which will vest over the next 3.86 years.

Following is the status of all stock options as of September 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		90,000			11.13
Exercised		(19,800	)		3.40
Cancelled		(8,000	)		3.38
Outstanding - September 30, 2022		449,700		$	5.93		7.10	$	2,137
Exercisable - September 30, 2022		213,500		$	3.95		5.90	$	1,407

Restricted Stock Units

During the three and nine months ended September 30, 2022, we granted 0 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 nine months ended September 30, 2022. Total compensation expense related to the RSUs were $31 and $66 for the three and nine months ended September 30, 2022, respectively. There was no compensation expense related to RSUs for the three and nine months ended September 30, 2021. Total unrecognized compensation expense related to the RSUs was $186, which will vest over the next 1.49 years. The RSUs granted in the nine months ended September 30, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.48 years. No RSUs vested during the nine months ended September 30, 2022.

9

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 nine months ended September 30, 2022 or September 30, 2021.

The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. There are no units outstanding as of September 30, 2022. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $13 and $127 for the three and nine months ended September 30, 2021, respectively.

Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income 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 nine months ended September 30, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per common share as their impact were dilutive. For the three and nine months ended September 30, 2021, stock options of 214,391 and 144,892, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

We had outstanding stock options totaling 34,211 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 September 30, 2022. We had average outstanding stock options totaling 44,070 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2022. Outstanding stock options totaling 0 and 221 are not considered in the computation of diluted net income per share for the three and nine months ended September 30, 2021, respectively.

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 September 30, 2022, we had outstanding letters of credit for $400. Restricted cash as of September 30, 2022 was $792, which includes 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 $257 at September 30, 2022 and $328 at December 31, 2021.

10

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:

	September 30,			December 31,
	2022			2021
Raw Materials	$	22,520		$	18,492
Work in Process		1,719			1,678
Finished Goods		615			562
Reserves		(1,244	)		(1,298	)
Total	$	23,610		$	19,434

Other Intangible Assets

Other intangible assets at September 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		-		-		43		43
Amortization		108		-		3		111
Balance at September 30, 2022	$	252	$	-	$	181	$	433

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 2.1 years. In-process patents are not amortized until the patent is received. At September 30, 2022, patents totaling $96 had been received while $85 of patents were in-process.

Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively. Amortization expense for the three and nine months ended September 30, 2021 was $45 and $139, respectively.

11

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

Year	Amount
Remainder of 2022	$	40
2023		159
2024		86
2025		14
Thereafter		49
Total	$	348

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.

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 $2,092 in cash and restricted cash at September 30, 2022, approximately $561 and $11 was held at banks located in China and Mexico, respectively. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of total accounts receivable. One customer accounted for 28% and 26% of net sales for the three and nine months ended September 30, 2022, respectively. For the three months ended September 30, 2021, two customers accounted for 36% of net sales. For the nine months ended September 30, 2021, one customer accounted for 26% of net sales.

At September 30, 2022, two customers represented approximately 43% of our total accounts receivable. At December 31, 2021, one customer represented approximately 19% of our total accounts receivable.

Export sales represented approximately 4% of net sales for both the three and nine months ended September 30, 2022. Export sales represented approximately 3% of net sales for the three and nine months ended September 30, 2021 respectively.

12

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 74% of our revenue for both the three and nine months ended September 30, 2022 and 82% and 80% of our revenue for the three and nine months ended September 30, 2021, 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.

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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 nine months ended September 30, 2022 was as follows (in thousands):

Balance outstanding at December 31, 2021	$	8,698
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		72,536
Amounts invoiced during the period		(71,348	)
Balance outstanding at September 30, 2022	$	9,886

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2022 to be transferred to receivables within 90 days, with the majority of 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 timing of transfer of goods and services by market:

	Three Months Ended September 30, 2022
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,753	$	5,366	$	420	$	20,539
Industrial		8,104		2,314		420		10,838
Aerospace and Defense		3,202		493		204		3,899
Total net sales	$	26,059	$	8,173	$	1,044	$	35,276

	Nine Months Ended September 30, 2022
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	37,725	$	15,044	$	1,574	$	54,343
Industrial		21,563		6,301		1,095		28,959
Aerospace and Defense		13,248		1,254		701		15,203
Total net sales	$	72,536	$	22,599	$	3,370	$	98,505

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	Three Months Ended September 30, 2021
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,762	$	2,933	$	282	$	16,977
Industrial		7,468		1,757		158		9,383
Aerospace and Defense		2,883		144		65		3,092
Total net sales	$	24,113	$	4,834	$	505	$	29,452

	Nine Months Ended September 30, 2021
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	35,497	$	8,876	$	1,017	$	45,390
Industrial		20,385		4,832		560		25,777
Aerospace and Defense		9,685		527		327		10,539
Total net sales	$	65,567	$	14,235	$	1,904	$	81,706

NOTE 4. FINANCING ARRANGEMENTS

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2026.

Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 4.1% and 3.5% as of September 30, 2022 and December 31, 2021, respectively. We had borrowings on our line of credit of $9,873 and $9,016 as of September 30, 2022 and December 31, 2021, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $48 and $58 on the consolidated balance sheet for the periods ended September 30, 2022 and December 31, 2021, respectively.

The line of credit with Bank of America contains 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 Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0 for the twelve months ended at each Fiscal Quarter end subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days. As of September 30, 2022 the Company was in compliance with its covenants.

At September 30, 2022, we had unused availability under our line of credit of $5,827 supported by our borrowing base. The line is secured by substantially all of our assets. In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improved our unused availability. In the third quarter of 2022, we amended our credit agreement to extend the inclusion of the Employee Retention Credit Receivable through December 31, 2022.

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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 September 30, 2022, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

	Three Months Ended September 30,		Three Months Ended September 30,
Lease Cost	2022		2021
Operating lease cost	$	572	$	576
Finance lease interest cost		14		18
Finance lease amortization expense		182		163
Total lease cost	$	768	$	757

	Nine Months Ended September 30,		Nine Months ended September 30,
Lease Cost	2022		2021
Operating lease cost	$	1,731	$	1,696
Finance lease interest cost		50		61
Finance lease amortization expense		547		489
Total lease cost	$	2,328	$	2,246

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	September 30, 2022		December 31, 2021
Assets
Operating lease assets	Operating lease assets	$	8,079	$	8,983
Finance lease assets	Property, plant and equipment		1,505		2,052
Total leased assets		$	9,584	$	11,035

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Supplemental cash flow information related to leases was as follows:

	September 30,		September 30,
	2022		2021
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,279	$	861
Right-of-use assets obtained in exchange for lease obligations	$	-	$	858

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2022	$	430		$	126		$	556
2023		1,765			409			2,175
2024		1,505			357			1,861
2025		1,255			103			1,358
2026		1,217			108			1,332
Thereafter		7,066			-			7,066
Total lease payments	$	13,238		$	1,103		$	14,341
Less: Interest		(4,328	)		(74	)		(4,402	)
Present value of lease liabilities	$	8,910		$	1,029		$	9,939

The lease term and discount rate at September 30, 2022 were as follows:

Weighted-average remaining lease term (years)
Operating leases	9.1
Finance leases	2.8
Weighted-average discount rate
Operating leases	7.7	%
Finance leases	5.2	%

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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 and nine months ended September 30, 2022 was 16% and 15%, respectively. The effective tax rate for the three and nine months ended September 30, 2021 was 26% and 23%, respectively. The primary drivers of the change in effective tax rate are due to a change in the federal valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.

NOTE 7. RESTRUCTURING CHARGES

During the first nine months of 2021, we recorded restructuring charges of $319 related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility. We recognized a gain on the sale of assets related to the restructure of $93 and $176 for the three and nine months ended September 30, 2021, respectively. There were no restructuring charges or amounts accrued in the nine months ended September 30, 2022.

NOTE 8. EMPLOYEE RETENTION CREDIT

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.

At September 30, 2022 and December 31, 2021, the Company has ERC benefits of $5,209 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.

