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, 2023

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 and post 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 3, 2023 was 2,739,377.

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
				Condensed Consolidated Statements of Shareholders’ Equity	7
				Condensed Notes to Consolidated Financial Statements	8-21
	Item 2	-	Management's Discussion and Analysis of Financial Condition And Results of Operations		22-27
	Item 3	-	Quantitative and Qualitative Disclosures About Market Risk		28
	Item 4	-	Controls and Procedures		28
PART II - OTHER INFORMATION
	Item 1	-	Legal Proceedings		29
	Item 1A.	-	Risk Factors		29
	Item 2	-	Unregistered Sales of Equity Securities, Use of Proceeds		29
	Item 3	-	Defaults on Senior Securities		29
	Item 4	-	Mine Safety Disclosures		29
	Item 5	-	Other Information		29
	Item 6	-	Exhibits		30
SIGNATURES					31

2

PART

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,
	2023			2022			2023			2022
Net Sales	$	33,369		$	35,276		$	103,278		$	98,505
Cost of Goods Sold		28,050			28,948			87,001			83,129
Gross Profit		5,319			6,328			16,277			15,376
Operating Expenses
Selling Expenses		923			959			2,766			2,752
General and Administrative Expenses		2,958			2,949			9,328			8,346
Research and Development Expenses		314			475			907			1,154
Gain on Sale of Assets		-			-			-			(15	)
Total Operating Expenses		4,195			4,383			13,001			12,237
Income From Operations		1,124			1,945			3,276			3,139
Other Expense
Interest Expense		(130	)		(122	)		(365	)		(337	)
Income Before Income Taxes		994			1,823			2,911			2,802
Income Tax (Benefit) Expense		(213	)		289			389			411
Net Income	$	1,207		$	1,534		$	2,522		$	2,391
Net Income Per Common Share:
Basic (in dollars per share)	$	0.44		$	0.57		$	0.93		$	0.89
Weighted Average Number of Common Shares Outstanding - Basic (in shares)		2,737,895			2,686,884			2,716,166			2,683,594
Diluted (in dollars per share)	$	0.42		$	0.53		$	0.87		$	0.83
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)		2,888,679			2,899,526			2,887,889			2,886,073
Other comprehensive income
Foreign currency translation		(77	)		(365	)		(318	)		(604	)
Comprehensive income, net of tax	$	1,130		$	1,169		$	2,204		$	1,787

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,
	2023			2022(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	699		$	1,027
Restricted Cash		422			1,454
Accounts Receivable, less allowances of $316 and $334		15,956			15,975
Employee Retention Credit Receivable		-			2,650
Inventories, Net		21,467			22,438
Contract Assets, less allowances of $22 and $0		11,746			9,982
Income Taxes Receivable		388			-
Prepaid Expenses		1,916			1,334
Total Current Assets		52,594			54,860
Property and Equipment, Net		6,135			6,408
Operating Lease Assets		6,955			7,850
Other Intangible Assets, Net		303			422
Total Assets	$	65,987		$	69,540
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Finance Lease Obligations	$	401		$	390
Current Portion of Operating Lease Obligations		996			1,155
Accounts Payable		13,099			14,792
Accrued Payroll and Commissions		3,976			4,803
Income Taxes Payable		27			733
Customer Deposits		3,861			3,515
Other Accrued Liabilities		839			1,010
Total Current Liabilities		23,199			26,398
Long-Term Liabilities
Long Term Line of Credit		4,611			6,853
Long Term Finance Lease Obligations, Net		261			565
Long-Term Operating Lease Obligations, Net		6,835			7,549
Deferred Income Taxes		278			-
Other Long-Term Liabilities		95			95
Total Long-Term Liabilities		12,080			15,062
Total Liabilities		35,279			41,460
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: 2,739,377 and 2,690,633 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		16,801			16,347
Accumulated Other Comprehensive Loss		(688	)		(370	)
Retained Earnings		14,318			11,826
Total Shareholders' Equity		30,708			28,080
Total Liabilities and Shareholders' Equity	$	65,987		$	69,540

⁽¹⁾ The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	NINE MONTHS ENDED
	SEPTEMBER 30
	2023			2022
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income	$	2,522		$	2,391
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Depreciation and Amortization		1,539			1,440
Compensation on Stock-Based Awards		299			234
Deferred Income Taxes		288			-
Change in Inventory Reserves		(8	)		(54	)
Other, Net		(169	)		(86	)
Changes in Current Operating Items
Accounts Receivable		(162	)		(1,115	)
Employee Retention Credit Receivable		2,650			-
Inventories		899			(4,402	)
Contract Assets		(1,780	)		(1,188	)
Prepaid Expenses		(588	)		(213	)
Income Tax Receivable		(388	)		(22	)
Income Tax Payable		(696	)		(45	)
Accounts Payable		(1,636	)		1,659
Accrued Payroll and Commissions		(810	)		1,071
Customer Deposits		345			934
Other Accrued Liabilities		(124	)		396
Net Cash Provided By Operating Activities		2,181			1,000
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Property and Equipment		-			15
Purchase of Intangible Asset		-			(43	)
Purchases of Property and Equipment		(1,121	)		(1,687	)
Net Cash Used In Investing Activities		(1,121	)		(1,715	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line of Credit		95,783			88,673
Payments to Line of Credit		(98,035	)		(87,816	)
Principal Payments on Financing Leases		(291	)		(326	)
Stock Option Excercises		155			51
Net Cash (Used In) Provided By Financing Activities		(2,388	)		582
Effect of Exchange Rate Changes on Cash		(32	)		-
Net Change in Cash and Restricted Cash		(1,360	)		(133	)
Cash and Restricted Cash - Beginning of Year		2,481			2,225
Cash and Restricted Cash - End of Period	$	1,121		$	2,092
Reconciliation of cash and restricted cash reported within the consolidated balance sheets
Cash	$	699		$	1,300
Restricted Cash		422			792
Total Cash and restricted cash reported in the consolidated statements of cash flows	$	1,121		$	2,092

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
	2023		2022
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	388	$	328
Cash Paid During the Period for Income Taxes		1,242		122
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		23		332

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, 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	)
Compensation on Stock-Based Awards		-		-		51		-			-			51
Stock Option Exercises		-		-		234		-			-			234
BALANCE SEPTEMBER 30, 2022	$	250	$	27	$	16,247	$	(548	)	$	12,207		$	28,183
BALANCE JUNE 30, 2023	$	250	$	27	$	16,712	$	(611	)	$	13,111		$	29,489
Net Income		-		-		-		-			1,207			1,207
Foreign Currency Translation Adjustment		-		-		-		(77	)		-			(77	)
Stock Option Exercises		-		-		9		-			-			9
Compensation on Stock-Based Awards		-		-		80		-			-			80
BALANCE SEPTEMBER 30, 2023	$	250	$	27	$	16,801	$	(688	)	$	14,318		$	30,708
BALANCE DECEMBER 31, 2022	$	250	$	27	$	16,347	$	(370	)	$	11,826		$	28,080
Net Income		-		-		-		-			2,522			2,522
Foreign Currency Translation Adjustment		-		-		-		(318	)		-			(318	)
Stock Option Exercises		-		-		155		-			-			155
Compensation on Stock-Based Awards		-		-		299		-			-			299
Cumulative Adjustment Related to the Adoption of ASC 326		-		-		-		-			(30	)		(30	)
BALANCE SEPTEMBER 30, 2023	$	250	$	27	$	16,801	$	(688	)	$	14,318		$	30,708

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, 2022. 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. 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.

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. Subsequent to this approval, an additional 325,000 shares have been authorized by the shareholders.

We granted 25,000 and 54,000 service-based stock options during the three and nine months ended September 30, 2023, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2023 was $6.13 and $5.88, respectively. There were no market-based stock options granted during the three and nine months ended September 30, 2023.

We granted 0 and 21,000 market-based stock options 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.

Total compensation expense related to stock options was $42 and $184 for the three and nine months ended September 30, 2023, respectively. Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was $724 of unrecognized compensation which will be recognized over a weighted average period of 3.8 years.

Following is the status of all stock options as of September 30, 2023:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2023		452,700		$	5.97
Granted		54,000			9.63
Exercised		(38,244	)		4.09
Cancelled		(43,956	)		7.50
Outstanding - September 30, 2023		424,500		$	6.45		6.48	$	1,375
Exercisable - September 30, 2023		242,800		$	4.44		5.16	$	1,197

Restricted Stock Units

During the three months and nine months ended September 30, 2023, we granted 0 and 18,000 restricted stock units (“RSUs”), respectively under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. The RSUs granted in the three and nine months ended September 30, 2023 had an average grant price of $9.37 per share. Total compensation expense related to the RSUs was $38 and $115 for the three and nine months ended September 30, 2023, respectively. Total unrecognized compensation expense related to the RSUs was $154, which will vest over a weighted average period of 1.2 years.

9

During the three months and nine months ended September 30, 2022, we granted 0 and 21,000 restricted stock units, respectively to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $31 and $66 for the three and nine months ended September 30, 2022, respectively.

Following is a status of all RSUs as of September 30, 2023:

	Shares			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)		Aggregate Fair Value (in thousands)
Outstanding - January 1, 2023		21,000		$	12.00
Granted		18,000			9.37
Vested		(10,500	)		12.00
Forfeited		(6,000	)		10.93
Outstanding - September 30, 2023		22,500		$	10.18		9.23	$	208

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. Dilutive 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, 2023, stock options of 150,783 and 171,723, 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, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per share as their impact were dilutive.

We had outstanding stock options totaling 47,538 and RSUs totaling 16,784 that are not included in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended September 30, 2023. We had average outstanding stock options totaling 37,869 and RSUs totaling 15,027 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, 2023.

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.

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, 2023, we had outstanding letters of credit for $300. Restricted cash as of September 30, 2023 was $422. The September 30, 2023 and December 31, 2022 restricted cash balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.

10

Accounts Receivable

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.

Allowance for Credit Losses

When we record customer receivables and contract assets arising from revenue transactions, we record an allowance for credit losses for the current expected credit losses (CECL) inherent in the asset over its expected life. The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.

We estimate expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics. Changes in the relevant information may significantly affect the estimates of expected credit losses.

Assets are written off when we determine them to be uncollectible. Write-offs are recognized as a deduction from the allowance for credit losses.

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,
	2023			2022
Raw Materials	$	20,551		$	21,673
Work in Process		1,220			1,238
Finished Goods		828			671
Reserves		(1,132	)		(1,144	)
Total	$	21,467		$	22,438

11

Other Intangible Assets

Other intangible assets at September 30, 2023 and December 31, 2022 are as follows:

	Customer Relationships		Patents		Total
Balance at January 1, 2022	$	360	$	141	$	501
Additions		-		71		71
Amortization		144		6		150
Balance at December 31, 2022		216		206		422
Amortization		108		11		119
Balance at September 30, 2023	$	108	$	195	$	303

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted-average remaining amortization period of our intangible assets is 1.1 years. Of the patents value at September 30, 2023, $85 are being amortized and $110 are in process and a patent has not yet been received.

Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2023 was $39 and $119, respectively. Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively.

Estimated future annual amortization expense (not including patents in process of $110) related to these assets is approximately as follows:

Year	Amount
Remainder of 2023	$	40
2024		87
2025		14
2026		14
Thereafter		38
Total	$	193

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asses is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized.

12

On January 1, 2023, we adopted the guidance prospectively with a cumulative adjustment to retained earnings. We have not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023.

At adoption, we recognized an allowance for credit losses related to accounts receivable and contract assets of $30, net of tax, and a decrease in retained earnings of $30 associated with the increased estimated credit losses.

Revision and Immaterial Correction of an Error in Previously Issued Financial Statements

The Company identified an error related to the classification of the activity on our line of credit facility with Bank of America at December 31, 2022 as reported on Form 10-K. In our September 30, 2022 condensed consolidated financial statements, we incorrectly classified borrowings and payments on our line of credit facility on a net basis within the financing section of the condensed consolidated cash flow statement; this activity should be shown on a gross basis. This change in presentation to the condensed consolidated cash flow statement does not impact total operating, investing, or financing cash flows. There was no change to the condensed consolidated statement of income or condensed consolidated balance sheet. In accordance with ASC 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company’s 2022 audited financial statements. Since these revisions were not material to any prior period financial statements, no amendments to previously filed financial statements are required. Consequently, the Company has corrected these immaterial errors by revising the September 30, 2022 consolidated financial statements presented herein.

The tables below present the effect of the financial statement adjustments related to the revision discussed above of the Company’s previously reported financial statements as of and for the period ended September 30, 2022:

Condensed Consolidated Statements of Cash Flows
	September 30, 2022
CASH FLOWS FROM FINANCING ACTIVITIES	As reported			Adjustment			As revised
Net Proceeds from Line of Credit		857			(857	)		-
Proceeds from Line of Credit		-			88,673			88,673
Payments to Line of Credit		-			(87,816	)		(87,816	)
Principal Payments on Long-Term Debt		-			-			-
Principal Payments on Financing Leases		(326	)		-			(326	)
Stock Option Exercises		51			-			51
Net Cash Provided by Financing Activities		582			-			582

13

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract assets. 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 $699 in cash and restricted cash at September 30, 2023, approximately $640 and $45 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 gross accounts receivable. Two customers accounted for 36% and 38% of net sales for the three and nine months ended September 30, 2023. One customer accounted for 28% and 26% of net sales for the three and nine months ended September 30, 2022, respectively.

At September 30, 2023, two customers represented approximately 37% of our gross accounts receivable. At December 31, 2022, one customer represented approximately 21% of our gross accounts receivable.

Contract assets for two customers accounted for 29% of gross contract assets at September 30, 2023. Contract assets for one customer accounted for 22% of gross contract assets at December 31, 2022, respectively.

Export sales represented approximately 3% for both the three and nine months ended September 30, 2023. Export sales represented approximately 4% of net sales for both the three and nine months ended September 30, 2022.

14

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. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred. 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 net sales for both the three and nine months ended September 30, 2023, and both the three and nine months ended September 30, 2022.

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.

15

Contract Assets

Contract assets, recorded as such in the Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the nine months ended September 30, 2023 was as follows (in thousands):

Balance outstanding at December 31, 2022	$	9,982
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		76,225
Allowance for current expected credit losses		(22	)
Amounts invoiced during the period		(74,439	)
Balance outstanding at September 30, 2023	$	11,746

We expect substantially all of the remaining performance obligations for the contract assets recorded as of September 30, 2023, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the three months ended September 30, 2023 and 2022, respectively:

	Three Months Ended September 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	12,029	$	5,185	$	621	$	17,835
Industrial		8,195		1,999		241		10,435
Aerospace and Defense		4,609		450		40		5,099
Total net sales	$	24,833	$	7,634	$	902	$	33,369

	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

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The following tables summarize our net sales by market for the nine months ended September 30, 2023 and 2022, respectively:

	Nine Months Ended September 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	42,324	$	15,564	$	1,926	$	59,814
Industrial		21,378		6,532		1,056		28,966
Aerospace and Defense		12,523		1,674		301		14,498
Total net sales	$	76,225	$	23,770	$	3,283	$	103,278

	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

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 8.2% and 5.2% as of September 30, 2023 and December 31, 2022, respectively. We had borrowings on our line of credit of $4,645 and $6,897 outstanding as of September 30, 2023 and December 31, 2022, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. In addition, the credit agreement does not expire within one year, the Company is not in violation of the covenants and the Company expects Bank of America to be capable of honoring the financing arrangement. The line of credit is shown net of debt issuance costs of $34 and $44 on the condensed consolidated balance sheet for the periods ended September 30, 2023 and December 31, 2022, 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 ending December 31, 2020 and each Fiscal Quarter end thereafter 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. The Company met the covenants for the period ended September 30, 2023.

At September 30, 2023, we had unused availability under our line of credit of $7,515 supported by our borrowing base. The line is secured by substantially all our assets.

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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, 2023, 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	2023		2022
Operating lease cost	$	576	$	572
Finance lease interest cost		9		14
Finance lease amortization expense		182		182
Total lease cost	$	767	$	768

	Nine Months Ended September 30,		Nine Months ended September 30,
Lease Cost	2023		2022
Operating lease cost	$	1,735	$	1,731
Finance lease interest cost		32		50
Finance lease amortization expense		546		547
Total lease cost	$	2,313	$	2,328

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Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	September 30, 2023		December 31, 2022
Assets
Operating lease assets	Operating lease assets	$	6,955	$	7,850
Finance lease assets	Property, Plant and Equipment		817		1,363
Total leased assets		$	7,772	$	9,213

Supplemental cash flow information related to leases was as follows:

	September 30,		September 30,
	2023		2022
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,381	$	1,279

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2023	$	434		$	108		$	542
2024		1,514			379			1,893
2025		1,265			106			1,371
2026		1,227			107			1,334
2027		1,256			-			1,256
Therafter		5,817			-			5,817
Total lease payments	$	11,513		$	700		$	12,213
Less: Interest		(3,682	)		(38	)		(3,720	)
Present value of lease liabilities	$	7,831		$	662		$	8,493

The lease term and discount rate at September 30, 2023 were as follows:

Weighted-average remaining lease term (years)
Operating leases	8.7
Finance leases	2.0
Weighted-average discount rate
Operating leases	7.8	%
Finance leases	5.3	%

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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, 2023 was (21%) and 13%, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 was 16% and 15%, respectively. The primary drivers of the change in the effective tax rate for both the three and nine month periods relates to the change in valuation allowance on the United States deferred tax assets due to return to provision adjustments partially offset by increased taxes on foreign entities.

NOTE 7. 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.

All ERC payments have been received as of September 30, 2023. At December 31, 2022, the Company had ERC benefits of $2,650 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.

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NOTE 8. RELATED PARTY TRANSACTIONS

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech through March 1, 2021. In the three and nine months ended September 30, 2022, Abilitech paid the Company $0 and $217, respectively, for the delivery of medical products. No payments were received for the three and nine months ended September 30, 2023. We have assets recorded related to Abilitech including $226 of accounts receivable and inventory. Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable or for inventory and we have recorded a full reserve against the gross amounts. 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. The Company and Marpe Technologies will each 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 with respect to administrative services at no cost to Marpe Technologies. The total value of the Company’s contribution will not exceed $500. Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s services beyond its contribution. 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 operations 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 recover the value of services provided to Marpe if not paid when the services are provided. 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 nine months ended September 30, 2023 and 2022, we recognized revenue to Marpe Technologies of $163 and $182, respectively. 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.

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,
	2023			2022			2023			2022
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold		84.1			82.1			84.2			84.4
Gross Profit		15.9			17.9			15.8			15.6
Selling Expenses		2.8			2.7			2.7			2.8
General and Administrative Expenses		8.8			8.4			9.0			8.5
Research and Development Expenses		0.9			1.3			0.9			1.2
Gain on Sale of Property and Equipment		0.0			0.0			0.0			0.0
Income from Operations		3.4			5.5			3.2			3.1
Interest Expense		(0.4	)		(0.3	)		(0.4	)		(0.3	)
Income Before Income Taxes		3.0			5.2			2.8			2.8
Income Tax (Benefit) Expense		(0.6	)		0.8			0.4			0.4
Net Income		3.6	%		4.4	%		2.4	%		2.4	%

22

Net Sales

Net sales for the three months ended September 30, 2023 and 2022 were $33.4 million and $35.3 million, respectively, a decrease of $1.9 million or 5%. The decrease in net sales relates to demand fluctuations as customers work through inventory. The three months ended September 30, 2022 benefited from significant pricing actions ahead of material cost increases that contributed to record-high revenue in that period.

Net sales for the nine months ended September 30, 2023 and 2022 were $103.3 million and $98.5 million, respectively, an increase of $4.8 million or 5%. The increase in net sales is due to continued strong demand across our medical, industrial and defense market, and the impact of pricing actions taken in the second half of 2022.

Net sales by our major industry markets for the three months ended September 30, 2023 and 2022 were as follows (in millions):

	Three months Ended September 30,							Nine months Ended September 30,
	2023		2022		% Change			2023		2022		% Change
Medical	$	17.8	$	20.5		(13.2	)	$	59.8	$	54.3		10.1
Industrial		10.5		10.9		(3.7	)		29.0		29.0		-
Aerospace and Defense		5.1		3.9		30.8			14.5		15.2		(4.6	)
Total Net Sales	$	33.4	$	35.3		(5.4	)	$	103.3	$	98.5		4.9

Backlog

Our 90-day shipment backlog as of September 30, 2023 was $33.8 million, a 1% decrease from the beginning of the quarter and a 8% decrease from September 30, 2022. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.

Our 90-day order backlog by market has decreased when compared to the prior quarter and the same period of the prior year. As the supply chain continues to normalize, lead times are reducing and customers are starting to return to their pre-pandemic ordering practices 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.

23

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
	2023		2023		2022
Medical	$	16.8	$	18.3	$	22.8
Industrial		9.7		9.7		8.3
Aerospace and Defense		7.3		6.3		5.8
Total 90-Day Backlog	$	33.8	$	34.3	$	36.9

Our total order backlog as of September 30, 2023 was $102.3 million, a 1% increase from $101.0 million the beginning of the quarter and a 1% decrease from September 30, 2022. Our total backlog remains strong.

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
	2023		2023		2022
Medical	$	51.4	$	51.9	$	58.4
Industrial	19.7			21.0		22.8
Aerospace and Defense		31.2		28.1		22.1
Total Backlog	$	102.3	$	101.0	$	103.3

The 90-day and total backlog at September 30, 2023 contain the contract asset value of $11.7 million which has been recognized as revenue.

Gross Profit

Gross profit as a percent of net sales was 15.9% and 15.8% for the three and nine months ended September 30, 2023, respectively. Gross profit as a percent of net sales was 17.9% and 15.6% for the three and nine months ended September 30, 2022, respectively. The decrease in gross profit as a percentage of net sales for the three months ended September 30, 2023 compared to the same period of the prior year relates to decreased plant utilization, product mix, as well as continued material and labor cost inflation.

Selling Expense

Selling expenses for the three and nine months ended September 30, 2023 were $0.9 million or 2.8% of sales and $2.8 million or 2.7% of sales, respectively. Selling expenses for the three and nine months ended September 30, 2022 were $1.0 million or 2.7% of sales and $2.8 million or 2.8% of sales, respectively.

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General and Administrative Expense

General and administrative expenses for the three and nine months ended September 30, 2023 were $3.0 million or 8.9% of sales and $9.3 million or 9.0% of sales, respectively. General and administrative expenses for the three and nine months ended September 30, 2022 were $2.9 million or 8.4% of net sales and $8.3 million or 8.5% of net sales, respectively. The increase in general and administrative expense was mainly due to higher wages and professional fees.

Research and Development Expense

Research and development expenses for the three and nine months ended September 30, 2023 were $0.3 or 0.9% of net sales and $0.9 million or 0.9% of net sales, respectively. Research and development expenses for the three and nine months ended September 30, 2022 were $0.5 or 1.3% of net sales and $1.2 million or 1.2% of net sales, respectively.

Income From Operations

Income from operations was $1.1 million and $3.3 million for the three and nine months ended September 30, 2023, respectively. Income from operations was $1.9 million and $3.1 million for the three and nine months ended September 30, 2022. The decrease in income from operations for the comparable three month periods relates to the decreased revenue and gross margin in the third quarter of 2023.

Interest Expense

Interest expense was $0.1 million for both the three months ended September 30, 2023 and 2022. Interest expense was $0.4 and $0.3 million for the nine months ended September 30, 2023 and 2022, respectively.

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, 2023 was (21%) and 13%, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 was 16% and 15%, respectively. The primary drivers of the change in the effective tax rate for both the three and nine month periods relates to the change in valuation allowance on the United States deferred tax assets due to return to provision adjustments partially offset by increased taxes on foreign entities.

Net Income

Net income for the three months ended September 30, 2023 was $1.2 million or $0.44 per basic common share and $0.42 per diluted common share. 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. The decrease in net income for the three month period was driven by the decrease in sales and gross margin.

Net income for the nine months ended September 30, 2023 was $2.5 million or $0.93 per basic and $0.87 per diluted common share. 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. The increase in net income for the nine month period was driven by the higher revenue and lower effective tax rate.

25

Liquidity and Capital Resources

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

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 $16,000 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 8.2% and 5.2% as of September 30, 2023 and December 31, 2022, respectively. We had borrowings on our line of credit of $4.6 million and $6.9 million outstanding as of September 30, 2023 and December 31, 2022, 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 $34 thousand and $44 thousand on the consolidated balance sheet for the periods ended September 30, 2023 and December 31, 2022, 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 ending December 31, 2020 and each Fiscal Quarter end thereafter 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. The Company met the covenants for the period ended September 30, 2023.

At September 30, 2023, we had unused availability under our line of credit of $7.5 million supported by our borrowing base. The line is secured by substantially all of our assets.

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, 2022. 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 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.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-K 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, 2022.

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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.

28

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, 2022.

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

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.

29

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, 2023, 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).

*Filed herewith

30

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 14, 2023	by	/s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated
Date:  November 14, 2023	by	/s/ Alan K. Nordstrom
		Alan K. Nordstrom
		Acting Chief Financial Officer and Corporate Controller
		Nortech Systems Incorporated

31

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 14, 2023	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, Alan K. Nordstrom, 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 14, 2023	By:	/s/ Alan K. Nordstrom
		Alan K. Nordstrom
		Acting Chief Financial Officer and Corporate Controller
		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, 2023 (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 14, 2023

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 Alan K. Nordstrom, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2023 (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 14, 2023

By:	/s/ Alan K. Nordstrom
	Alan K. Nordstrom
	Acting Chief Financial Officer and Corporate Controller
	Nortech Systems Incorporated

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2023	Nov. 03, 2023
Document Information [Line Items]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2023
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 (in shares)		2,739,377
Entity Central Index Key	0000722313
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Net Sales	$ 33,369	$ 35,276	$ 103,278	$ 98,505
Cost of Goods Sold	28,050	28,948	87,001	83,129
Gross Profit	5,319	6,328	16,277	15,376
Operating Expenses
Selling Expenses	923	959	2,766	2,752
General and Administrative Expenses	2,958	2,949	9,328	8,346
Research and Development Expenses	314	475	907	1,154
Gain on Sale of Assets	0	0	0	(15)
Total Operating Expenses	4,195	4,383	13,001	12,237
Income From Operations	1,124	1,945	3,276	3,139
Other Expense
Interest Expense	(130)	(122)	(365)	(337)
Income Before Income Taxes	994	1,823	2,911	2,802
Income Tax (Benefit) Expense	(213)	289	389	411
Net Income	$ 1,207	$ 1,534	$ 2,522	$ 2,391
Net Income Per Common Share:
Basic (in dollars per share) (in dollars per share)	$ 0.44	$ 0.57	$ 0.93	$ 0.89
Weighted Average Number of Common Shares Outstanding - Basic (in shares) (in shares)	2,737,895	2,686,884	2,716,166	2,683,594
Diluted (in dollars per share) (in dollars per share)	$ 0.42	$ 0.53	$ 0.87	$ 0.83
Weighted Average Number of Common Shares Outstanding - Diluted (in shares) (in shares)	2,888,679	2,899,526	2,887,889	2,886,073
Other comprehensive income
Foreign currency translation	$ (77)	$ (365)	$ (318)	$ (604)
Comprehensive income, net of tax	$ 1,130	$ 1,169	$ 2,204	$ 1,787

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022	[1]
Current Assets
Cash	$ 699	$ 1,027
Restricted Cash	422	1,454
Accounts Receivable, less allowances of $316 and $334	15,956	15,975
Employee Retention Credit Receivable	0	2,650
Inventories, Net	21,467	22,438
Contract Assets, less allowances of $22 and $0	11,746	9,982
Income Taxes Receivable	388	0
Prepaid Expenses	1,916	1,334
Total Current Assets	52,594	54,860
Property and Equipment, Net	6,135	6,408
Operating Lease Assets	6,955	7,850
Other Intangible Assets, Net	303	422
Total Assets	65,987	69,540
Current Liabilities
Current Portion of Finance Lease Obligations	401	390
Current Portion of Operating Lease Obligations	996	1,155
Accounts Payable	13,099	14,792
Accrued Payroll and Commissions	3,976	4,803
Income Taxes Payable	27	733
Customer Deposits	3,861	3,515
Other Accrued Liabilities	839	1,010
Total Current Liabilities	23,199	26,398
Long-Term Liabilities
Long Term Line of Credit	4,611	6,853
Long Term Finance Lease Obligations, Net	261	565
Long-Term Operating Lease Obligations, Net	6,835	7,549
Deferred Income Taxes	278	0
Other Long-Term Liabilities	95	95
Total Long-Term Liabilities	12,080	15,062
Total Liabilities	35,279	41,460
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: 2,739,377 and 2,690,633 Shares Issued and Outstanding, respectively	27	27
Additional Paid-In Capital	16,801	16,347
Accumulated Other Comprehensive Loss	(688)	(370)
Retained Earnings	14,318	11,826
Total Shareholders' Equity	30,708	28,080
Total Liabilities and Shareholders' Equity	$ 65,987	$ 69,540

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Accounts receivable allowance	$ 316	$ 334
Contract with Customer, Asset, Allowance for Credit Loss, Current	$ 22	$ 0
Preferred stock, par value (in dollars per share)	$ 1	$ 1
Preferred Stock, Shares Authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	250,000	250,000
Preferred Stock, Shares Outstanding (in shares)	250,000	250,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	9,000,000	9,000,000
Common Stock, Shares, Outstanding (in shares)	2,739,377	2,690,633
Common stock, shares issued (in shares)	2,739,377	2,690,633

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income	$ 2,522	$ 2,391
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities:
Depreciation and Amortization	1,539	1,440
Compensation on Stock-Based Awards	299	234
Deferred Income Taxes	288	0
Change in Inventory Reserves	(8)	(54)
Other, Net	(169)	(86)
Changes in Current Operating Items
Accounts Receivable	(162)	(1,115)
Employee Retention Credit Receivable	2,650	0
Inventories	899	(4,402)
Contract Assets	(1,780)	(1,188)
Prepaid Expenses	(588)	(213)
Income Tax Receivable	(388)	(22)
Income Tax Payable	(696)	(45)
Accounts Payable	(1,636)	1,659
Accrued Payroll and Commissions	(810)	1,071
Customer Deposits	345	934
Other Accrued Liabilities	(124)	396
Net Cash Provided By Operating Activities	2,181	1,000
Net Cash Provided by (Used in) Investing Activities [Abstract]
Proceeds from Sale of Property and Equipment	0	15
Purchase of Intangible Asset	0	(43)
Purchases of Property and Equipment	(1,121)	(1,687)
Net Cash Used In Investing Activities	(1,121)	(1,715)
Net Cash Provided by (Used in) Financing Activities [Abstract]
Proceeds from Line of Credit	95,783	88,673
Payments to Line of Credit	(98,035)	(87,816)
Principal Payments on Financing Leases	(291)	(326)
Stock Option Excercises	155	51
Net Cash (Used In) Provided By Financing Activities	(2,388)	582
Effect of Exchange Rate Changes on Cash	(32)	0
Net Change in Cash and Restricted Cash	(1,360)	(133)
Cash and Restricted Cash - Beginning of Year	2,481	2,225
Cash and Restricted Cash - End of Period	1,121	2,092
Reconciliation of cash and restricted cash reported within the consolidated balance sheets
Cash	699	1,300
Restricted Cash	422	792
Total Cash and restricted cash reported in the consolidated statements of cash flows	1,121	2,092
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	388	328
Cash Paid During the Period for Income Taxes	1,242	122
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	$ 23	$ 332

XML

Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($) $ in Thousands	Preferred Stock [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Preferred Stock [Member]	Common Stock [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Common Stock [Member]	Additional Paid-in Capital [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Retained Earnings [Member]	Cumulative Effect, Period of Adoption, Adjustment [Member]	Total
BALANCE at Dec. 31, 2021		$ 250		$ 27		$ 15,962		$ 56		$ 9,816		$ 26,111
Net Income		0		0		0		0		2,391		2,391
Foreign Currency Translation Adjustment		0		0		0		(604)		0		(604)
Stock option exercises						234						234
Compensation on Stock-Based Awards		0		0		51		0		0		51
BALANCE at Sep. 30, 2022		250		27		16,247		(548)		12,207		28,183
BALANCE 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 at Sep. 30, 2022		250		27		16,247		(548)		12,207		28,183
BALANCE at Dec. 31, 2022	$ 0	250	$ 0	27	$ 0	16,347	$ 0	(370)	$ (30)	11,826	$ (30)	28,080	[1]
Net Income		0		0		0		0		2,522		2,522
Foreign Currency Translation Adjustment		0		0		0		(318)		0		(318)
Stock option exercises		0		0		155		0		0		155
Compensation on Stock-Based Awards		0		0		299		0		0		299
BALANCE at Sep. 30, 2023		250		27		16,801		(688)		14,318		30,708
BALANCE at Jun. 30, 2023		250		27		16,712		(611)		13,111		29,489
Net Income		0		0		0		0		1,207		1,207
Foreign Currency Translation Adjustment		0		0		0		(77)		0		(77)
Stock option exercises		0		0		9		0		0		9
Compensation on Stock-Based Awards		0		0		80		0		0		80
BALANCE at Sep. 30, 2023		$ 250		$ 27		$ 16,801		$ (688)		$ 14,318		$ 30,708

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

XML

Note 1 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2023

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, 2022. 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. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock-Based Awards

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. Subsequent to this approval, an additional 325,000 shares have been authorized by the shareholders.

We granted 25,000 and 54,000 service-based stock options during the three and nine months ended September 30, 2023, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2023 was $6.13 and $5.88, respectively. There were no market-based stock options granted during the three and nine months ended September 30, 2023.

We granted 0 and 21,000 market-based stock options 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.

Total compensation expense related to stock options was $42 and $184 for the three and nine months ended September 30, 2023, respectively. Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was $724 of unrecognized compensation which will be recognized over a weighted average period of 3.8 years.

Following is the status of all stock options as of September 30, 2023:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2023		452,700		$	5.97
Granted		54,000			9.63
Exercised		(38,244	)		4.09
Cancelled		(43,956	)		7.50
Outstanding - September 30, 2023		424,500		$	6.45		6.48	$	1,375
Exercisable - September 30, 2023		242,800		$	4.44		5.16	$	1,197

Restricted Stock Units

During the three months and nine months ended September 30, 2023, we granted 0 and 18,000 restricted stock units (“RSUs”), respectively under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. The RSUs granted in the three and nine months ended September 30, 2023 had an average grant price of $9.37 per share. Total compensation expense related to the RSUs was $38 and $115 for the three and nine months ended September 30, 2023, respectively. Total unrecognized compensation expense related to the RSUs was $154, which will vest over a weighted average period of 1.2 years.

During the three months and nine months ended September 30, 2022, we granted 0 and 21,000 restricted stock units, respectively to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $31 and $66 for the three and nine months ended September 30, 2022, respectively.

Following is a status of all RSUs as of September 30, 2023:

	Shares			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)		Aggregate Fair Value (in thousands)
Outstanding - January 1, 2023		21,000		$	12.00
Granted		18,000			9.37
Vested		(10,500	)		12.00
Forfeited		(6,000	)		10.93
Outstanding - September 30, 2023		22,500		$	10.18		9.23	$	208

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. Dilutive 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, 2023, stock options of 150,783 and 171,723, 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, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per share as their impact were dilutive.

We had outstanding stock options totaling 47,538 and RSUs totaling 16,784 that are not included in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended September 30, 2023. We had average outstanding stock options totaling 37,869 and RSUs totaling 15,027 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, 2023.

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.

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, 2023, we had outstanding letters of credit for $300. Restricted cash as of September 30, 2023 was $422. The September 30, 2023 and December 31, 2022 restricted cash balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.

Accounts Receivable

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.

Allowance for Credit Losses

When we record customer receivables and contract assets arising from revenue transactions, we record an allowance for credit losses for the current expected credit losses (CECL) inherent in the asset over its expected life. The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.

We estimate expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics. Changes in the relevant information may significantly affect the estimates of expected credit losses.

Assets are written off when we determine them to be uncollectible. Write-offs are recognized as a deduction from the allowance for credit losses.

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,
	2023			2022
Raw Materials	$	20,551		$	21,673
Work in Process		1,220			1,238
Finished Goods		828			671
Reserves		(1,132	)		(1,144	)
Total	$	21,467		$	22,438

Other Intangible Assets

Other intangible assets at September 30, 2023 and December 31, 2022 are as follows:

	Customer Relationships		Patents		Total
Balance at January 1, 2022	$	360	$	141	$	501
Additions		-		71		71
Amortization		144		6		150
Balance at December 31, 2022		216		206		422
Amortization		108		11		119
Balance at September 30, 2023	$	108	$	195	$	303

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted-average remaining amortization period of our intangible assets is 1.1 years. Of the patents value at September 30, 2023, $85 are being amortized and $110 are in process and a patent has not yet been received.

Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2023 was $39 and $119, respectively. Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively.

Estimated future annual amortization expense (not including patents in process of $110) related to these assets is approximately as follows:

Year	Amount
Remainder of 2023	$	40
2024		87
2025		14
2026		14
Thereafter		38
Total	$	193

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asses is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized.

On January 1, 2023, we adopted the guidance prospectively with a cumulative adjustment to retained earnings. We have not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023.

At adoption, we recognized an allowance for credit losses related to accounts receivable and contract assets of $30, net of tax, and a decrease in retained earnings of $30 associated with the increased estimated credit losses.

Revision and Immaterial Correction of an Error in Previously Issued Financial Statements

The Company identified an error related to the classification of the activity on our line of credit facility with Bank of America at December 31, 2022 as reported on Form 10-K. In our September 30, 2022 condensed consolidated financial statements, we incorrectly classified borrowings and payments on our line of credit facility on a net basis within the financing section of the condensed consolidated cash flow statement; this activity should be shown on a gross basis. This change in presentation to the condensed consolidated cash flow statement does not impact total operating, investing, or financing cash flows. There was no change to the condensed consolidated statement of income or condensed consolidated balance sheet. In accordance with ASC 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company’s 2022 audited financial statements. Since these revisions were not material to any prior period financial statements, no amendments to previously filed financial statements are required. Consequently, the Company has corrected these immaterial errors by revising the September 30, 2022 consolidated financial statements presented herein.

The tables below present the effect of the financial statement adjustments related to the revision discussed above of the Company’s previously reported financial statements as of and for the period ended September 30, 2022:

Condensed Consolidated Statements of Cash Flows
	September 30, 2022
CASH FLOWS FROM FINANCING ACTIVITIES	As reported			Adjustment			As revised
Net Proceeds from Line of Credit		857			(857	)		-
Proceeds from Line of Credit		-			88,673			88,673
Payments to Line of Credit		-			(87,816	)		(87,816	)
Principal Payments on Long-Term Debt		-			-			-
Principal Payments on Financing Leases		(326	)		-			(326	)
Stock Option Exercises		51			-			51
Net Cash Provided by Financing Activities		582			-			582

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Note 2 - Concentration of Credit Risk and Major Customers

9 Months Ended

Sep. 30, 2023

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, accounts receivable, and contract assets. 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 $699 in cash and restricted cash at September 30, 2023, approximately $640 and $45 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 gross accounts receivable. Two customers accounted for 36% and 38% of net sales for the three and nine months ended September 30, 2023. One customer accounted for 28% and 26% of net sales for the three and nine months ended September 30, 2022, respectively.

At September 30, 2023, two customers represented approximately 37% of our gross accounts receivable. At December 31, 2022, one customer represented approximately 21% of our gross accounts receivable.

Contract assets for two customers accounted for 29% of gross contract assets at September 30, 2023. Contract assets for one customer accounted for 22% of gross contract assets at December 31, 2022, respectively.

Export sales represented approximately 3% for both the three and nine months ended September 30, 2023. Export sales represented approximately 4% of net sales for both the three and nine months ended September 30, 2022.

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Note 3 - Revenue

9 Months Ended

Sep. 30, 2023

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. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred. 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 net sales for both the three and nine months ended September 30, 2023, and both the three and nine months ended September 30, 2022.

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 Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the nine months ended September 30, 2023 was as follows (in thousands):

Balance outstanding at December 31, 2022	$	9,982
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		76,225
Allowance for current expected credit losses		(22	)
Amounts invoiced during the period		(74,439	)
Balance outstanding at September 30, 2023	$	11,746

We expect substantially all of the remaining performance obligations for the contract assets recorded as of September 30, 2023, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the three months ended September 30, 2023 and 2022, respectively:

	Three Months Ended September 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	12,029	$	5,185	$	621	$	17,835
Industrial		8,195		1,999		241		10,435
Aerospace and Defense		4,609		450		40		5,099
Total net sales	$	24,833	$	7,634	$	902	$	33,369

	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

The following tables summarize our net sales by market for the nine months ended September 30, 2023 and 2022, respectively:

	Nine Months Ended September 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	42,324	$	15,564	$	1,926	$	59,814
Industrial		21,378		6,532		1,056		28,966
Aerospace and Defense		12,523		1,674		301		14,498
Total net sales	$	76,225	$	23,770	$	3,283	$	103,278

	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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Note 4 - Financing Arrangements

9 Months Ended

Sep. 30, 2023

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 8.2% and 5.2% as of September 30, 2023 and December 31, 2022, respectively. We had borrowings on our line of credit of $4,645 and $6,897 outstanding as of September 30, 2023 and December 31, 2022, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. In addition, the credit agreement does not expire within one year, the Company is not in violation of the covenants and the Company expects Bank of America to be capable of honoring the financing arrangement. The line of credit is shown net of debt issuance costs of $34 and $44 on the condensed consolidated balance sheet for the periods ended September 30, 2023 and December 31, 2022, 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 ending December 31, 2020 and each Fiscal Quarter end thereafter 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. The Company met the covenants for the period ended September 30, 2023.

At September 30, 2023, we had unused availability under our line of credit of $7,515 supported by our borrowing base. The line is secured by substantially all our assets.

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Note 5 - Leases

9 Months Ended

Sep. 30, 2023

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, 2023, 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	2023		2022
Operating lease cost	$	576	$	572
Finance lease interest cost		9		14
Finance lease amortization expense		182		182
Total lease cost	$	767	$	768

	Nine Months Ended September 30,		Nine Months ended September 30,
Lease Cost	2023		2022
Operating lease cost	$	1,735	$	1,731
Finance lease interest cost		32		50
Finance lease amortization expense		546		547
Total lease cost	$	2,313	$	2,328

Supplemental balance sheet information related to leases was as follows:

	Balance Sheet Location	September 30, 2023		December 31, 2022
Assets
Operating lease assets	Operating lease assets	$	6,955	$	7,850
Finance lease assets	Property, Plant and Equipment		817		1,363
Total leased assets		$	7,772	$	9,213

Supplemental cash flow information related to leases was as follows:

	September 30,		September 30,
	2023		2022
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,381	$	1,279

Maturities of lease liabilities were as follows:

	Operating Leases			Finance Leases			Total
Remaining 2023	$	434		$	108		$	542
2024		1,514			379			1,893
2025		1,265			106			1,371
2026		1,227			107			1,334
2027		1,256			-			1,256
Therafter		5,817			-			5,817
Total lease payments	$	11,513		$	700		$	12,213
Less: Interest		(3,682	)		(38	)		(3,720	)
Present value of lease liabilities	$	7,831		$	662		$	8,493

The lease term and discount rate at September 30, 2023 were as follows:

Weighted-average remaining lease term (years)
Operating leases	8.7
Finance leases	2.0
Weighted-average discount rate
Operating leases	7.8	%
Finance leases	5.3	%

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Note 6 - Income Taxes

9 Months Ended

Sep. 30, 2023

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, 2023 was (21%) and 13%, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 was 16% and 15%, respectively. The primary drivers of the change in the effective tax rate for both the three and nine month periods relates to the change in valuation allowance on the United States deferred tax assets due to return to provision adjustments partially offset by increased taxes on foreign entities.

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Note 7 - Employee Retention Credit

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Employee Retention Credit [Text Block]

NOTE 7. 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.

All ERC payments have been received as of September 30, 2023. At December 31, 2022, the Company had ERC benefits of $2,650 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.

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Note 8 - Related Party Transactions

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE 8. RELATED PARTY TRANSACTIONS

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech through March 1, 2021. In the three and nine months ended September 30, 2022, Abilitech paid the Company $0 and $217, respectively, for the delivery of medical products. No payments were received for the three and nine months ended September 30, 2023. We have assets recorded related to Abilitech including $226 of accounts receivable and inventory. Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable or for inventory and we have recorded a full reserve against the gross amounts. 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. The Company and Marpe Technologies will each 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 with respect to administrative services at no cost to Marpe Technologies. The total value of the Company’s contribution will not exceed $500. Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s services beyond its contribution. 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 operations 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 recover the value of services provided to Marpe if not paid when the services are provided. 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 nine months ended September 30, 2023 and 2022, we recognized revenue to Marpe Technologies of $163 and $182, respectively. 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, 2023

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

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

Revenue [Policy Text Block]

Revenue Recognition

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

Share-Based Payment Arrangement [Policy Text Block]

Stock-Based Awards

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. Subsequent to this approval, an additional 325,000 shares have been authorized by the shareholders.

We granted 25,000 and 54,000 service-based stock options during the three and nine months ended September 30, 2023, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2023 was $6.13 and $5.88, respectively. There were no market-based stock options granted during the three and nine months ended September 30, 2023.

We granted 0 and 21,000 market-based stock options 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.

Total compensation expense related to stock options was $42 and $184 for the three and nine months ended September 30, 2023, respectively. Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was $724 of unrecognized compensation which will be recognized over a weighted average period of 3.8 years.

Following is the status of all stock options as of September 30, 2023:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2023		452,700		$	5.97
Granted		54,000			9.63
Exercised		(38,244	)		4.09
Cancelled		(43,956	)		7.50
Outstanding - September 30, 2023		424,500		$	6.45		6.48	$	1,375
Exercisable - September 30, 2023		242,800		$	4.44		5.16	$	1,197

Restricted Stock Units

During the three months and nine months ended September 30, 2023, we granted 0 and 18,000 restricted stock units (“RSUs”), respectively under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. The RSUs granted in the three and nine months ended September 30, 2023 had an average grant price of $9.37 per share. Total compensation expense related to the RSUs was $38 and $115 for the three and nine months ended September 30, 2023, respectively. Total unrecognized compensation expense related to the RSUs was $154, which will vest over a weighted average period of 1.2 years.

During the three months and nine months ended September 30, 2022, we granted 0 and 21,000 restricted stock units, respectively to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $31 and $66 for the three and nine months ended September 30, 2022, respectively.

Following is a status of all RSUs as of September 30, 2023:

	Shares			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)		Aggregate Fair Value (in thousands)
Outstanding - January 1, 2023		21,000		$	12.00
Granted		18,000			9.37
Vested		(10,500	)		12.00
Forfeited		(6,000	)		10.93
Outstanding - September 30, 2023		22,500		$	10.18		9.23	$	208

Earnings Per Share, Policy [Policy Text Block]

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. Dilutive 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, 2023, stock options of 150,783 and 171,723, 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, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per share as their impact were dilutive.

We had outstanding stock options totaling 47,538 and RSUs totaling 16,784 that are not included in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended September 30, 2023. We had average outstanding stock options totaling 37,869 and RSUs totaling 15,027 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, 2023.

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.

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, 2023, we had outstanding letters of credit for $300. Restricted cash as of September 30, 2023 was $422. The September 30, 2023 and December 31, 2022 restricted cash balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.

Accounts Receivable [Policy Text Block]

Accounts Receivable

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.

Allowance for Credit Losses

When we record customer receivables and contract assets arising from revenue transactions, we record an allowance for credit losses for the current expected credit losses (CECL) inherent in the asset over its expected life. The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.

We estimate expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics. Changes in the relevant information may significantly affect the estimates of expected credit losses.

Assets are written off when we determine them to be uncollectible. Write-offs are recognized as a deduction from the allowance for credit losses.

Inventory, Policy [Policy Text Block]

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,
	2023			2022
Raw Materials	$	20,551		$	21,673
Work in Process		1,220			1,238
Finished Goods		828			671
Reserves		(1,132	)		(1,144	)
Total	$	21,467		$	22,438

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

Other Intangible Assets

Other intangible assets at September 30, 2023 and December 31, 2022 are as follows:

	Customer Relationships		Patents		Total
Balance at January 1, 2022	$	360	$	141	$	501
Additions		-		71		71
Amortization		144		6		150
Balance at December 31, 2022		216		206		422
Amortization		108		11		119
Balance at September 30, 2023	$	108	$	195	$	303

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted-average remaining amortization period of our intangible assets is 1.1 years. Of the patents value at September 30, 2023, $85 are being amortized and $110 are in process and a patent has not yet been received.

Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2023 was $39 and $119, respectively. Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively.

Estimated future annual amortization expense (not including patents in process of $110) related to these assets is approximately as follows:

Year	Amount
Remainder of 2023	$	40
2024		87
2025		14
2026		14
Thereafter		38
Total	$	193

New Accounting Pronouncements, Policy [Policy Text Block]

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asses is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized.

On January 1, 2023, we adopted the guidance prospectively with a cumulative adjustment to retained earnings. We have not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023.

At adoption, we recognized an allowance for credit losses related to accounts receivable and contract assets of $30, net of tax, and a decrease in retained earnings of $30 associated with the increased estimated credit losses.

Reclassification, Comparability Adjustment [Policy Text Block]

Revision and Immaterial Correction of an Error in Previously Issued Financial Statements

The Company identified an error related to the classification of the activity on our line of credit facility with Bank of America at December 31, 2022 as reported on Form 10-K. In our September 30, 2022 condensed consolidated financial statements, we incorrectly classified borrowings and payments on our line of credit facility on a net basis within the financing section of the condensed consolidated cash flow statement; this activity should be shown on a gross basis. This change in presentation to the condensed consolidated cash flow statement does not impact total operating, investing, or financing cash flows. There was no change to the condensed consolidated statement of income or condensed consolidated balance sheet. In accordance with ASC 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company’s 2022 audited financial statements. Since these revisions were not material to any prior period financial statements, no amendments to previously filed financial statements are required. Consequently, the Company has corrected these immaterial errors by revising the September 30, 2022 consolidated financial statements presented herein.

The tables below present the effect of the financial statement adjustments related to the revision discussed above of the Company’s previously reported financial statements as of and for the period ended September 30, 2022:

Condensed Consolidated Statements of Cash Flows
	September 30, 2022
CASH FLOWS FROM FINANCING ACTIVITIES	As reported			Adjustment			As revised
Net Proceeds from Line of Credit		857			(857	)		-
Proceeds from Line of Credit		-			88,673			88,673
Payments to Line of Credit		-			(87,816	)		(87,816	)
Principal Payments on Long-Term Debt		-			-			-
Principal Payments on Financing Leases		(326	)		-			(326	)
Stock Option Exercises		51			-			51
Net Cash Provided by Financing Activities		582			-			582

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Note 1 - Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2023

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, 2023		452,700		$	5.97
Granted		54,000			9.63
Exercised		(38,244	)		4.09
Cancelled		(43,956	)		7.50
Outstanding - September 30, 2023		424,500		$	6.45		6.48	$	1,375
Exercisable - September 30, 2023		242,800		$	4.44		5.16	$	1,197

Share-Based Payment Arrangement, Restricted Stock Unit, Activity [Table Text Block]

	Shares			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)		Aggregate Fair Value (in thousands)
Outstanding - January 1, 2023		21,000		$	12.00
Granted		18,000			9.37
Vested		(10,500	)		12.00
Forfeited		(6,000	)		10.93
Outstanding - September 30, 2023		22,500		$	10.18		9.23	$	208

Schedule of Inventory, Current [Table Text Block]

	September 30,			December 31,
	2023			2022
Raw Materials	$	20,551		$	21,673
Work in Process		1,220			1,238
Finished Goods		828			671
Reserves		(1,132	)		(1,144	)
Total	$	21,467		$	22,438

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

	Customer Relationships		Patents		Total
Balance at January 1, 2022	$	360	$	141	$	501
Additions		-		71		71
Amortization		144		6		150
Balance at December 31, 2022		216		206		422
Amortization		108		11		119
Balance at September 30, 2023	$	108	$	195	$	303

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

Year	Amount
Remainder of 2023	$	40
2024		87
2025		14
2026		14
Thereafter		38
Total	$	193

Schedule of Error Corrections and Prior Period Adjustments [Table Text Block]

Condensed Consolidated Statements of Cash Flows
	September 30, 2022
CASH FLOWS FROM FINANCING ACTIVITIES	As reported			Adjustment			As revised
Net Proceeds from Line of Credit		857			(857	)		-
Proceeds from Line of Credit		-			88,673			88,673
Payments to Line of Credit		-			(87,816	)		(87,816	)
Principal Payments on Long-Term Debt		-			-			-
Principal Payments on Financing Leases		(326	)		-			(326	)
Stock Option Exercises		51			-			51
Net Cash Provided by Financing Activities		582			-			582

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Note 3 - Revenue (Tables)

9 Months Ended

Sep. 30, 2023

Notes Tables

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

Balance outstanding at December 31, 2022	$	9,982
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		76,225
Allowance for current expected credit losses		(22	)
Amounts invoiced during the period		(74,439	)
Balance outstanding at September 30, 2023	$	11,746

Disaggregation of Revenue [Table Text Block]

	Three Months Ended September 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	12,029	$	5,185	$	621	$	17,835
Industrial		8,195		1,999		241		10,435
Aerospace and Defense		4,609		450		40		5,099
Total net sales	$	24,833	$	7,634	$	902	$	33,369

	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, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	42,324	$	15,564	$	1,926	$	59,814
Industrial		21,378		6,532		1,056		28,966
Aerospace and Defense		12,523		1,674		301		14,498
Total net sales	$	76,225	$	23,770	$	3,283	$	103,278

	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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Note 5 - Leases (Tables)

9 Months Ended

Sep. 30, 2023

Notes Tables

Lease, Cost [Table Text Block]

	Three Months Ended September 30,		Three Months Ended September 30,
Lease Cost	2023		2022
Operating lease cost	$	576	$	572
Finance lease interest cost		9		14
Finance lease amortization expense		182		182
Total lease cost	$	767	$	768

	Nine Months Ended September 30,		Nine Months ended September 30,
Lease Cost	2023		2022
Operating lease cost	$	1,735	$	1,731
Finance lease interest cost		32		50
Finance lease amortization expense		546		547
Total lease cost	$	2,313	$	2,328

	September 30,		September 30,
	2023		2022
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,381	$	1,279

Weighted-average remaining lease term (years)
Operating leases	8.7
Finance leases	2.0
Weighted-average discount rate
Operating leases	7.8	%
Finance leases	5.3	%

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

	Balance Sheet Location	September 30, 2023		December 31, 2022
Assets
Operating lease assets	Operating lease assets	$	6,955	$	7,850
Finance lease assets	Property, Plant and Equipment		817		1,363
Total leased assets		$	7,772	$	9,213

Schedule of Lease Liability Maturity [Table Text Block]

	Operating Leases			Finance Leases			Total
Remaining 2023	$	434		$	108		$	542
2024		1,514			379			1,893
2025		1,265			106			1,371
2026		1,227			107			1,334
2027		1,256			-			1,256
Therafter		5,817			-			5,817
Total lease payments	$	11,513		$	700		$	12,213
Less: Interest		(3,682	)		(38	)		(3,720	)
Present value of lease liabilities	$	7,831		$	662		$	8,493

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Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended		27 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022		May 31, 2022	Jan. 01, 2023	Dec. 31, 2021	May 31, 2017
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross		3,000	54,000	90,000
Weighted Average Number of Shares Outstanding, Diluted, Adjustment	150,783	212,643	171,723	202,479
Letters of Credit Outstanding, Amount	$ 300		$ 300
Restricted Cash and Cash Equivalents, Current	$ 422	$ 792	$ 422	$ 792	$ 1,454	[1]
Finite-Lived Intangible Assets, Remaining Amortization Period	1 year 1 month 6 days		1 year 1 month 6 days
Finite-Lived Intangible Assets, Net	$ 303		$ 303		422	[1]			$ 501
Amortization of Intangible Assets	39	$ 40	119	$ 111	150
Accounts Receivable, Allowance for Credit Loss, Current	316		316		334
Retained Earnings (Accumulated Deficit)	(14,318)		(14,318)		$ (11,826)	[1]
Accounting Standards Update 2016-13 [Member] | Cumulative Effect, Period of Adoption, Adjustment [Member]
Accounts Receivable, Allowance for Credit Loss, Current								$ 30
Retained Earnings (Accumulated Deficit)								$ 30
Patents Received [Member]
Finite-Lived Intangible Assets, Net	85		85
Patents In Process [Member]
Finite-Lived Intangible Assets, Net	$ 110		$ 110
Service-based Options [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross	25,000	3,000	54,000	69,000
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value	$ 6.13
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 5.88
Market Condition Options [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Options, Grants in Period, Gross	0	0	0	21,000
Share-Based Payment Arrangement, Option [Member]
Share-Based Payment Arrangement, Expense	$ 42	$ 62	$ 184	$ 168
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount	$ 724		$ 724
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition			3 years 9 months 18 days
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	47,538	34,211	37,869	44,070
Restricted Stock Units (RSUs) [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 9.37
Share-Based Payment Arrangement, Expense	$ 38	$ 31	$ 115	$ 66
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount	$ 154		$ 154
Share-Based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition			1 year 2 months 12 days
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period			18,000
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	16,784		15,027
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							325,000
Stock Incentive Plan 2017 [Member] | Restricted Stock Units (RSUs) [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 9.37
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period	0
Stock Incentive Plan 2017 [Member] | Restricted Stock Units (RSUs) [Member] | Non-employee Directors [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period		0	18,000	21,000
Share-Based Compensation Arrangement by Share-Based Payment Award, Award Vesting Period			2 years	2 years

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies -Schedule of Option Activity (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Outstanding, shares (in shares)		452,700
Outstanding, weighted average exercise price per share (in dollars per share)		$ 5.97
Granted, shares (in shares)	3,000	54,000	90,000
Granted, weighted average exercise price per share (in dollars per share)		$ 9.63
Exercised, shares (in shares)		(38,244)
Exercised, weighted average exercise price per share (in dollars per share)		$ 4.09
Cancelled, shares (in shares)		(43,956)
Cancelled, weighted average exercise price per share (in dollars per share)		$ 7.50
Outstanding, shares (in shares)		424,500
Outstanding, weighted average exercise price per share (in dollars per share)		$ 6.45
Outstanding, weighted average remaining contractual term (Year)		6 years 5 months 23 days
Outstanding, aggregate intrinsic value		$ 1,375
Exercisable , shares (in shares)		242,800
Exercisable, weighted average exercise price per share (in dollars per share)		$ 4.44
Exercisable, weighted average remaining contractual term (Year)		5 years 1 month 28 days
Exercisable, aggregate intrinsic value		$ 1,197

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Note 1 - Summary of Significant Accounting Policies - RSU Activity (Details) - Restricted Stock Units (RSUs) [Member] - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2023
Outstanding, shares (in shares)	21,000
Outstanding, weighted average grant date fair value (in dollars per share)	$ 12.00
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period	18,000
Share-Based Compensation Arrangement by Share-Based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value	$ 9.37
Vested, shares (in shares)	(10,500)
Vested, weighted average grant date fair value (in dollars per share)	$ 12.00
Forfeited, shares (in shares)	(6,000)
Forfeited, weighted average grant date fair value (in dollars per share)	$ 10.93
Outstanding, shares (in shares)	22,500
Outstanding, weighted average grant date fair value (in dollars per share)	$ 10.18
Outstanding, weighted average remaining contractual term (Year)	9 years 2 months 23 days
Outstanding, aggregate fair value	$ 208

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Note 1 - Summary of Significant Accounting Policies - Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Raw Materials	$ 20,551	$ 21,673
Work in Process	1,220	1,238
Finished Goods	828	671
Reserves	(1,132)	(1,144)
Total	$ 21,467	$ 22,438	[1]

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Schedule of Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended			12 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023		Sep. 30, 2022	Dec. 31, 2022
Balance			$ 422	[1]	$ 501	$ 501
Additions						71
Amortization	$ 39	$ 40	119		111	150
Balance	303		303			422	[1]
Customer Relationships [Member]
Balance			216		360	360
Additions						0
Amortization			108			144
Balance	108		108			216
Patents [Member]
Balance			206		$ 141	141
Additions						71
Amortization			11			6
Balance	$ 195		$ 195			$ 206

[1] The balance sheet at December 31, 2022 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, 2023	Dec. 31, 2022	[1]	Dec. 31, 2021
Total	$ 303	$ 422		$ 501
Finite-lived Intangible Assets, Excluding Projects in Process [Member]
Remainder of 2023	40
2024	87
2025	14
2026	14
Thereafter	38
Total	$ 193

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

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Note 1 - Summary of Significant Accounting Policies - Error Corrections and Prior Period Adjustments (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Net Proceeds from Line of Credit		$ 0
Proceeds from Line of Credit	$ 95,783	88,673
Payments to Line of Credit	(98,035)	(87,816)
Principal Payments on Long-Term Debt		0
Principal Payments on Financing Leases	(291)	(326)
Stock Option Excercises	155	51
Net Cash Provided by Financing Activities	$ (2,388)	582
Previously Reported [Member]
Net Proceeds from Line of Credit		857
Proceeds from Line of Credit		0
Payments to Line of Credit		0
Principal Payments on Long-Term Debt		0
Principal Payments on Financing Leases		(326)
Stock Option Excercises		51
Net Cash Provided by Financing Activities		582
Revision of Prior Period, Adjustment [Member]
Net Proceeds from Line of Credit		(857)
Proceeds from Line of Credit		88,673
Payments to Line of Credit		(87,816)
Principal Payments on Long-Term Debt		0
Principal Payments on Financing Leases		0
Stock Option Excercises		$ 0

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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, 2023 USD ($)	Sep. 30, 2022 USD ($)	Sep. 30, 2023 USD ($)	Sep. 30, 2022 USD ($)	Dec. 31, 2022 USD ($)
Cash and Cash Equivalents, at Carrying Value	$ 699	$ 1,300	$ 699	$ 1,300	$ 1,027	[1]
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$ 1,121	$ 2,092	$ 1,121	$ 2,092
Revenue Benchmark [Member] | Customer Concentration Risk [Member]
Concentration Risk Number of Customers	2	1	2	1
Revenue Benchmark [Member] | Customer Concentration Risk [Member] | Two Customers [Member]
Concentration Risk, Percentage	36.00%		38.00%
Revenue Benchmark [Member] | Customer Concentration Risk [Member] | One Customer [Member]
Concentration Risk, Percentage		28.00%		26.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member]
Concentration Risk Number of Customers			2		1
Accounts Receivable [Member] | Customer Concentration Risk [Member] | Two Customers [Member]
Concentration Risk, Percentage			37.00%
Accounts Receivable [Member] | Customer Concentration Risk [Member] | One Customer [Member]
Concentration Risk, Percentage					21.00%
Contract Assets Benchmark [Member] | Customer Concentration Risk [Member]
Concentration Risk Number of Customers			1		1
Contract Assets Benchmark [Member] | Customer Concentration Risk [Member] | One Customer [Member]
Concentration Risk, Percentage			29.00%		22.00%
UNITED STATES
Excess Cash Balances, Number of High Credit Quality Financial Institutions			1
CHINA
Excess Cash Balances, Number of High Credit Quality Financial Institutions			1
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$ 640		$ 640
MEXICO
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents	$ 45		$ 45
Non-US [Member] | Revenue Benchmark [Member] | Geographic Concentration Risk [Member]
Concentration Risk, Percentage	3.00%	4.00%	3.00%	4.00%

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

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Note 3 - Revenue 1 (Details Textual)	9 Months Ended
	Sep. 30, 2023
Percentage of Revenue Transferred to Customers	74.00%
Revenue Remaining Performance Obligation, Customers Upon Shipment With Payment Terms	120 days

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Note 3 - Revenue 2 (Details Textual)	Sep. 30, 2023
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period	180 days

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Note 3 - Revenue - Contract Assets (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Dec. 31, 2022
Balance outstanding		$ 9,982
Amounts transferred over time to contract assets	$ 76,225
Allowance for current expected credit losses	(22)
Amounts invoiced during the period	(74,439)
Balance outstanding at March 31, 2023	$ 11,746

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Note 3 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Net Sales	$ 33,369	$ 35,276	$ 103,278	$ 98,505
Medical [Member]
Net Sales	17,835	20,539	59,814	54,343
Industrial [Member]
Net Sales	10,435	10,838	28,966	28,959
Aerospace and Defense [Member]
Net Sales	5,099	3,899	14,498	15,203
Transferred over Time [Member]
Net Sales	24,833	26,059	76,225	72,536
Transferred over Time [Member] | Medical [Member]
Net Sales	12,029	14,753	42,324	37,725
Transferred over Time [Member] | Industrial [Member]
Net Sales	8,195	8,104	21,378	21,563
Transferred over Time [Member] | Aerospace and Defense [Member]
Net Sales	4,609	3,202	12,523	13,248
Transferred at Point in Time [Member]
Net Sales	7,634	8,173	23,770	22,599
Transferred at Point in Time [Member] | Medical [Member]
Net Sales	5,185	5,366	15,564	15,044
Transferred at Point in Time [Member] | Industrial [Member]
Net Sales	1,999	2,314	6,532	6,301
Transferred at Point in Time [Member] | Aerospace and Defense [Member]
Net Sales	450	493	1,674	1,254
Noncash Consideration [Member]
Net Sales	902	1,044	3,283	3,370
Noncash Consideration [Member] | Medical [Member]
Net Sales	621	420	1,926	1,574
Noncash Consideration [Member] | Industrial [Member]
Net Sales	241	420	1,056	1,095
Noncash Consideration [Member] | Aerospace and Defense [Member]
Net Sales	$ 40	$ 204	$ 301	$ 701

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Note 4 - Financing Arrangements (Details Textual) - Credit Agreement [Member] $ in Thousands		9 Months Ended	12 Months Ended
	Dec. 31, 2020	Sep. 30, 2023 USD ($)	Dec. 31, 2022 USD ($)	Jun. 15, 2017 USD ($)
Bank of America [Member]
Debt Issuance Costs, Net		$ 34	$ 44
Bank of America [Member]
Long-Term Line of Credit		4,645	$ 6,897
Line of Credit, Minimum Fixed Charge Coverage Ratio During the Period	1.0
Line of Credit Facility, Remaining Borrowing Capacity		$ 7,515
Bank of America [Member] | Line of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity				$ 16,000
Debt Instrument, Interest Rate During Period		8.20%	5.20%

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Note 5 - Leases (Details Textual)	Sep. 30, 2023
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, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Operating lease cost	$ 576	$ 572	$ 1,735	$ 1,731
Cash paid for amounts included in the measurement of lease liabilities			$ 1,381	1,279
Operating leases (Year)	8 years 8 months 12 days		8 years 8 months 12 days
Finance lease interest cost	$ 9	14	$ 32	50
Finance leases (Year)	2 years		2 years
Finance lease amortization expense	$ 182	182	$ 546	547
Operating leases	7.80%		7.80%
Finance leases	5.30%		5.30%
Total lease cost	$ 767	$ 768	$ 2,313	$ 2,328

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Note 5 - Leases - Supplemental Balance Sheet Information (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Operating lease assets	$ 6,955	$ 7,850	[1]
Total leased assets	7,772	9,213
Property and Equipment [Member]
Finance lease assets	$ 817	$ 1,363

[1] The balance sheet at December 31, 2022 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, 2023 USD ($)
Remaining 2023, operating leases	$ 434
Remaining 2023, finance leases	108
Remaining 2023	542
2024, operating leases	1,514
2024, finance leases	379
2024	1,893
2025, operating leases	1,265
2025, finance leases	106
2025	1,371
2026, operating leases	1,227
2026, finance leases	107
2026	1,334
2027, operating leases	1,256
2027, finance leases	0
2027	1,256
Therafter, operating leases	5,817
Therafter, finance leases	0
Therafter	5,817
Total lease payments, operating leases	11,513
Total lease payments, finance leases	700
Total lease payments	12,213
Less: Interest, operating leases	(3,682)
Less: Interest, finance leases	(38)
Less: Interest	(3,720)
Present value of lease liabilities, operating leases	7,831
Present value of lease liabilities, finance leases	662
Present value of lease liabilities	$ 8,493

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Note 6 - Income Taxes (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Effective Income Tax Rate Reconciliation, Percent	(21.00%)	16.00%	13.00%	15.00%

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Note 7 - Employee Retention Credit (Details Textual) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Employee Retention Credit Receivable	$ 0	$ 2,650	[1]

[1] The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date

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Note 8 - Related Party Transactions (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
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] | Loss on Long-Term Purchase Commitment [Member]
Accounts Receivable, after Allowance for Credit Loss	226		$ 226
Abilitech Medical, Inc [Member] | Payments Received for Delivery of EMS Products [Member]
Related Party Transaction, Amounts of Transaction	$ 0	$ 0	$ 217	$ 0
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
Revenue from Related Parties			$ 163	$ 182