PART 1

ITEM 1. FINANCIAL STATEMENTS

See Accompanying Condensed Notes to the Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

⁽¹⁾ The condensed consolidated balance sheet at December 31, 20162021 has been derived from the audited consolidated financial statements at that date

See Accompanying Condensed Notes to the Condensed Consolidated Financial Statements

(UNAUDITED)

See Accompanying Condensed Notes to the Condensed Consolidated Financial Statements

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-K10-K for the year ended December 31, 2016. 2021. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc., and Nortech Systems Hong Kong Company, Limited and its subsidiary, Nortech Systems Suzhou Company, Limited.wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

ReclassificationsRevenue Recognition

Certain reclassificationsOur 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 been made to the prior year Condensed Consolidated Statementa single performance obligation. Revenue is recorded net of Cash Flowsreturns, allowances and customer discounts. Our net sales for the nine months ended September 30, 2016 to conform to the current year presentation. In the current year we revisedservices were less than 10% of our presentation of non-cash changestotal sales for all periods presented, and accordingly, are included in the accounts receivable allowance and changesnet sales in inventory reserves on the Condensed Consolidated Statements of Cash Flows to show these amounts separately. Prior year amounts were reclassified to conform with current year presentation, which decreased cash provided by accounts receivable by $312,421 and decreased cash used in inventories by $104,341 for the nine months ended September 30, 2016.

Also in the current year we revised our prior year presentation of borrowings and repayments on our line of credit on the Condensed Consolidated Statements of Cash Flows to show the amounts together as the net change in our line of credit.

There was no change in total net cash provided by operating activities or cash used by financing activities for the nine months ended September 30, 2016. These changes have no impact on the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Revenue Recognition

We recognize manufacturing revenue when we ship goods or the goods Sales, value add, and other taxes collected from customers and remitted to governmental authorities are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of

Stock Options

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

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

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

Following is the status of all stock options as of SeptemberJune 30, 2017:2022:

There were no options exercised duringRestricted Stock Units

During the three and ninesix months ended SeptemberJune 30, 2017.  For the three2022, we granted 3,000 and nine months ended September 30, 2016, 1,507 options were exercised. These exercised options had a total intrinsic value of $964 and resulted in cash proceeds of $4,822 for the three and nine months ended September 30, 2016.

Under the 2005 Incentive Compensation Plan, there were no21,000 restricted stock options granted during the three and nine months ended September 30, 2016.  In May units (“RSUs”), respectively, under our 2017 the shareholders approved the 2017 Stock Incentive Plan to non-employee directors which authorized the issuance of 350,000 shares.vest over two years. There were no stock options granted during RSUs outstanding prior to the threesix months ended SeptemberJune 30, 2017.  There were 150,000 options granted during the nine months ended September 30, 2017.

2022. Total compensation expense related to stock optionsthe RSUs were $29 and $35 for the three and six months ended SeptemberJune 30, 2017 and 20162022, respectively. There was $17,280 and $0, respectively.  Total0 compensation expense related to stock optionsRSUs for the ninethree and six months ended SeptemberJune 30, 2017 and 20162021. Total unrecognized compensation expense related to the RSUs was $25,920 and $994, respectively. As of September 30, 2017, there was $181,440 of unrecognized compensation$218, which will vest over the next 2.621.74 years. The RSUs granted in the six months ended June 30, 2022 had an average grant price of $12.00 per share with a weighted average remaining contractual term of 9.73 years. NaN RSUs vested during the six months ended June 30, 2022.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“(“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book

There were no Units units granted during the threesix months ended SeptemberJune 30, 2017. During the nine months ended September2022 or June 30, 2017, a total of 100,000 Units were granted.  During the three and nine months ended September 30, 2016, a total of 31,666 Units were granted.2021.

The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. As of June 30, 2022, there are 0 units outstanding. Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was ($4,478)$100 and $12,372$114 for the three and six months ended SeptemberJune 30, 2017 and 2016, respectively and ($3,527) and $5,950 for the nine months ended September 30, 2017 and 2016, 2021, respectively. The income for the three and nine months ended September 30, 2017 was the result of a change in the estimate of the appreciation of book value per share of common stock.