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NOTE 9. RELATED PARTY TRANSACTIONS

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021. In the three and nine months ended September 30, 2022, Abilitech paid the Company $0 and $217, respectively, for delivery of medical products. In the three and nine months ended September 30, 2021, Abilitech paid the Company $316 and $1,056, respectively for the delivery of medical products. The Company believes that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

David Kunin, our Chairman, is a minority owner (less than 10%) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $1,000 conditional grant. Under the terms of the BIRD Foundation grant, the Company and Marpe Technologies are to receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company will meet its obligation by providing certain services at cost or no cost to Marpe Technologies. The total value of the contribution will not exceed $500; the Company has contributed $226 as of September 30, 2022. The Company will receive a 10-year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recoup the value of services provided to Marpe for which is not fully paid. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the three and nine months ended September 30, 2022, we recognized revenue of $66 and $182. During both the three and nine months ended September 30, 2021, we recognized revenue of $78. The Company believes that transactions with Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.

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

Overview

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. We maintain facilities in Bemidji, Blue Earth, Mankato, 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.

Recent Developments

Global Pandemic

The COVID-19 pandemic continued to impact our business in the first nine months of 2022, primarily by continued supply chain disruptions and delays. The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

We will continue to assess the current and potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations. We actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

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Results of Operations

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net Sales		100.0	%		100.0	%		100.0	%		100.0
Cost of Goods Sold		82.1			72.7			84.4			83.9
Gross Profit		17.9			27.3			15.6			16.1
Selling Expenses		2.7			1.5			2.8			2.1
General and Administrative Expenses		8.4			6.9			8.5			8.9
R&D Expenses		1.3			0.5			1.2			0.4
Restructuring Charges		-			0.1			-			0.4
Gain on Sale of Property and Equipment		-			(0.3	)		-			(0.2	)
Income from Operations		5.5			18.6			3.1			4.5
Interest Expense		(0.3	)		(0.4	)		(0.3	)		(0.4	)
Income Before Income Taxes		5.2			18.2			2.8			4.2
Income Tax Expense		0.8			4.2			0.4			0.8
Net Income		4.4	%		14.0	%		2.4	%		3.4	%

Net Sales

Net sales for the three months ended September 30, 2022 and 2021 were $35.3 and $29.5 million, respectively, an increase of $5.8 million or 19.7%. Net sales for the nine months ended September 30, 2022 and 2021 were $98.5 million and $81.7 million, respectively, an increase of $16.8 million or 20.6%. The three and nine month increases were driven by increased demand as well as price increases to counteract higher material and labor cost. We have also taken actions to scale the direct labor workforce and strengthen the supply chain for parts.

Net sales by our major EMS industry markets for the three and nine months ended September 30, 2022 and 2021 were as follows (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change
Medical	$	20.5	$	17.0		20.6	$	54.3	$	45.4		19.6
Industrial		10.9		9.4		16.0		29.0		25.8		12.4
Aerospace and Defense		3.9		3.1		25.8		15.2		10.5		44.8
Total Net Sales	$	35.3	$	29.5		19.7	$	98.5	$	81.7		20.6

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Backlog

Our 90-day order backlog as of September 30, 2022 was $36.9 million, a 2.8% increase from the beginning of the quarter and a 5.1% decrease from September 30, 2021. Our 90-day 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.

Our 90-day order backlog by market has remained relatively constant when compared to the prior quarter end and the same period of the prior year. 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.

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

	90 Day Backlog as of the Period Ended
	September 30		June 30		September 30
	2022		2022		2021
Medical	$	22.8	$	20.9	$	19.7
Industrial		8.3		9.8		10.6
Aerospace and Defense		5.8		5.2		8.6
Total 90-Day Backlog	$	36.9	$	35.9	$	38.9

Our total order backlog as of September 30, 2022 was $103.3 million, a 2.7% decrease from the beginning of the quarter and a 31.4% increase from September 30, 2021. Our total backlog remains strong as our biggest customers are placing orders into the future to secure supply of critical components, in particular for those with long lead times.

Total order backlog by our major industry markets are as follows (in millions):

	Total Backlog as of the Period Ended
	September 30		June 30		September 30
	2022		2022		2021
Medical	$	58.4	$	63.7	$	37.3
Industrial		22.8		22.6		17.8
Aerospace and Defense		22.1		19.9		23.5
Total Backlog	$	103.3	$	106.2	$	78.6

The 90-day and total backlog at September 30, 2022 contain the contract asset value of $9.9 million which has been recognized as revenue.

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Gross Profit

Gross profit as a percent of net sales was 17.9% and 27.3% for the three months ended September 30, 2022 and 2021, respectively. Gross profit as a percent of net sales was 15.6% and 16.1% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in gross profit as a percent of net sales for the three and nine months ended September 30, 2022 compared to the same periods in 2021 is primarily due to the $4.7 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.

Selling Expense

Selling expenses for the three months ended September 30, 2022 and 2021 were $1.0 million or 2.7% of sales and $0.4 million or 1.5% of sales, respectively. Selling expenses for the nine months ended September 30, 2022 and 2021 were $2.8 million or 2.8% of sales and $1.7 million or 2.1% of sales, respectively. Selling expense for the three and nine months ended September 30, 2021 includes a $0.1 million reduction in payroll and medical expenses related to the ERC. The increase in selling expense for the three and nine months ended September 30, 2022 compared to the same periods of the prior year relates to an increase in sales engineering expenses to support the increased sales.

General and Administrative Expense

General and administrative expenses for the three months ended September 30, 2022 and 2021 were $2.9 million or 8.4% of sales and $2.0 million or 6.9% of sales, respectively. General and administrative expenses for the nine months ended September 30, 2022 and 2021 were $8.3 million or 8.5% of sales and $7.2 million or 8.9% of sales, respectively. General and administrative expenses for the three and nine months ended September 30, 2021 includes a $0.4 million reduction in payroll and medical expenses related to the ERC. General and administrative expenses for the three and nine months ended September 30, 2022 were otherwise held relatively flat compared to the same periods of the prior year, and are generally fixed in nature.

Restructuring Charges

Restructuring charges for the three and nine months ended September 30, 2021 were $23 thousand and $0.3 million, respectively. There were no restructuring charges for the three and nine months ended September 30, 2022. The restructuring charges relate to the closure of the Merrifield facility during 2021.

Research and Development Expense

Research and development expenses were $0.5 million or 1.3% of net sales for the three months ended September 30, 2022 and $1.2 million or 1.2% of net sales for the nine months ended September 30, 2022. Research and development expenses for the three and nine months ended September 30, 2021 were $0.1 and $0.3 million, respectively.

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Income From Operations

Income from operations for the three months ended September 30, 2022 was $1.9 million compared to $4.9 million for the three months ended September 30, 2021. Income from operations for both the nine months ended September 30, 2022 and 2021 was $3.1 million. The decrease in income from operations for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the $5.2 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by the increased gross profit in 2022.

Interest Expense

Interest expense was $0.1 million for both the three months ended September 30, 2022 and 2021. Interest expense was $0.3 million for both the nine months ended September 30, 2022 and 2021.

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 and nine months ended September 30, 2022 was 16% and 15%, respectively. The effective tax rate for the three and nine months ended September 30, 2021 was 26% and 23%, respectively. The primary drivers of the change in effective tax rate are a release in valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.

Net Income

Net income for the three months ended September 30, 2022 was $1.5 million or $0.57 per basic common share and $0.53 per diluted common share. Net income for the three months ended September 30, 2021 was $3.6 million or $1.33 per basic common share and $1.24 per diluted common share. The decrease in net income for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the $5.2 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by the increased gross profit in 2022. Net income for the nine months ended September 30, 2022 was $2.4 million or $0.89 per basic common share and $0.83 per diluted common share. Net income for the nine months ended September 30, 2021 was $2.2 million or $0.82 per basic common share and $0.78 per diluted common share.

Liquidity and Capital Resources

We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC and cash on hand will be sufficient to satisfy our working capital needs for the next twelve months, capital expenditures and debt repayments.

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Credit Facility

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2026.

Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 4.1% and 3.5% as of September 30, 2022 and December 31, 2021, respectively. We had borrowings on our line of credit of $9.9 million and $9.0 million outstanding as of September 30, 2022 and December 31, 2021, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $48 thousand and $58 thousand on the consolidated balance sheet for the periods ended September 30, 2022 and December 31, 2021, respectively.

The line of credit with Bank of America contains 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 Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0 for the twelve months ended at each Fiscal Quarter end subject only during a trigger period commencing when our availability under our line is less than $2.0 million until availability is above that amount for 30 days. As of September 30, 2022 the Company was in compliance with its covenants.

At September 30, 2022, we had unused availability under our line of credit of $5.8 million supported by our borrowing base. The line is secured by substantially all of our assets. In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improved our unused availability. In the third quarter of 2022, we amended our credit agreement to extend the inclusion of the Employee Retention Credit Receivable through December 31, 2022.

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, 2021. 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.

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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, labor rates or currency exchange rates;

♦ Supply chain disruption and unreliability;

♦ Lack of supply of sufficient human resources to produce our products;

♦ 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;

♦ 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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included or incorporated into 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, 2021.

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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.

27

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021.

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

As of September 30, 2022, 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.

28

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 September 30, 2022, formatted in Inline 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.

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

105* Eighth Amendment dated September 1, 2022 to Loan and Security Agreement between the Company and Bank of America N.A.

*Filed herewith

29

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: November 9, 2022	by:	/s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

Date: November 9, 2022	by:	/s/ Christopher D. Jones
		Christopher D. Jones
		Vice President and Chief Financial Officer
		Nortech Systems Incorporated

30

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: November 9, 2022	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, Christopher D. Jones, 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: November 9, 2022	By:	/s/ Christopher D. Jones
		Christopher D. Jones
		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 September 30, 2022 (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: November 9, 2022

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 Christopher D. Jones, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2022 (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: November 9, 2022

By:	/s/ Christopher D. Jones
	Christopher D. Jones
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

EX-99.105

Exhibit 105

EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”) is made and entered into effective as of September 1, 2022, by and between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (“Borrower”), and BANK OF AMERICA, N.A., a national banking association (together with its successors and assigns, the “Lender”).

RECITALS:         

A.         Borrower and Lender are parties to a certain Loan and Security Agreement dated as of June 15, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”). Capitalized terms not otherwise defined in this Amendment shall have the meanings assigned to them in the Loan Agreement.

B.          Borrower has requested that Lender amend and modify certain terms and provisions of the Loan Agreement.

C.          Lender has agreed to so amend the Loan Agreement upon the terms and subject to the conditions set forth in this Amendment.

AGREEMENTS:

NOW, THEREFORE, in consideration of the premises herein set forth and for other good and valuable consideration, the nature, receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1.          Recitals. Borrower and Lender agree that the Recitals set forth above are true and correct.

2.          Definition of “Eligible ERC Amount”. Section 1.1 of the Loan Agreement is hereby amended by amending and restating the definition of “Eligible ERC Amount” in its entirety as follows:

Eligible ERC Amount: at any date of determination (a) prior to December 31, 2022, the sum of (i) the aggregate amount of Employee Retention Credits minus (ii) all payments of Employee Retention Credits received by Borrower prior to such date and (b) on or after December 31, 2022, $0.

3.          Conditions Precedent. This Amendment shall become effective upon delivery to Lender of the following, each in form and substance acceptable to Lender:

a.    this Amendment, duly executed by Borrower and Lender; and

b.    such other documents, instruments and agreements as Lender may reasonably require.

4.         Representations; No Default. Borrower represents and warrants that: (a) Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized the execution and delivery of this Amendment and other agreements and documents executed and delivered by Borrower in connection herewith, (b) neither this Amendment nor the agreements contained herein contravene or constitute a Default or Event of Default under the Loan Agreement or a default under any other agreement, instrument or indenture to which Borrower is a party or a signatory, or any provision of Borrower’s Articles of Incorporation or By-Laws or, to the best of Borrower’s knowledge, any other agreement or requirement of law, or result in the imposition of any lien or other encumbrance on any of its property under any agreement binding on or applicable to Borrower or any of its property except, if any, in favor of Lender, (c) no consent, approval or authorization of or registration or declaration with any party, including but not limited to any governmental authority, is required in connection with the execution and delivery by Borrower of this Amendment or other agreements and documents executed and delivered by Borrower in connection herewith or the performance of obligations of Borrower herein described, except for those which Borrower has obtained or provided and as to which Borrower has delivered certified copies of documents evidencing each such action to Lender, (d) no events have taken place and no circumstances exist at the date hereof which would give Borrower grounds to assert a defense, offset or counterclaim to the obligations of Borrower under the Loan Agreement or any of the other Loan Documents, (e) there are no known claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including attorneys’ fees) of any kind, character or nature whatsoever, fixed or contingent, which Borrower may have or claim to have against Lender, which might arise out of or be connected with any act of commission or omission of Lender existing or occurring on or prior to the date of this Amendment, including, without limitation, any claims, liabilities or obligations arising with respect to the indebtedness evidenced by any promissory note executed by Borrower in favor of Lender, (f) the representations and warranties of Borrower contained in the Loan Agreement are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, (g) no Default or Event of Default has occurred and is continuing under the Loan Agreement, and (h) to the Borrower’s knowledge, all Employee Retention Credits are without offset or dispute.

5.          Affirmation, Further References. Lender and Borrower each acknowledge and affirm that the Loan Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Loan Agreement (except as amended by this Amendment) and of each of the other Loan Documents shall remain unmodified and in full force and effect. All references in any document or instrument to the Loan Agreement are hereby amended and shall refer to the Loan Agreement as amended by this Amendment.

6.          Severability. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction.

7.          Successors. This Amendment shall be binding upon Borrower and Lender and their respective successors and assigns, and shall inure to the benefit of Borrower and Lender and to the respective successors and assigns of Lender.

8.         Costs and Expenses. Borrower agrees to reimburse Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys’ fees and legal expenses of counsel for Lender) incurred in connection with the Loan Agreement, including in connection with the negotiation, preparation and execution of this Amendment and all other documents negotiated, prepared and executed in connection with this Amendment, and in enforcing the obligations of Borrower under this Amendment, and to pay and save Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment.

9.          Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment.

10.        Counterparts; Digital Copies. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and any party to this Amendment may execute any such agreement by executing a counterpart of such agreement. A facsimile or digital copy (pdf) of this signed Amendment shall be deemed to be an original thereof.

11.        Governing Law. This Amendment shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof.

12.        Release of Rights and Claims. Borrower, for itself and its successors and assigns, hereby releases, acquits, and forever discharges Lender and its successors and assigns for any and all manner of actions, suits, claims, charges, judgments, levies and executions occurring or arising from the transactions entered into with Lender prior to entering into this Amendment whether known or unknown, liquidated or unliquidated, fixed or contingent, direct or indirect which Borrower may have against Lender.

13.        No Waiver. Nothing contained in this Amendment (or in any other agreement or understanding between the parties) shall constitute a waiver of, or shall otherwise diminish or impair, Lender’s rights or remedies under the Loan Agreement or any of the other Loan Documents, or under applicable law.

[Remainder of Page Intentionally Blank]

IN WITNESS WHEREOF, the parties hereto have entered into this Amendment as of the date first above written.

BORROWER:	NORTECH SYSTEMS INCORPORATED
	By:	/s/ Alan K. Nordstrom
	Name:	Alan K. Nordstrom
	Title:	Corporate Controller
LENDER:	BANK OF AMERICA, N.A.
	By:	/s/ Matthew J. Zeratsky
	Name:	Matthew J. Zeratsky
	Title:	Senior Vice President

Eighth Amendment to Loan and Security Agreement

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2022	Nov. 04, 2022
Document Information [Line Items]
Entity Central Index Key	0000722313
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q3
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2022
Document Transition Report	false
Entity Registrant Name	NORTECH SYSTEMS INCORPORATED
Entity File Number	0-13257
Entity Incorporation, State or Country Code	MN
Entity Tax Identification Number	41-1681094
Entity Address, Address Line One	7550 Meridian Circle N., Suite # 150
Entity Address, City or Town	Maple Grove
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55369
City Area Code	(952)
Local Phone Number	345-2244
Title of 12(b) Security	Common Stock, par value $.01 per share
Trading Symbol	NSYS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		2,690,634

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Net Sales	$ 35,276	$ 29,452	$ 98,505	$ 81,706
Cost of Goods Sold	28,948	21,411	83,129	68,519
Gross Profit	6,328	8,041	15,376	13,187
Operating Expenses
Selling Expenses	959	449	2,752	1,741
General and Administrative Expenses	2,949	2,045	8,346	7,247
Research and Development Expenses	475	141	1,154	348
Restructuring Charges	0	23	0	319
Loss on Abandonment of Intangible Assets	0	560	0	560
Gain on Sale of Assets	0	(93)	(15)	(176)
Total Operating Expenses	4,383	3,125	12,237	10,039
Income From Operations	1,945	4,916	3,139	3,148
Other Expense
Interest Expense	(122)	(112)	(337)	(314)
Income Before Income Taxes	1,823	4,804	2,802	2,834
Income Tax Expense	289	1,247	411	646
Net Income	$ 1,534	$ 3,557	$ 2,391	$ 2,188
Net Income Per Common Share:
Basic (in dollars per share) (in dollars per share)	$ 0.57	$ 1.33	$ 0.89	$ 0.82
Weighted Average Number of Common Shares Outstanding - Basic (in shares) (in shares)	2,686,884	2,665,682	2,683,594	2,662,066
Diluted (in dollars per share) (in dollars per share)	$ 0.53	$ 1.24	$ 0.83	$ 0.78
Weighted Average Number of Common Shares Outstanding - Diluted (in shares) (in shares)	2,899,526	2,880,073	2,886,073	2,806,958
Other comprehensive income
Foreign currency translation	$ (365)	$ (5)	$ (604)	$ 20
Comprehensive income, net of tax	$ 1,169	$ 3,552	$ 1,787	$ 2,208

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Current Assets
Cash	$ 1,300	$ 643	[1]
Restricted Cash	792	1,582	[1]
Accounts Receivable, less allowances of $257 and $328	15,497	14,548	[1]
Employee Retention Credit Receivable	5,209	5,209	[1]
Inventories, Net	23,610	19,434	[1]
Contract Assets	9,886	8,698	[1]
Prepaid Expenses and Other Current Assets	1,851	1,660	[1]
Total Current Assets	58,145	51,774	[1]
Property and Equipment, Net	6,457	5,833	[1]
Operating Lease Assets	8,079	8,983	[1]
Other Intangible Assets, Net	433	501	[1]
Total Assets	73,114	67,091	[1]
Current Liabilities
Current Portion of Finance Lease Obligations	390	601	[1]
Current Portion of Operating Lease Obligations	1,113	1,043	[1]
Accounts Payable	14,701	12,710	[1]
Accrued Payroll and Commissions	5,116	4,045	[1]
Customer Deposits	3,870	2,936	[1]
Other Accrued Liabilities	1,380	971	[1]
Total Current Liabilities	26,570	22,306	[1]
Long-Term Liabilities
Long Term Line of Credit	9,826	8,959	[1]
Long Term Finance Lease Obligations, Net	639	916	[1]
Long-Term Operating Lease Obligations, Net	7,797	8,695	[1]
Other Long-Term Liabilities	99	104	[1]
Total Long-Term Liabilities	18,361	18,674	[1]
Total Liabilities	44,931	40,980	[1]
Commitments and contingencies
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250	250	[1]
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,683,513 and 2,672,064 Shares Issued and Outstanding, respectively	27	27	[1]
Additional Paid-In Capital	16,247	15,962	[1]
Accumulated Other Comprehensive (Income) Loss	(548)	56	[1]
Retained Earnings	12,207	9,816	[1]
Total Shareholders' Equity	28,183	26,111	[1]
Total Liabilities and Shareholders' Equity	$ 73,114	$ 67,091	[1]

[1] The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited)-parentheticals (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Accounts receivable allowance	$ 257	$ 328
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 outstanding (in shares)	250,000	250,000
Preferred Stock, Shares Issued (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 outstanding (in shares)	2,683,513	2,672,064
Common stock, shares issued (in shares)	2,683,513	2,672,064

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$ 2,391	$ 2,188
Adjustments to Reconcile Net Income to Net Cash
Depreciation and Amortization	1,440	1,506
Compensation on Stock-Based Awards	234	201
Change in Accounts Receivable Allowance	(71)	18
Change in Inventory Reserves	(54)	(959)
Loss on Abandonment of Intangible Assets	0	560
Gain on Disposal of Property and Equipment	(15)	(176)
Changes in Current Operating Items
Accounts Receivable	(1,115)	1,686
Employee Retention Credit Receivable	0	(5,209)
Inventories	(4,402)	(5,755)
Contract Assets	(1,188)	(2,246)
Prepaid Expenses and other Curent Assets	(213)	(276)
Income Taxes	(67)	708
Accounts Payable	1,659	2,901
Accrued Payroll and Commissions	1,071	1,537
Other Accrued Liabilities	1,330	464
Net Cash Provided By (Used In) Operating Activities	1,000	(2,852)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Property and Equipment	15	626
Purchase of Intangible Asset	(43)	(49)
Purchases of Property and Equipment	(1,687)	(1,198)
Net Cash Used In Investing Activities	(1,715)	(621)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Line of Credit	857	2,681
Principal Payments on Long-Term Debt	0	(873)
Principal Payments on Financing Leases	(336)	(492)
Debt Issuance Costs	10	0
Stock Option Excercises	51	36
Net Cash Provided By Financing Activities	582	1,352
Net Change in Cash and Cash Equivalents	(133)	(2,121)
Cash and Cash Equivalents - Beginning of Period	2,225	3,564
Cash and Cash Equivalents - End of Period	2,092	1,443
Reconciliation of cash and restricted cash reported within the consolidated balance sheets
Cash	1,300	444
Restricted Cash	792	999
Total Cash and restricted cash reported in the consolidated statements of cash flows	2,092	1,443
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	328	220
Cash Paid (Refunded) During the Period for Income Taxes	122	(114)
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	332	0
Property Acquired Under Operating Lease	$ 0	$ 858

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 JUNE 30, 2021 at Dec. 31, 2020	$ 250	$ 27	$ 15,816	$ (37)	$ 2,662	$ 18,718
Net Income	0	0	0	0	2,188	2,188
Foreign currency translation adjustment	0	0	0	20	0	20
Stock option exercises			36			36
Compensation on stock-based awards	0	0	74	0	0	74
BALANCE SEPTEMBER 30, 2021 at Sep. 30, 2021	250	27	15,926	(17)	4,850	21,036
BALANCE JUNE 30, 2021 at Jun. 30, 2021	250	27	15,862	(12)	1,293	17,420
Net Income	0	0	0	0	3,557	3,557
Foreign currency translation adjustment	0	0	0	(5)	0	(5)
Stock option exercises			36			36
Compensation on stock-based awards	0	0	28	0	0	28
BALANCE SEPTEMBER 30, 2021 at Sep. 30, 2021	250	27	15,926	(17)	4,850	21,036
BALANCE JUNE 30, 2021 at Dec. 31, 2021	250	27	15,962	56	9,816	26,111	[1]
Net Income	0	0	0	0	2,391	2,391
Foreign currency translation adjustment	0	0	0	(604)	0	(604)
Stock option exercises	0	0	51	0	0	51
Compensation on stock-based awards	0	0	234	0	0	234
BALANCE SEPTEMBER 30, 2021 at Sep. 30, 2022	250	27	16,247	(548)	12,207	28,183
BALANCE JUNE 30, 2021 at Jun. 30, 2022	250	27	16,136	(183)	10,673	26,903
Net Income	0	0	0	0	1,534	1,534
Foreign currency translation adjustment	0	0	0	(365)	0	(365)
Stock option exercises	0	0	18	0	0	18
Compensation on stock-based awards	0	0	93	0	0	93
BALANCE SEPTEMBER 30, 2021 at Sep. 30, 2022	$ 250	$ 27	$ 16,247	$ (548)	$ 12,207	$ 28,183

[1] The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 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. Customer deposits represent cash received in advance of revenue earned.

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 nine months ended September 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 3,000 and 69,000 service-based options during the three and nine months ended September 30, 2022, respectively. Total option grants for the three and nine months ended September 30, 2022 were 3,000 and 90,000, respectively. There were 27,000 stock options granted during the nine months ended September 30, 2021.

Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. Total compensation expense related to stock options was $28 and $74 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $810 of unrecognized compensation which will vest over the next 3.86 years.

Following is the status of all stock options as of September 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		90,000			11.13
Exercised		(19,800	)		3.40
Cancelled		(8,000	)		3.38
Outstanding - September 30, 2022		449,700		$	5.93		7.10	$	2,137
Exercisable - September 30, 2022		213,500		$	3.95		5.90	$	1,407

Restricted Stock Units

During the three and nine months ended September 30, 2022, we granted 0 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 nine months ended September 30, 2022. Total compensation expense related to the RSUs were $31 and $66 for the three and nine months ended September 30, 2022, respectively. There was no compensation expense related to RSUs for the three and nine months ended September 30, 2021. Total unrecognized compensation expense related to the RSUs was $186, which will vest over the next 1.49 years. The RSUs granted in the nine months ended September 30, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.48 years. No RSUs vested during the nine months ended September 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 nine months ended September 30, 2022 or September 30, 2021.

The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. There are no units outstanding as of September 30, 2022. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $13 and $127 for the three and nine months ended September 30, 2021, respectively.

Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income 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 nine months ended September 30, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per common share as their impact were dilutive. For the three and nine months ended September 30, 2021, stock options of 214,391 and 144,892, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

We had outstanding stock options totaling 34,211 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 September 30, 2022. We had average outstanding stock options totaling 44,070 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2022. Outstanding stock options totaling 0 and 221 are not considered in the computation of diluted net income per share for the three and nine months ended September 30, 2021, respectively.

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 September 30, 2022, we had outstanding letters of credit for $400. Restricted cash as of September 30, 2022 was $792, which includes 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 $257 at September 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:

	September 30,			December 31,
	2022			2021
Raw Materials	$	22,520		$	18,492
Work in Process		1,719			1,678
Finished Goods		615			562
Reserves		(1,244	)		(1,298	)
Total	$	23,610		$	19,434

Other Intangible Assets

Other intangible assets at September 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		-		-		43		43
Amortization		108		-		3		111
Balance at September 30, 2022	$	252	$	-	$	181	$	433

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 2.1 years. In-process patents are not amortized until the patent is received. At September 30, 2022, patents totaling $96 had been received while $85 of patents were in-process.

Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively. Amortization expense for the three and nine months ended September 30, 2021 was $45 and $139, respectively.

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

Year	Amount
Remainder of 2022	$	40
2023		159
2024		86
2025		14
Thereafter		49
Total	$	348

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.

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Note 2 - Concentration of Credit Risk and Major Customers

9 Months Ended

Sep. 30, 2022

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 $2,092 in cash and restricted cash at September 30, 2022, approximately $561 and $11 was held at banks located in China and Mexico, respectively. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of total accounts receivable. One customer accounted for 28% and 26% of net sales for the three and nine months ended September 30, 2022, respectively. For the three months ended September 30, 2021, two customers accounted for 36% of net sales. For the nine months ended September 30, 2021, one customer accounted for 26% of net sales.

At September 30, 2022, two customers represented approximately 43% of our total accounts receivable. At December 31, 2021, one customer represented approximately 19% of our total accounts receivable.

Export sales represented approximately 4% of net sales for both the three and nine months ended September 30, 2022. Export sales represented approximately 3% of net sales for the three and nine months ended September 30, 2021 respectively.

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Note 3 - Revenue

9 Months Ended

Sep. 30, 2022

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 74% of our revenue for both the three and nine months ended September 30, 2022 and 82% and 80% of our revenue for the three and nine months ended September 30, 2021, 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 nine months ended September 30, 2022 was as follows (in thousands):

Balance outstanding at December 31, 2021	$	8,698
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		72,536
Amounts invoiced during the period		(71,348	)
Balance outstanding at September 30, 2022	$	9,886

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2022 to be transferred to receivables within 90 days, with the majority of 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 timing of transfer of goods and services by market:

	Three Months Ended September 30, 2022
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,753	$	5,366	$	420	$	20,539
Industrial		8,104		2,314		420		10,838
Aerospace and Defense		3,202		493		204		3,899
Total net sales	$	26,059	$	8,173	$	1,044	$	35,276

	Nine Months Ended September 30, 2022
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	37,725	$	15,044	$	1,574	$	54,343
Industrial		21,563		6,301		1,095		28,959
Aerospace and Defense		13,248		1,254		701		15,203
Total net sales	$	72,536	$	22,599	$	3,370	$	98,505

	Three Months Ended September 30, 2021
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,762	$	2,933	$	282	$	16,977
Industrial		7,468		1,757		158		9,383
Aerospace and Defense		2,883		144		65		3,092
Total net sales	$	24,113	$	4,834	$	505	$	29,452

	Nine Months Ended September 30, 2021
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	35,497	$	8,876	$	1,017	$	45,390
Industrial		20,385		4,832		560		25,777
Aerospace and Defense		9,685		527		327		10,539
Total net sales	$	65,567	$	14,235	$	1,904	$	81,706

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Note 4 - Financing Arrangements

9 Months Ended

Sep. 30, 2022

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 provides for a line of credit arrangement of $16,000 that expires on June 15, 2026.

Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 4.1% and 3.5% as of September 30, 2022 and December 31, 2021, respectively. We had borrowings on our line of credit of $9,873 and $9,016 as of September 30, 2022 and December 31, 2021, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $48 and $58 on the consolidated balance sheet for the periods ended September 30, 2022 and December 31, 2021, respectively.

The line of credit with Bank of America contains 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 Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0 for the twelve months ended at each Fiscal Quarter end subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days. As of September 30, 2022 the Company was in compliance with its covenants.

At September 30, 2022, we had unused availability under our line of credit of $5,827 supported by our borrowing base. The line is secured by substantially all of our assets. In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improved our unused availability. In the third quarter of 2022, we amended our credit agreement to extend the inclusion of the Employee Retention Credit Receivable through December 31, 2022.

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Note 5 - Leases

9 Months Ended

Sep. 30, 2022

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 September 30, 2022, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

	Three Months Ended September 30,		Three Months Ended September 30,
Lease Cost	2022		2021
Operating lease cost	$	572	$	576
Finance lease interest cost		14		18
Finance lease amortization expense		182		163
Total lease cost	$	768	$	757

	Nine Months Ended September 30,		Nine Months ended September 30,
Lease Cost	2022		2021
Operating lease cost	$	1,731	$	1,696
Finance lease interest cost		50		61
Finance lease amortization expense		547		489
Total lease cost	$	2,328	$	2,246

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	September 30, 2022		December 31, 2021
Assets
Operating lease assets	Operating lease assets	$	8,079	$	8,983
Finance lease assets	Property, plant and equipment		1,505		2,052
Total leased assets		$	9,584	$	11,035

Supplemental cash flow information related to leases was as follows:

	September 30,		September 30,
	2022		2021
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,279	$	861
Right-of-use assets obtained in exchange for lease obligations	$	-	$	858

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2022	$	430		$	126		$	556
2023		1,765			409			2,175
2024		1,505			357			1,861
2025		1,255			103			1,358
2026		1,217			108			1,332
Thereafter		7,066			-			7,066
Total lease payments	$	13,238		$	1,103		$	14,341
Less: Interest		(4,328	)		(74	)		(4,402	)
Present value of lease liabilities	$	8,910		$	1,029		$	9,939

The lease term and discount rate at September 30, 2022 were as follows:

Weighted-average remaining lease term (years)
Operating leases	9.1
Finance leases	2.8
Weighted-average discount rate
Operating leases	7.7	%
Finance leases	5.2	%

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Note 6 - Income Taxes

9 Months Ended

Sep. 30, 2022

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 and nine months ended September 30, 2022 was 16% and 15%, respectively. The effective tax rate for the three and nine months ended September 30, 2021 was 26% and 23%, respectively. The primary drivers of the change in effective tax rate are due to a change in the federal valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.

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Note 7 - Restructuring Charges

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Restructuring and Related Activities Disclosure [Text Block]

NOTE 7. RESTRUCTURING CHARGES

During the first nine months of 2021, we recorded restructuring charges of $319 related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility. We recognized a gain on the sale of assets related to the restructure of $93 and $176 for the three and nine months ended September 30, 2021, respectively. There were no restructuring charges or amounts accrued in the nine months ended September 30, 2022.

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Note 8 - Employee Retention Credit

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Employee Retention Credit [Text Block]

NOTE 8. EMPLOYEE RETENTION CREDIT

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.

At September 30, 2022 and December 31, 2021, the Company has ERC benefits of $5,209 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.

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Note 9 - Related Party Transactions

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE 9. RELATED PARTY TRANSACTIONS

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021. In the three and nine months ended September 30, 2022, Abilitech paid the Company $0 and $217, respectively, for delivery of medical products. In the three and nine months ended September 30, 2021, Abilitech paid the Company $316 and $1,056, respectively for the delivery of medical products. The Company believes that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

David Kunin, our Chairman, is a minority owner (less than 10%) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $1,000 conditional grant. Under the terms of the BIRD Foundation grant, the Company and Marpe Technologies are to receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company will meet its obligation by providing certain services at cost or no cost to Marpe Technologies. The total value of the contribution will not exceed $500; the Company has contributed $226 as of September 30, 2022. The Company will receive a 10-year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recoup the value of services provided to Marpe for which is not fully paid. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the three and nine months ended September 30, 2022, we recognized revenue of $66 and $182. During both the three and nine months ended September 30, 2021, we recognized revenue of $78. The Company believes that transactions with Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2022

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of PresentationThe 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.

Consolidation, Policy [Policy Text Block]

Principles of ConsolidationThe 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 RecognitionOur 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. Customer deposits represent cash received in advance of revenue earned.

Share-Based Payment Arrangement [Policy Text Block]

Stock-Based AwardsStock OptionsIn 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 nine months ended September 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 3,000 and 69,000 service-based options during the three and nine months ended September 30, 2022, respectively. Total option grants for the three and nine months ended September 30, 2022 were 3,000 and 90,000, respectively. There were 27,000 stock options granted during the nine months ended September 30, 2021.Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. Total compensation expense related to stock options was $28 and $74 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $810 of unrecognized compensation which will vest over the next 3.86 years.Following is the status of all stock options as of September 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		90,000			11.13
Exercised		(19,800	)		3.40
Cancelled		(8,000	)		3.38
Outstanding - September 30, 2022		449,700		$	5.93		7.10	$	2,137
Exercisable - September 30, 2022		213,500		$	3.95		5.90	$	1,407

Restricted Stock UnitsDuring the three and nine months ended September 30, 2022, we granted 0 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 nine months ended September 30, 2022. Total compensation expense related to the RSUs were $31 and $66 for the three and nine months ended September 30, 2022, respectively. There was no compensation expense related to RSUs for the three and nine months ended September 30, 2021. Total unrecognized compensation expense related to the RSUs was $186, which will vest over the next 1.49 years. The RSUs granted in the nine months ended September 30, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.48 years. No RSUs vested during the nine months ended September 30, 2022.Equity Appreciation Rights PlanIn 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 nine months ended September 30, 2022 or September 30, 2021.The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. There are no units outstanding as of September 30, 2022. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $13 and $127 for the three and nine months ended September 30, 2021, respectively.

Earnings Per Share, Policy [Policy Text Block]

Net Income per Common ShareBasic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income 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 nine months ended September 30, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per common share as their impact were dilutive. For the three and nine months ended September 30, 2021, stock options of 214,391 and 144,892, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.We had outstanding stock options totaling 34,211 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 September 30, 2022. We had average outstanding stock options totaling 44,070 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2022. Outstanding stock options totaling 0 and 221 are not considered in the computation of diluted net income per share for the three and nine months ended September 30, 2021, respectively.

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

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 September 30, 2022, we had outstanding letters of credit for $400. Restricted cash as of September 30, 2022 was $792, which includes 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 [Policy Text Block]

Accounts Receivable and Allowance for Doubtful AccountsCredit 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 $257 at September 30, 2022 and $328 at December 31, 2021.

Inventory, Policy [Policy Text Block]

InventoriesInventories 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:

	September 30,			December 31,
	2022			2021
Raw Materials	$	22,520		$	18,492
Work in Process		1,719			1,678
Finished Goods		615			562
Reserves		(1,244	)		(1,298	)
Total	$	23,610		$	19,434

Intangible Assets, Finite-Lived, Policy [Policy Text Block]

Other Intangible AssetsOther intangible assets at September 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		-		-		43		43
Amortization		108		-		3		111
Balance at September 30, 2022	$	252	$	-	$	181	$	433

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 2.1 years. In-process patents are not amortized until the patent is received. At September 30, 2022, patents totaling $96 had been received while $85 of patents were in-process.Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively. Amortization expense for the three and nine months ended September 30, 2021 was $45 and $139, respectively.Estimated future annual amortization expense (not including patents in process) related to these assets is approximately as follows:

Year	Amount
Remainder of 2022	$	40
2023		159
2024		86
2025		14
Thereafter		49
Total	$	348

New Accounting Pronouncements, Policy [Policy Text Block]

Accounting Pronouncements Issued But Not Yet AdoptedIn 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.

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Note 1 - Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2022

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, 2022		387,500		$	4.57
Granted		90,000			11.13
Exercised		(19,800	)		3.40
Cancelled		(8,000	)		3.38
Outstanding - September 30, 2022		449,700		$	5.93		7.10	$	2,137
Exercisable - September 30, 2022		213,500		$	3.95		5.90	$	1,407

Schedule of Inventory, Current [Table Text Block]

	September 30,			December 31,
	2022			2021
Raw Materials	$	22,520		$	18,492
Work in Process		1,719			1,678
Finished Goods		615			562
Reserves		(1,244	)		(1,298	)
Total	$	23,610		$	19,434

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

	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		-		-		43		43
Amortization		108		-		3		111
Balance at September 30, 2022	$	252	$	-	$	181	$	433

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

Year	Amount
Remainder of 2022	$	40
2023		159
2024		86
2025		14
Thereafter		49
Total	$	348

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Note 3 - Revenue (Tables)

9 Months Ended

Sep. 30, 2022

Notes Tables

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

Balance outstanding at December 31, 2021	$	8,698
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		72,536
Amounts invoiced during the period		(71,348	)
Balance outstanding at September 30, 2022	$	9,886

Disaggregation of Revenue [Table Text Block]

	Three Months Ended September 30, 2022
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	14,753	$	5,366	$	420	$	20,539
Industrial		8,104		2,314		420		10,838
Aerospace and Defense		3,202		493		204		3,899
Total net sales	$	26,059	$	8,173	$	1,044	$	35,276

	Nine Months Ended September 30, 2022
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	37,725	$	15,044	$	1,574	$	54,343
Industrial		21,563		6,301		1,095		28,959
Aerospace and Defense		13,248		1,254		701		15,203
Total net sales	$	72,536	$	22,599	$	3,370	$	98,505

	Three Months Ended September 30, 2021
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	13,762	$	2,933	$	282	$	16,977
Industrial		7,468		1,757		158		9,383
Aerospace and Defense		2,883		144		65		3,092
Total net sales	$	24,113	$	4,834	$	505	$	29,452

	Nine Months Ended September 30, 2021
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	35,497	$	8,876	$	1,017	$	45,390
Industrial		20,385		4,832		560		25,777
Aerospace and Defense		9,685		527		327		10,539
Total net sales	$	65,567	$	14,235	$	1,904	$	81,706

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Note 5 - Leases (Tables)

9 Months Ended

Sep. 30, 2022

Notes Tables

Lease, Cost [Table Text Block]

	Three Months Ended September 30,		Three Months Ended September 30,
Lease Cost	2022		2021
Operating lease cost	$	572	$	576
Finance lease interest cost		14		18
Finance lease amortization expense		182		163
Total lease cost	$	768	$	757

	Nine Months Ended September 30,		Nine Months ended September 30,
Lease Cost	2022		2021
Operating lease cost	$	1,731	$	1,696
Finance lease interest cost		50		61
Finance lease amortization expense		547		489
Total lease cost	$	2,328	$	2,246

	September 30,		September 30,
	2022		2021
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,279	$	861
Right-of-use assets obtained in exchange for lease obligations	$	-	$	858

Weighted-average remaining lease term (years)
Operating leases	9.1
Finance leases	2.8
Weighted-average discount rate
Operating leases	7.7	%
Finance leases	5.2	%

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

	Balance Sheet Location	September 30, 2022		December 31, 2021
Assets
Operating lease assets	Operating lease assets	$	8,079	$	8,983
Finance lease assets	Property, plant and equipment		1,505		2,052
Total leased assets		$	9,584	$	11,035

Schedule of Lease Liability Maturity [Table Text Block]

	Operating Leases			Finance Leases			Total
Remaining 2022	$	430		$	126		$	556
2023		1,765			409			2,175
2024		1,505			357			1,861
2025		1,255			103			1,358
2026		1,217			108			1,332
Thereafter		7,066			-			7,066
Total lease payments	$	13,238		$	1,103		$	14,341
Less: Interest		(4,328	)		(74	)		(4,402	)
Present value of lease liabilities	$	8,910		$	1,029		$	9,939

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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		9 Months Ended		12 Months Ended
	May 31, 2022	Mar. 31, 2020	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021		Dec. 31, 2020	May 31, 2017	Dec. 31, 2012	Nov. 30, 2010
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross (in shares)					90,000
Share-Based Compensation Arrangements by Share-Based Payment Award, Options, Grants in Period, Weighted Average Exercise Price					$ 11.13
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term					7 years 1 month 6 days
Share-Based Payment Arrangement, Expense (in shares)			212,643	214,391	202,479	144,892
Letters of Credit Outstanding, Amount			$ 400		$ 400
Restricted Cash and Cash Equivalents, Current, Total			792	$ 999	792	$ 999	$ 1,582	[1]
Accounts Receivable, Allowance for Credit Loss, Current			257		$ 257		328
Finite-Lived Intangible Assets, Remaining Amortization Period					2 years 1 month 6 days
Finite-Lived Intangible Assets, Net, Ending Balance			433		$ 433		501	[1]	$ 1,173
Amortization of Intangible Assets			40	45	111	$ 139	$ 176
Patents Received [Member]
Finite-Lived Intangible Assets, Net, Ending Balance			96		96
Patents In Process [Member]
Finite-Lived Intangible Assets, Net, Ending Balance			$ 85		$ 85
Employee Market Condition Options [Member]
Accounts Receivable, Allowance for Credit Loss, Current (in shares)			0
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross (in shares)					21,000
Employee Service-based Options [Member]
Accounts Receivable, Allowance for Credit Loss, Current (in shares)			3,000		69,000
Share-Based Payment Arrangement, Option [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross (in shares)			3,000		90,000	27,000
Share-Based Payment Arrangement, Expense			$ 62	$ 28	$ 168	$ 74
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total			$ 810		$ 810
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition					3 years 10 months 9 days
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount			34,211	0	44,070	221
Stock Appreciation Rights (SARs) [Member]
Accounts Receivable, Allowance for Credit Loss, Current (in shares)					0	0
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Nonvested, Number, Ending Balance			0		0						100,000
Equity Appreciation Right Units [Member]
Share-Based Payment Arrangement, Expense				$ 13		$ 127
Stock Incentive Plan 2017 [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Number of Shares Authorized										350,000
Share-Based Compensation Arrangement by Share-Based Payment Award, Number of Additional Shares Authorized (in shares)	175,000	50,000
Stock Incentive Plan 2017 [Member] | Restricted Stock Units (RSUs) [Member]
Share-Based Payment Arrangement, Expense				$ 0		$ 0
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total			$ 186		$ 186
Share-Based Compensation Arrangement by Share-Based Payment Award, Award Vesting Period					1 year 5 months 26 days
Share-Based Compensation Arrangements by Share-Based Payment Award, Options, Grants in Period, Weighted Average Exercise Price					$ 12.00
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term					9 years 5 months 23 days
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Vested in Period, Fair Value					$ 0
Stock Incentive Plan 2017 [Member] | Restricted Stock Units (RSUs) [Member] | Non-employee Directors [Member]
Accounts Receivable, Allowance for Credit Loss, Current (in shares)			0		21,000
Share-Based Payment Arrangement, Expense			$ 31		$ 66
Share-Based Compensation Arrangement by Share-Based Payment Award, Award Vesting Period					2 years
Equity Appreciation Rights Plan 2010 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Number of Shares Authorized												1,000,000

[1] The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Option Activity (Details) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2022 USD ($) $ / shares shares	Sep. 30, 2021 shares
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Outstanding, Number, Ending Balance (in shares) | shares		387,500
Outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 4.57
Granted (in shares) | shares	90,000
Granted, weighted average exercise price (in dollars per share) | $ / shares	$ 11.13
Exercised (in shares) | shares	(19,800)
Exercised, weighted average exercise price (in dollars per share) | $ / shares	$ 3.40
Cancelled (in shares) | shares	(8,000)
Cancelled, weighted average exercise price (in dollars per share) | $ / shares	$ 3.38
Outstanding (in shares) | shares	449,700
Outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 5.93
Outstanding, weighted average remaining contractual term (Year)	7 years 1 month 6 days
Outstanding, aggregate intrinsic value | $	$ 2,137
Exercisable (in shares) | shares	213,500
Exercisable, weighted average exercise price (in dollars per share) | $ / shares	$ 3.95
Exercisable, weighted average remaining contractual term (Year)	5 years 10 months 24 days
Exercisable, aggregate intrinsic value | $	$ 1,407

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Note 1 - Summary of Significant Accounting Policies - Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Raw Materials	$ 22,520	$ 18,492
Work in Process	1,719	1,678
Finished Goods	615	562
Reserves	(1,244)	(1,298)
Total	$ 23,610	$ 19,434	[1]

[1] The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Finite Lived Intangible Assets (Details) - USD ($)	3 Months Ended		9 Months Ended			12 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022		Sep. 30, 2021	Dec. 31, 2021
Finite-Lived Intangible Assets, Net, Ending Balance			$ 501,000	[1]	$ 1,173,000	$ 1,173,000
Additions			43,000			64,000
Amortization	$ 40,000	$ 45,000	111,000		139,000	176,000
Abandonment Loss						560,000
Balance at December 31, 2021	433,000		433,000			501,000	[1]
Customer Relationships [Member]
Finite-Lived Intangible Assets, Net, Ending Balance			360,000		507,000	507,000
Additions			0			0
Amortization			108,000			147,000
Abandonment Loss						0
Balance at December 31, 2021	252,000		252,000			360,000
Trade Names [Member]
Finite-Lived Intangible Assets, Net, Ending Balance			0		589,000	589,000
Additions			0			0
Amortization			0			29,000
Abandonment Loss						560,000
Balance at December 31, 2021	0		0			0
Patents [Member]
Finite-Lived Intangible Assets, Net, Ending Balance			141,000		$ 77,000	77,000
Additions			43,000			64,000
Amortization			3,000			0
Abandonment Loss						0
Balance at December 31, 2021	$ 181,000		$ 181,000			$ 141,000

[1] The condensed consolidated balance sheet at December 31, 2021 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	Sep. 30, 2022	Dec. 31, 2021	[1]	Dec. 31, 2020
2025	$ 14
Thereafter	49
Total	433	$ 501		$ 1,173
Finite-lived Intangible Assets, Excluding Projects in Process [Member]
Remainder of 2022	40
2023	159
2024	86
Total	$ 348