As of September 30, 2017 and December 31, 2016, approximately $18,600 and $45,000 is accrued under this plan, respectively. As of September 30, 2017, approximately $8,700 of this balance was included in other accrued liabilities and approximately $9,900 of this balance was included in other long-term liabilities. As of December 31, 2016, approximately $23,000 of this balance was included in other accrued liabilities and the remaining $22,000 balance was included in other long-term liabilities.

EarningsNet Income (Loss) per Common Share

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

For the three and ninesix months ended SeptemberJune 30, 2017, 14,500 2022, stock options of 203,625 and 197,285, respectively were included in the computation of diluted net income per common share amounts as their impact waswere dilutive. For the three and nine months ended SeptemberJune 30, 2017, 2021, stock options of 173,250 were excluded because their inclusion would be antidilutive.

For the three months ended September 30, 2016, 14,500 stock options109,065 were included in the computation of diluted earningsnet income per share amounts as their impact was dilutive, and stock options of 64,250 were excluded because their inclusion would be antidilutive.common share. For the ninesix months ended SeptemberJune 30, 2016, the effect of 2021, all stock options isare deemed to be antidilutive due to the net loss incurred and therefore, were not included in the computation of earnings per-share amounts.net income per common share amount.

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

Share Repurchase Program

As of September 30, 2017, we have a $250,000 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 4,824 shares in open market transactions totaling $16,909 for the three and nine months ended September 30, 2017. As of September 30, 2017, we had a $250,000 share repurchase program with $233,091 remaining under this authorization. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.

Segment Reporting Information

All of our operations fall under the contract manufacturing segment within the electronic manufacturing Services industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. As of June 30, 2022 we had outstanding letters of credit for $400. Restricted cash as of June 30, 2022 was $231. The SeptemberJune 30, 20172022 restricted cash balance included cash collateral required to be held against our corporate employee purchasing card program and lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are

applied against our line of credit the next business day. As of September 30, 2017, we had no outstanding letters of credit. We held no restricted cash as of December 31, 2016.

Accounts Receivable and Allowance for Doubtful Accounts

We grant credit to customers inCredit is extended based upon an evaluation of the normal course of business. Accountscustomer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable are unsecured and are presented net ofhave been reduced by an allowance for doubtful accounts. The allowance for doubtful accounts was approximately $163,400 of $297 at June 30, 2022 and $883,000$328 at September 30, 2017 and December 31, 2016, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.2021.

Inventories

Inventories are stated at the lower of average cost (first-in, first-out method)(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:

Other Intangible Assets

Other intangible assets at SeptemberJune 30, 2017 2022 and December 31, 2016 2021 are as follows:

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

Amortization expense of finite life intangible assets for the three and ninesix months ended SeptemberJune 30, 2017 2022 was $75,844$35 and $182,283,$71, respectively. Amortization expense for the three and ninesix months ended SeptemberJune 30, 2016 2021 was $47,663$46 and $142,992,$92, respectively. The increase in

Estimated future annual amortization expense for(not including the three and nine months ended September 30, 2017 was due to the redemption of our industrial revenue bond payable to the City of Blue Earth, which accelerated the recognition of the remaining bond issue costs.

Estimated future amortization expensepatents in process) related to these assets is approximately as follows:

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st.

Impairment AnalysisAccounting Pronouncements Issued But Not Yet Adopted

We evaluate long-lived assets, primarily property and equipment, as well as In June 2016, the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amountFASB issued ASU 2016-13, Measurement of an asset or asset

group may not be recoverable. RecoverabilityCredit Losses on Financial Instruments. This guidance introduces a new model for assets to be held and used isrecognizing credit losses on financial instruments based on our projectionan estimate of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No events related to long-lived assets were identified during the three and nine months ended September 30, 2017 that would require us to test for impairment.

In the third quarter of 2017, as a result of changes in the reporting unit’s forecast, goodwill was evaluated for impairment as of September 30, 2017. Based oncurrent expected credit losses. The ASU also provides updated guidance regarding the impairment analysis performed, it was concluded there was no impairment of goodwillavailable-for-sale debt securities and no impairment expense was recorded duringincludes additional disclosure requirements. The new guidance is effective for public business entities that meet the three and nine months ended September 30, 2017 and 2016, respectively.