[1] The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

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Note 2 - Concentration of Credit Risk and Major Customers (Details Textual) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2022 USD ($)	Sep. 30, 2021	Sep. 30, 2022 USD ($)	Sep. 30, 2021	Dec. 31, 2021
Excess Cash Balances, Number of High Credit Quality Financial Institutions			2
Customer Concentration Risk [Member] | Revenue from Contract with Customer Benchmark [Member] | One Customer [Member]
Concentration Risk Number of Customers	1			1
Concentration Risk, Percentage	28.00%		26.00%	26.00%
Customer Concentration Risk [Member] | Revenue from Contract with Customer Benchmark [Member] | Two Customers [Member]
Concentration Risk Number of Customers		2
Concentration Risk, Percentage		36.00%
Customer Concentration Risk [Member] | Revenue from Contract with Customer Benchmark [Member] | Largest Customer [Member]
Concentration Risk, Percentage		3.00%	4.00%	3.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | One Customer [Member]
Concentration Risk Number of Customers					1
Concentration Risk, Percentage					19.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Two Customers [Member]
Concentration Risk Number of Customers			2
Concentration Risk, Percentage			43.00%
UNITED STATES
Excess Cash Balances, Number of High Credit Quality Financial Institutions			1,000
Cash	$ 2,092		$ 2,092
CHINA
Excess Cash Balances, Number of High Credit Quality Financial Institutions			1
Cash	561		$ 561
MEXICO
Cash	$ 11		$ 11

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Note 3 - Revenue 1 (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Percentage of Revenue Transferred to Customers	74.00%	82.00%	74.00%	80.00%
Revenue Remaining Performance Obligation, Customers Upon Shipment With Payment Terms			120 days

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Note 3 - Revenue 2 (Details Textual)	Sep. 30, 2022
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period	180 days

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Note 3 - Revenue - Contract Assets (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2022 USD ($)
Outstanding	$ 8,698
Transferred to receivables from contract assets recognized	72,536
Product transferred over time	(71,348)
Outstanding	$ 9,886

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Note 3 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Net Sales	$ 35,276	$ 29,452	$ 98,505	$ 81,706
Medical [Member]
Net Sales	20,539	16,977	54,343	45,390
Industrial [Member]
Net Sales	10,838	9,383	28,959	25,777
Aerospace and Defense [Member]
Net Sales	3,899	3,092	15,203	10,539
Transferred over Time [Member]
Net Sales	26,059	24,113	72,536	65,567
Transferred over Time [Member] | Medical [Member]
Net Sales	14,753	13,762	37,725	35,497
Transferred over Time [Member] | Industrial [Member]
Net Sales	8,104	7,468	21,563	20,385
Transferred over Time [Member] | Aerospace and Defense [Member]
Net Sales	3,202	2,883	13,248	9,685
Transferred at Point in Time [Member]
Net Sales	8,173	4,834	22,599	14,235
Transferred at Point in Time [Member] | Medical [Member]
Net Sales	5,366	2,933	15,044	8,876
Transferred at Point in Time [Member] | Industrial [Member]
Net Sales	2,314	1,757	6,301	4,832
Transferred at Point in Time [Member] | Aerospace and Defense [Member]
Net Sales	493	144	1,254	527
Noncash Consideration [Member]
Net Sales	1,044	505	3,370	1,904
Noncash Consideration [Member] | Medical [Member]
Net Sales	420	282	1,574	1,017
Noncash Consideration [Member] | Industrial [Member]
Net Sales	420	158	1,095	560
Noncash Consideration [Member] | Aerospace and Defense [Member]
Net Sales	$ 204	$ 65	$ 701	$ 327

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Note 4 - Financing Arrangements (Details Textual) - Credit Agreement [Member] - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2022	Dec. 31, 2021	Jun. 15, 2017
Bank of America [Member]
Debt Issuance Costs, Net, Total	$ 48	$ 58
Bank of America [Member]
Long-Term Line of Credit, Total	$ 9,873	$ 9,016
Line of Credit, Minimum Fixed Charge Coverage Ratio During the Period	1.0
Line of Credit Facility, Remaining Borrowing Capacity	$ 5,827
Bank of America [Member] | Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity			$ 16,000
Debt Instrument, Interest Rate During Period	4.10%	3.50%

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Note 5 - Leases (Details Textual)	Sep. 30, 2022
Minimum [Member]
Lessee, Operating Lease, Renewal Term	1 year
Maximum [Member]
Lessee, Operating Lease, Renewal Term	5 years

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Note 5 - Leases - Lease Cost (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Operating lease cost	$ 572	$ 576	$ 1,731	$ 1,696
Cash paid for amounts included in the measurement of lease liabilities			$ 1,279	861
Operating leases (Year)	9 years 1 month 6 days		9 years 1 month 6 days
Finance leases (Year)	2 years 9 months 18 days		2 years 9 months 18 days
Finance lease interest cost	$ 14	18	$ 50	61
Property Acquired Under Operating Lease			$ 0	858
Operating leases	7.70%		7.70%
Finance leases	5.20%		5.20%
Finance lease amortization expense	$ 182	163	$ 547	489
Total lease cost	$ 768	$ 757	$ 2,328	$ 2,246

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Note 5 - Leases - Supplemental Balance Sheet Information (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Operating lease assets	$ 8,079	$ 8,983	[1]
Total leased assets	9,584	11,035
Property and Equipment [Member]
Finance lease assets	$ 1,505	$ 2,052

[1] The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

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Note 5 - Leases - Maturity of Lease Liabilities (Details) $ in Thousands	Sep. 30, 2022 USD ($)
Operating leases, Remaining 2022	$ 430
Finance leases, Remaining 2022	126
Total, Remaining 2022	556
Operating leases, 2023	1,765
Finance leases, 2023	409
Total, 2023	2,175
Operating leases, 2024	1,505
Finance leases, 2024	357
Total, 2024	1,861
Operating leases, 2025	1,255
Finance leases, 2025	103
Total, 2025	1,358
Operating leases, 2026	1,217
Finance leases, 2026	108
Total, 2026	1,332
Operating leases, Thereafter	7,066
Finance leases, Thereafter	0
Total, Thereafter	7,066
Operating leases, total lease payments	13,238
Finance leases, total lease payments	1,103
Total, total lease payments	14,341
Operating leases, less: Interest	(4,328)
Finance leases, less: Interest	(74)
Total, less: Interest	(4,402)
Operating leases, present value of lease liabilities	8,910
Finance leases, present value of lease liabilities	1,029
Total, present value of lease liabilities	$ 9,939

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Note 6 - Income Taxes (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Effective Income Tax Rate Reconciliation, Percent, Total	16.00%	26.00%	15.00%	23.00%

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Note 7 - Restructuring Charges (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Restructuring Charges, Total	$ 0	$ 23	$ 0	$ 319
Consolidation of our Production Facilities and Closure of our Merrifield, Minnesota Facility [Member]
Restructuring Charges, Total				319
Disposal Group, Not Discontinued Operation, Gain (Loss) on Disposal		$ 93		$ 176

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Note 8 - Employee Retention Credit (Details Textual) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2022	Dec. 31, 2021
Employee Retention Credit Benefits, CARES Act	$ 5,209	$ 5,209

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Note 9 - Related Party Transactions (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Agreement Between the BIRD Foundation, the Company, and MARPE Technologies, LTD [Member]
Agreement, Conditional Grant	$ 1,000		$ 1,000
Agreement, Exclusive Manufacturing Rights, Term (Year)			10 years
Abilitech Medical, Inc [Member] | Payments Received for Delivery of EMS Products [Member]
Related Party Transaction, Amounts of Transaction	$ 0	$ 316	$ 217	$ 1,056
David Kunin [Member] | Marpe Technologies, LTD [Member] | Maximum [Member]
Ownership, Percent	10.00%		10.00%
Marpe Technologies, LTD [Member] | Agreement Between the BIRD Foundation, the Company, and MARPE Technologies, LTD [Member]
Agreement, Conditional Grant Matching Amount	$ 500		$ 500
Agreement, Contribution Amount	226		226
Revenue from Related Parties	$ 66	$ 78	$ 182	$ 78