Recently Issued Accounting Standards

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, Compensation — Stock Compensation (Topic 718), to reduce the diversity in practice and the cost and complexity for the accounting for a change in terms or conditionsdefinition of a share-based award. ASU 2017-09 is to be applied on a prospective basis effectiveSmaller Reporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2017, with early2022. Early adoption is permitted. We are currently evaluating the effectimpact of this updatestandard on our consolidated financial statements.statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is to be applied on a prospective basis effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the effect of this update on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash in the Statement of Cash Flows (Topic 230), which prescribes that restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  This standard is effective for fiscal years beginning after December 15, 2017, although early adoption is permitted, including adoption in an interim period. We adopted this guidance in 2017. See Note 1, “Summary of Significant Accounting Policies,” of Condensed Notes to the Consolidated Financial Statements for further description of our restricted cash.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments (Topic 230). This guidance will be effective for us beginning in the first quarter of 2018, although early adoption is permitted. We are evaluating the impact, if any, that this new guidance will have on our Consolidated Statements of Cash Flows.

In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for our consolidated financial statements issued for fiscal years beginning after December 15, 2016, and interim periods

within those fiscal years. The Company adopted the guidance in the current year. The adoption of ASU 2016-09 required no retrospective adjustments to the consolidated financial statements. In addition, there was no material cumulative-effect adjustment to retained earnings, nor did the adoption impact the tax provision for the current quarter.

During February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This standard changes the measurement principle for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This standard does not apply to inventory that is measured using Last-in First-out (“LIFO”) or the retail inventory method. The provisions of ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this guidance in the current year and there was no impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. We plan to adopt the new guidance beginning January 1, 2018.

We have performed a review of the requirements of the new guidance and have initially identified which of our revenue streams will be within the scope of ASU 2014-09.  We are continuing to working through an adoption plan which includes a review of customer contracts, applying the five-step model of the new standard to each revenue stream and comparing the results to our current accounting; an evaluation of the method of adoption; and assessing changes that might be necessary to our processes, internal controls and changes in financial reporting. The Company expects to complete the review of contracts and evaluate the impact of the accounting and disclosure changes on its business processes and controls during the fourth quarter of 2017.

NOTE 2.   CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two high-credit quality financial institutions. These accounts 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 $1,175 in cash and restricted cash at June 30, 2022, approximately $691 and $54 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.

Our largest customer has two divisions that together accounted for

We have certain customers whose revenue individually represented 10% or more of our net sales, during the three and nine months ended September 30, 2017 and 2016. or whose accounts receivable balances individually represented 10% or more of total accounts receivable. One division customer accounted for approximately 23.2%28% and 24.3%26% of net sales for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2022, respectively. One customer accounted for 25% and approximately 19.7% and 19.0%27% of net sales for the three and ninesix months ended SeptemberJune 30, 2016. The second division accounted for approximately 1.0% and 1.5% of net sales for the three and nine months ended September2021, respectively.

At June 30, 2017, respectively, and approximately 2.4% and 4.3% of net sales for the three and nine months ended September 30, 2016. Together they accounted for approximately 24.2% and 25.8% of net sales for the three and nine months ended September 30, 2017 and approximately 22.1% and 23.3% of net sales for the three and nine months ended September 30, 2016. Accounts receivable from the customer at September 30, 2017 and December 31, 20162022, two customers represented approximately 19.2% and 13.6%37% of our total accounts receivable, respectively.receivable. At December 31, 2021, one customer represented approximately 19% of our total accounts receivable.

Export sales represented approximately 18.0%4% of net sales for both the three and 13.0%six months ended June 30, 2022. Export sales represented approximately 2% and 3% of net sales for the three and six months ended SeptemberJune 30, 20172021 respectively.

NOTE 3.   REVENUE

Revenue recognition

Our revenue is comprised of product, engineering services and 2016, repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 74% of our revenue for both the three and six months ended June 30, 2022 and 82% and 79% of our revenue for the three and six months ended June 30, 2021, respectively. Export sales represented 15.8%Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and 12.2%costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the six months ended June 30, 2022 was as follows (in thousands):

We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2022 to be transferred to receivables within 90 days, with the majority of any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales for the nine months ended September 30, 2017 and 2016, respectively.by market: