UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

~~FORM 10-Q~~

~~(Mark One)~~

x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2018~~2019

o☐ 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.N., Suite # 150, Maple Grove, MN 55369

Telephone number: (952) 345-2244

Securities registered pursuant to Section 12(b) of the Exchange 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 x☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No o☐

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 o☐		Accelerated Filer o☐
Non-accelerated Filer o☒		Smaller Reporting Company x
~~Emerging growth company~~ o		☒

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. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x☐

No Number of shares of $.01 par value common stock outstanding at ~~November 13, 2018~~August 5, 2019 was ~~2,673,435~~2,657,314.

Table of Contents

TABLE OF CONTENTS

			PAGE

PART I - FINANCIAL INFORMATION

	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 Notes to Consolidated Financial Statements~~	~~6-18~~

		~~Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations~~Condensed Consolidated Balance Sheets	~~19-24~~4

		~~Item 3 - Quantitative and Qualitative Disclosures About Market Risk~~Condensed Consolidated Statements of Cash Flows	245

		Condensed Consolidated Statements of Shareholders’ Equity	6

		Condensed Notes to Consolidated Financial Statements	7-18

	Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations		19-24

	Item 3 - Quantitative and Qualitative Disclosures About Market Risk		24

	Item 4 - Controls and Procedures		25

PART II - OTHER INFORMATION

	Item 1 - Legal Proceedings		26

	Item 1A. - Risk Factors		26

	Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds		26

	Item 3 - Defaults on Senior Securities		2726

	Item 4 - Mine Safety Disclosures		2726

	Item 5 - Other Information		2726

	Item 6 - Exhibits		27

SIGNATURES			28

Table of Contents

PART 1.1

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

THREE MONTHS ENDED

SIX MONTHS ENDED

JUNE 30,

JUNE 30,

2019

2018

2019

2018

Net Sales
$ 27,292 $ 28,538 $ 55,457 $ 54,985

Cost of Goods Sold
24,967 24,721 50,171 48,140

Gross Profit
2,325 3,817 5,286 6,845

Operating Expenses

Selling Expenses
797 1,037 1,558 2,075
General and Administrative Expenses
2,737 2,046 5,041 4,155

Total Operating Expenses
3,534 3,083 6,599 6,230

(Loss) Income From Operations
(1,209 ) 734 (1,313 ) 615

Other Expense

Interest Expense
(279 ) (209 ) (524 ) (382 )

(Loss) Income Before Income Taxes
(1,488 ) 525 (1,837 ) 233

Income Tax Expense
64 135 78 235

(Net Loss) Income
$ (1,552 ) $ 390 $ (1,915 ) $ (2 )

(Net Loss) Income Per Common Share - Basic and Diluted
$ (0.58 ) $ 0.14 $ (0.72 ) $ (0.00 )

Weighted Average Number of Common Shares Outstanding - Basic and Diluted
2,676,449 2,695,994 2,672,758 2,708,234

Other comprehensive income (loss)

Foreign currency translation
(56 ) (126 ) - (54 )
Comprehensive (Loss) Income, net of tax
$ (1,608 ) $ 264 $ (1,915 ) $ (56 )

See Accompanying Condensed Notes to Consolidated Financial Statements

Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

JUNE 30,

DECEMBER 31,

2019
2018⁽¹⁾
ASSETS

(Unaudited)

Current Assets

Cash
$ 399 $ 480
Restricted Cash
406 467
Accounts Receivable, less allowances of $262 and $222
20,691 20,093
Inventories
16,273 17,004
Contract Assets
7,228 6,431
Prepaid Expenses and Other Current Assets
1,776 1,381
Total Current Assets
46,773 45,856

Property and Equipment, Net
9,512 10,178
Operating Lease Assets
5,202 -
Goodwill
2,375 2,375
Other Intangible Assets, Net
1,439 1,523
Other Non Current Assets
28 28
Total Assets
$ 65,329 $ 59,960

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Current Maturities of Long-Term Debt
$ 878 $ 780
Current Portion of Finance Lease Obligation
364 337
Current Portion of Operating Lease Obligations
826 -
Accounts Payable
16,845 18,142
Accrued Payroll and Commissions
3,118 2,747
Other Accrued Liabilities
2,793 2,886
Total Current Liabilities
24,824 24,892

Long-Term Liabilities

Long Term Line of Credit
12,297 9,264
Long-Term Debt, Net
3,401 3,624
Long Term Finance Lease Obligation, Net
776 951
Long-Term Operating Lease Obligation, Net
4,666 -
Other Long-Term Liabilities
118 139
Total Long-Term Liabilities
21,258 13,978

Total Liabilities
46,082 38,870

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: 2,658,559 and 2,663,049 Shares Issued and Outstanding, respectively
27 27
Additional Paid-In Capital
15,682 15,610
Accumulated Other Comprehensive Loss
(233 ) (233 )
Retained Earnings
3,521 5,436
Total Shareholders' Equity
19,247 21,090
Total Liabilities and Shareholders' Equity
$ 65,329 $ 59,960

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

~~NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME~~

~~(UNAUDITED)~~

~~(IN THOUSANDS, EXCEPT SHARE DATA)~~

THREE MONTHS ENDED
SEPTEMBER 30,

NINE MONTHS ENDED
SEPTEMBER 30,

2018

2017

2018

2017

Net Sales

$
29,558

$
28,310

$
84,543

$
86,762

Cost of Goods Sold

26,171

24,794

74,311

76,789

Gross Profit

3,387

3,516

10,232

9,973

Operating Expenses

Selling Expenses

717

1,144

2,792

3,676

General and Administrative Expenses

2,021

2,088

6,177

6,152

Gain on Sale of Property and Equipment

—

—

—

(355
)
Total Operating Expenses

2,738

3,232

8,969

9,473

Income From Operations

649

284

1,263

500

Other Expense

Loss on Extinguishment of Debt

—

—

—

(175
)
Interest Expense

(170
)
(172
)
(551
)
(453
)

Income (Loss) Before Income Taxes

479

112

712

(128
)

Income Tax Expense (Benefit)

115

69

350

(141
)

Net Income

$
364

$
43

$
362

$
13

Net Income Per Common Share:

Basic (in dollars per share)

$
0.14

$
0.02

$
0.13

$
0.00

Weighted Average Number of Common Shares Outstanding - Basic (in shares)

2,680,684

2,747,168

2,698,950

2,747,608

Diluted (in dollars per share)

$
0.14

$
0.02

$
0.13

$
0.00

Weighted Average Number of Common Shares Outstanding - Diluted (in shares)

2,682,901

2,748,533

2,702,503

2,748,973

Other comprehensive income (loss)

Foreign currency translation

(83
)
—

(137
)
(3
)
Comprehensive income, net of tax

$
281

$
43

$
225

$
10

~~See Accompanying Condensed Notes to Condensed Consolidated Financial Statements~~
~~NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~
~~(IN THOUSANDS, EXCEPT SHARE DATA)~~

SEPTEMBER 30,

DECEMBER 31,

2018

2017(1)

(Unaudited)

ASSETS

Current Assets

Cash

$
397

$
473

Restricted Cash

236

306

Accounts Receivable, less allowances of $204 and $209

18,979

17,417

Inventories

15,236

18,527

Contract Assets

7,076

—

Prepaid Expenses and Other Current Assets

1,380

1,044

Total Current Assets

43,304

37,767

Property and Equipment, Net

10,097

10,176

Goodwill

2,375

2,375

Other Intangible Assets, Net

1,578

1,739

Other Non Current Assets

27

28

Total Assets

$
57,381

$
52,085

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Current Maturities of Long-Term Debt

$
871

$
1,003

Current Portion of Capital Lease Obligation

350

295

Accounts Payable

16,887

11,699

Accrued Payroll and Commissions

2,526

2,900

Other Accrued Liabilities

2,475

2,148

Total Current Liabilities

23,109

18,045

Long-Term Liabilities

Long-Term Line of Credit

8,058

8,503

Long-Term Debt, Net

3,735

4,353

Long-Term Capital Lease Obligation, Net

1,037

1,222

Other Long-Term Liabilities

159

137

Total Long-Term Liabilities

12,989

14,215

Total Liabilities

36,098

32,260

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:

2,675,411 and 2,739,250 Shares Issued and Outstanding, respectively

27

27

Additional Paid-In Capital

15,612

15,760

Accumulated Other Comprehensive Loss

(238
)
(101
)
Retained Earnings

5,632

3,889

Total Shareholders’ Equity

21,283

19,825

Total Liabilities and Shareholders’ Equity

$
57,381

$
52,085

~~See Accompanying Condensed Notes to Condensed Consolidated Financial Statements~~
~~437~~⁽¹⁾ The balance sheet at December 31, ~~2017~~2018 has been derived from the audited financial statements at that date
~~NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~(UNAUDITED)~~
~~(IN THOUSANDS)~~

NINE MONTHS ENDED

SEPTEMBER 30,

2018

2017

Cash Flows From Operating Activities

Net Income

$
362

$
13

Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities

Depreciation and Amortization

1,655

1,873

Compensation on Stock-Based Awards and Equity Appreciation Rights

80

22

Loss on Extinguishment of Debt

—

17

Deferred Taxes

1

15

Change in Contingent Consideration

—

(300
)
Change in Accounts Receivable Allowance

(5
)
(720
)
Change in Inventory Reserves

118

272

Gain on Disposal of Property and Equipment

—

(355
)
Changes in Current Operating Items

Accounts Receivable

(1,619
)
(272
)
Inventories

(1,959
)
(686
)
Contract Assets

(617
)
—

Prepaid Expenses and Other Current Assets

(278
)
(115
)
Accounts Payable

4,913

824

Accrued Payroll and Commissions

(374
)
(882
)
Other Accrued Liabilities

287

909

Net Cash Provided by Operating Activities

2,564

615

Cash Flows from Investing Activities

Proceeds from Sale of Property and Equipment

17

669

Purchase of Intangible Asset

(3
)
(100
)
Purchases of Property and Equipment

(999
)
(574
)
Net Cash Used in Investing Activities

(985
)
(5
)
Cash Flows from Financing Activities

Net Change in Line of Credit

(445
)
1,166

Proceeds from Long-Term Debt

—

5,123

Principal Payments on Long-Term Debt

(819
)
(5,623
)
Principal Payments on Capital Leases

(231
)
—

Loss on Extinguishment of Debt

—

(158
)
Debt Issuance Costs

—

(268
)
Share Repurchases

(229
)
(16
)
Net Cash (Used in) Provided by Financing Activities

(1,724
)
224

Effect of Exchange Rate Changes on Cash

(1
)
(29
)

Net Change in Cash

(146
)
805

Cash - Beginning of Period

779

268

Cash - Ending of Period

$
633

$
1,073

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets

Cash

$
397

$
531

Restricted Cash

236

542

Total cash and restricted cash reported in the condensed consolidated statements of cash flows

$
633

$
1,073

Supplemental Disclosure of Cash Flow Information:

Cash Paid During the Period for Interest

$
507

$
383

Cash Paid (Refunded) During the Period for Income Taxes

167

(22
)

Supplemental Noncash Investing and Financing Activities:

Property and Equipment Purchases in Accounts Payable

304

193

Equipment Acquired under Capital Lease

100

972

4
Table of Contents
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

SIX MONTHS ENDED

JUNE 30,

2019

2018

Cash Flows From Operating Activities

Net Loss
$ (1,915 ) $ (2 )
Adjustments to Reconcile Net Loss to Net Cash

Provided by (Used in) Operating Activities

Depreciation and Amortization
1,096 1,108
Compensation on Stock-Based Awards
191 45
Change in Accounts Receivable Allowance
40 (5 )
Change in Inventory Reserves
54 73
Changes in Current Operating Items
Accounts Receivable
(646 ) (1,886 )
Inventories
670 (594 )
Contract Assets
(798 ) (88 )
Prepaid Expenses and Other Current Assets
(395 ) (130 )
Accounts Payable
(1,087 ) 3,722
Accrued Payroll and Commissions
596 374
Other Accrued Liabilities
(49 ) 124
Net Cash (Used in) Provided by Operating Activities
(2,243 ) 2,741
Cash Flows from Investing Activities

Purchase of Intangible Asset
(25 ) (4 )
Purchases of Property and Equipment
(545 ) (557 )
Net Cash Used in Investing Activities
(570 ) (561 )
Cash Flows from Financing Activities

Net Change in Line of Credit
3,469 (1,361 )
Principal Payments on Long-Term Debt
(584 ) (545 )
Principal Payments on Finance Leases
(96 ) (150 )
Stock Option Exercises
7 -
Share Repurchases
(126 ) (186 )
Net Cash Provided By (Used in) Financing Activities
2,670 (2,242 )

Effect of Exchange Rate Changes on Cash
- (46 )

Net Change in Cash
(143 ) (108 )
Cash - Beginning of Period
948 779

Cash - Ending of Period
$ 805 $ 671

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets

Cash
$ 399 $ 437
Restricted Cash
406 234
Total cash and restricted cash reported in the condensed consolidated statements of cash flows
$ 805 $ 671

Supplemental Disclosure of Cash Flow Information:

Cash Paid During the Period for Interest
$ 477 $ 317
Cash Paid and Refunded During the Period for Income Taxes
(47 ) 167

Supplemental Noncash Investing and Financing Activities:

Property and Equipment Purchases in Accounts Payable
180 284

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
5
Table of Contents
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)

Accumulated

Additional

Other

Retained

Total

Preferred

Common

Paid-In

Comprehensive
Earnings
Shareholders'

BALANCE MARCH 31, 2018
$ 250 $ 27 $ 15,654 $ (29 ) $ 4,880 $ 20,782
Net Income
- - - - 390 390
Cumulative Adjustment
- - - - (2 ) (2 )
Foreign currency translation adjustment
- - - (126 ) - (126 )
Compensation on stock-based awards
- - 25 - - 25
Share repurchases
- - (60 ) - - (60 )

BALANCE JUNE 30, 2018
$ 250 $ 27 $ 15,619 $ (155 ) $ 5,268 $ 21,009

BALANCE DECEMBER 31, 2017
$ 250 $ 27 $ 15,760 $ (101 ) $ 3,889 $ 19,825
Net Loss
- - - - (2 ) (2 )
Cumulative Adjustment
- - - - 1,381 1,381
Foreign currency translation adjustment
- - - (54 ) - (54 )
Compensation on stock-based awards
- - 45 - - 45
Share repurchases
- - (186 ) - - (186 )

BALANCE JUNE 30, 2018
$ 250 $ 27 $ 15,619 $ (155 ) $ 5,268 $ 21,009

BALANCE MARCH 31, 2019
$ 250 $ 27 $ 15,757 $ (177 ) $ 5,073 $ 20,930
Net Loss
- - - - (1,552 ) (1,552 )
Foreign currency translation adjustment
- - - (56 ) - (56 )
Compensation on stock-based awards
- - 31 - - 31
Share repurchases
- - (113 ) - - (113 )
Stock option exercises
- - 7 - - 7

BALANCE JUNE 30, 2019
$ 250 $ 27 $ 15,682 $ (233 ) $ 3,521 $ 19,247

BALANCE DECEMBER 31, 2018
$ 250 $ 27 $ 15,610 $ (233 ) $ 5,436 $ 21,090
Net Loss
- - - - (1,915 ) (1,915 )
Stock option exercises
- - 7 - - 7
Compensation on stock-based awards
- - 191 - - 191
Share repurchases
- - (126 ) - - (126 )

BALANCE JUNE 30, 2019
$ 250 $ 27 $ 15,682 $ (233 ) $ 3,521 $ 19,247
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
6
Table of Contents
CONDENSED NOTES TO 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, ~~2017.~~2018. 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.~~Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Effective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer

Table of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing,
Contents
and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the provisions of ASU 2014-09 using the modified retrospective approach with application to contracts that were not completed as of January 1, 2018. The adoption of ASU 2014-09 had a significant impact to the Company’s results of operations, cash flow and financial position, and as a result we now recognize the majority of our revenue over time rather than upon shipment resulting in an adjustment to retained earnings of $1,381 on January 1, 2018. The Company has presented the disclosures required by this new standard, refer to Note 3.

Stoc~~Stock-Based~~k-Based Awards

Following is the status of all stock options as of ~~September~~June 30, ~~2018:~~2019:

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)		Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2018	187,750		$	3.70
Outstanding - January 1, 2019									224,750		$	3.44
Granted	134,000		3.36						169,500			4.44
Exercised	—		—						(2,250	)		3.20
Cancelled	(3,000	)	3.29						(23,250	)		3.85
Outstanding - September 30, 2018	318,750		$	3.62	8.27	$	210
Exercisable - September 30, 2018	87,750		$	4.00	5.97	$	54
Outstanding - June 30, 2019									368,750		$	3.88		9.01	$	134
Exercisable - June 30, 2019									111,817		$	3.46		7.06	$	64

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were no137,500 and 169,500 stock options granted during the three and six months ended ~~September~~June 30, ~~2018. There were 134,000 stock options granted during the nine months ended September 30, 2018.~~2019, respectively.

Total compensation expense related to stock options for the three months ended ~~September~~June 30, 2019 and 2018 was $32 and ~~2017 was $35 and $17,~~$25, respectively and ~~$80~~$75 and ~~$26~~$45 for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. As of ~~September~~June 30, ~~2018,~~2019, there was ~~$275~~$444 of unrecognized compensation which will vest over the next ~~3.28~~3.26 years.

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. 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 value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to market value for each reporting period.

During the six months ended June 30, 2019, 100,000 Units were granted in the first quarter. During the three and ~~nine~~six months ended ~~September~~June 30, 2018, no additional Units were granted. ~~There were no Units granted during the three months ended September 30, 2017. During the nine months ended September 30, 2017, a total of 100,000 Units were granted.~~

Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 ~~and ($4)~~ for the three and six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017, respectively and $0 and ($4) for the nine months ended September 30, 2018 and 2017, respectively.~~2018.

AsDuring the six months ended June 30, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of ~~both September 30, 2018 and December 31, 2017, no amounts were accrued under this plan.~~$116 during the first quarter.

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Table of Contents
Net Income (Loss) per Common Share
For both the three months and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.
Share Repurchase Program
As of ~~September~~June 30, ~~2018,~~2019, we ~~had~~have a $250 share repurchase program which was authorized by our Board of Directors in August ~~2017 and expired in July 2018 with no authorized repurchases remaining under this program.~~2017. Under this repurchase program, we repurchased ~~2,277~~28,363 and ~~55,199~~31,740 shares in the open market transactions totaling $8$113 and ~~$200~~$126 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively and 4,824 shares in open market transactions totaling $16,909 for the three and nine months ended September 30, 2017.~~
~~In August 2018, the Board of Directors approved an additional $250 share repurchase program.~~ Under this repurchase program, we repurchased 8,640 shares in the open market transactions totaling $35 for the three and nine months ended September 30, 2018. As of September 30, 2018, we had $215 remaining under this authorization.2019, respectively. 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. The ~~September~~June 30, ~~2018~~2019 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. As of ~~September~~June 30, ~~2018,~~2019, we had no outstanding letters of credit.

Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the three months ended and six months ended June 30, 2019 have been reduced by an allowance for doubtful accounts of ~~$204~~$262 at ~~September~~June 30, ~~2018~~2019 and ~~$209~~$222 at December 31, ~~2017.~~2018.

Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows (in thousands):

September 30,

December 31,

June 30,

December 31,

2018

2017

2019

2018

Raw Materials

$
15,595

$
13,870

$ 16,447 $ 16,769
Work in Process

437

3,112

780 1,015
Finished Goods

166

2,389

212 332
Reserves

(962
)
(844
)
(1,166 ) (1,112 )

Total

$
15,236

$
18,527

$ 16,273 $ 17,004
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Table of Contents

The primary decrease in work in process and finished goods inventory as of September 30, 2018 as compared to December 31, 2017 primarily relates to the adoption of ASU 2014-09 and the recognition of revenue over time rather than upon shipment of inventory. Refer to Note 3 for further information.
Other Intangible Assets
Other intangible assets at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows (in thousands):

September 30, 2018

June 30, 2019

Gross

Gross

Carrying

Accumulated

Net Book

Carrying

Accumulated

Net Book

Years

Amount

Amortization

Value

Years

Amount

Amortization

Value

Customer Relationships

9

$
1,302

$
470

$
832

9 $ 1,302 $ 578 $ 724
Trade Names

3

100

53

47

3 100 78 22
Intellectual Property

20

814

132

682

20 814 163 651
Patents

7

17

—

17

7 42 - 42
Totals

$
2,233

$
655

$
1,578

$ 2,258 $ 819 $ 1,439

December 31, 2017

Gross

Carrying

Accumulated

Net Book

Years

Amount

Amortization

Value

Customer Relationships

9

$
1,302

$
361

$
941

Intellectual Property

3

100

28

72

Trade Names

20

814

102

712

Patents

7

14

—

14

Totals

$
2,230

$
491

$
1,739

December 31, 2018

Gross

Carrying

Accumulated

Net Book

Years

Amount

Amortization

Value

Customer Relationships
9 $ 1,302 $ 506 $ 796
Intellectual Property
3 100 61 39
Trade Names
20 814 143 671
Patents
7 17 - 17
Totals
$ 2,233 $ 710 $ 1,523

Amortization expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was $55 and ~~$164,~~$109, respectively. ~~Amortization expense for the three and nine months ended September 30, 2017 was $76 and $182, respectively.~~
Estimated future annual amortization expense (not including projects in process) related to these assets is approximately as follows (in thousands):

Year

Amount

Amount

Remainder of 2018

$
164

2019

208

Remainder of 2019
$ 109
2020

185

192
2021

185

185
2022

185

185
2023
185
Thereafter

634

541
Total

$
1,561

$ 1,397

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 1^st. No events were identified during the ~~nine~~six months ended ~~September~~June 30, 2018 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than ~~its~~it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

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Table of Contents
Impairment Analysis
We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection 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 impairment expense was recorded during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017, respectively.~~2018.

Recently Issued ~~and Adopted~~ Accounting Standards

~~In February 2016, the FASB issued~~On January 1, 2019, we adopted ASU No. 2016-02, ~~“Leases”~~Leases (Topic 842). This ASU requires lessees to ~~improve financial reporting about leasing transactions. This guidance will require organizations that~~recognize lease assets ~~to recognize~~and lease liabilities on the balance ~~sheet~~sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year. We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases.
The impact of adopting the new lease standard was the recognition of $5,731 of lease assets and lease liabilities ~~for the rights and obligations created by those~~related to our operating leases. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued new guidance which includes an option to not restate comparative periods in transition. This guidance is effective for the Company’s annual and quarterly periods beginning January 1, 2019. The Company is in the process of evaluating the impact that the adoption of ~~this~~the new lease standard ~~will have on its consolidated financial statements and is currently assessing its leases. The Company expects that the adoption~~had no impact to our Condensed Consolidated Statements of this guidance will result in a material increase in the assets and liabilities recorded on its consolidated balance sheets and additional qualitative and quantitative disclosures. The Company expects to use the effective dateOperations, Condensed Consolidated Statements of ~~this standard as the date~~Cash Flows or Condensed Consolidated Statements of ~~initial application, with no retrospective adjustments to prior comparative periods.~~Shareholders’ Equity.

~~In March 2018, we adopted FASB ASU 2018-05,~~ ~~Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118~~, which updates the income tax accounting in U.S. GAAP to reflect the Securities and Exchange Commission (‘SEC’) interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the ‘Tax Act’) was signed into law. Additional information regarding the adoption of this standard is contained in Note 5, ~~‘Income Taxes’~~.

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the ~~$397~~$399 in cash at ~~September~~June 30, ~~2018,~~2019, approximately ~~$395~~$333 was held at banks located in China. 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 10% or more of our net sales during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018. One division accounted for approximately ~~20%~~21% and 22% of net sales for the three and six months ended June 30, 2019, respectively, and approximately 21% and 20% for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, and approximately 23% and 20% for the three and nine months ended September 30, 2017, respectively.~~2018. The other division accounted for approximately 1%2% of net sales for both the three months and ~~nine~~six ended ~~September~~June 30, ~~2018, respectively,~~2019, and approximately 1% net sales for both the three and 2%six months ended June 30, 2018. Together they accounted for approximately 23% and 24% of net sales for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively. Together they accounted for~~2019, respectively, and approximately 22% and 21% of net sales for ~~both~~ the three and ~~nine~~six months ended ~~September~~June 30, 2018, ~~respectively, and approximately 24% and 26% for the three and nine months ended September 30, 2017.~~respectively. Accounts receivable from the customer at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 represented approximately ~~21%~~22% and 16% of our total accounts receivable, respectively.

Export sales represented approximately ~~20%~~17% and ~~18%~~21% of net sales for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Export sales represented ~~19%~~18% and ~~16%~~20% of net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

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NOTE 3. REVENUE

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

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

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.
Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

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

12
Table of Contents
Contract Assets
Contract assets, recorded as such in the Condensed Consolidated Balance ~~Sheets,~~Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the ~~nine~~three and six months ended ~~September~~June 30, ~~2018~~2019 was as follows (in thousands):

Nine Months Ended September 30, 2018

Outstanding at January 1, 2018

$
6,459

Six Months Ended June 30, 2019

Outstanding at January 1, 2019
$ 6,431
Increase (decrease) attributed to:

Transferred to receivables from contract assets recognized

(5,727
)
(4,985 )
Product transferred over time

6,344

5,782
Outstanding at September 30, 2018

$
7,076

Outstanding at June 30, 2019
$ 7,228

We expect substantially all of the remaining performance obligations for the contract assets recorded as of ~~September~~June 30, ~~2018,~~2019, 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 and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 (in thousands):

Three Months Ended September 30, 2018

Three Months Ended June 30, 2019

Product/ Service
Transferred Over
Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Product/ Service
Transferred
Over Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense

$
3,931

$
50

$
203

$
4,184

$ 4,155 $ 222 $ 205 $ 4,582
Medical

13,461

151

668

14,280

13,145 218 661 14,024
Industrial

9,486

1,116

492

11,094

7,428 878 380 8,686
Total net sales

$
26,878

$
1,317

$
1,363

$
29,558

$ 24,728 $ 1,318 $ 1,246 $ 27,292

Nine Months Ended September 30, 2018

Product/ Service
Transferred Over
Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense

$
12,675

$
170

$
599

$
13,444

Medical

34,513

720

1,605

36,838

Industrial

29,698

3,165

1,398

34,261

Total net sales

$
76,886

$
4,055

$
3,602

$
84,543

~~Impact of New Revenue Guidance on Financial Statement Line Items~~

Six Months Ended June 30, 2019

Product/ Service
Transferred
Over Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense
$ 8,258 $ 242 $ 327 $ 8,827
Medical
27,640 253 1,070 28,963
Industrial
15,568 1,475 624 17,667
Total net sales
$ 51,466 $ 1,970 $ 2,021 $ 55,457
~~The following table compares the reported condensed consolidated statement~~
13
Table of operations and comprehensive income, balance sheets and cash flows, as of and for the three and nine months ended September 30, 2018, to the pro-forma amounts had the previous guidance been in effect (in thousands):
Contents

Three Months Ended
September 30, 2018

Nine Months Ended
September 30, 2018

As Reported

Pro forma as if the
previous accounting
guidance was in
effect

As Reported

Pro forma as if the
previous accounting
guidance was in
effect

Condensed Consolidated Statement of Operations

Net Sales

$
29,558

$
27,665

$
84,543

$
80,323

Cost of Goods Sold

26,171

24,454

74,311

70,291

Gross Profit

3,387

3,211

10,232

10,032

Income from Operations

649

472

1,263

1,063

Income Before Income Taxes

479

303

712

512

Income Tax Expense

115

115

350

350

Net Income

$
364

$
188

$
362

$
162

Net Income Per Common Share - Diluted

$
0.14

$
0.07

$
0.13

$
0.06

As of September 30, 2018

As Reported

Pro forma as if the
previous accounting
guidance was in
effect

Condensed Consolidated Balance Sheet

Assets

Inventories

$
15,236

$
20,732

Contract Assets

$
7,076

$
—

Shareholders’ Equity

Retained Earnings

$
5,632

$
4,051

Nine Months Ended
September 30, 2018

As Reported

Pro forma as if the
previous accounting
guidance was in
effect

Condensed Consolidated Statement of Cash Flows

Net Income

$
362

$
162

Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities

Change in Current Operating Items

Inventories

(1,959
)
(2,376
)

Contract Asset

(617
)
—

Net Cash Provided by Operating Activities

$
2,564

$
2,564

NOTE 4. FINANCING ARRANGEMENTS

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and amended effective December 29, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022. The Bank of America credit agreement replaced our previous credit agreement with Wells Fargo Bank which terminated on June 20, 2017 and resulted in a loss on the extinguishment of debt of $175 primarily related to legal and terminations fees.

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of ~~4.3%~~5.8% and 4.5% as of ~~September~~June 30, ~~2018.~~2019 and 2018, respectively. We had borrowings on our line of credit of ~~$8,058~~$12,297 and ~~$8,503~~$9,264 outstanding as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

The line of credit and real estate term notes with Bank of America contain 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 availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

The ~~Bank of America~~BofA credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. ~~In addition,~~As of June 30, 2019 we did not meet the fixed charge coverage ratio which was waived by BofA in the second amendment to the credit agreement requires that the Company comply with certain minimum levels of cumulative EBITDA for measurement periods during fiscal 2018, including cumulative EBITDA of $1,970 for the twelve months ending December 31, 2018.received on August 13, 2019.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At ~~September~~June 30, ~~2018,~~2019, we had unused availability under our line of credit of ~~$4,797,~~$3,703, supported by our borrowing base. The line is secured by substantially all of our assets.

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300. The $1,000 promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $23 and is subject to offsets if certain revenue levels are not met. The $1,300, ~~promissory note has a four-year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29 and is not subject to offset.~~
~~Long-term debt at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):~~

September 30,

December 31,

2018

2017

Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.5% as of September 30, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

$
4,377

$
4,751

Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019

200

394

Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019

260

512

4,837

5,657

Discount on Devicix Notes Payable

(33
)
(63
)
Debt issuance Costs

(198
)
(238
)

Total long-term debt

4,606

5,356

Current maturities of long-term debt

(871
)
(1,003
)
Long-term debt - net of current maturities

$
3,735

$
4,353

~~The Company has lease financing facilities for property and equipment. The obligations are collateralized by the property underlying the lease. Total cost of the leased equipment~~which was ~~$1,624 at September 30, 2018 and $1,524 at December 31, 2017.~~
~~Current maturities of capital leases were $350 at September 30, 2018 and $295 at December 31, 2017.~~
~~Interest expense related to the leased assets was $19 and $0 for~~fully paid off during the three months ended ~~September~~June 30, 2019.
In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of credit arrangement of 6,000,000 Renminbi (RMB) that expires on April 3, 2021. This line of credit bears an interest rate of 6% and we had borrowings of 3,006,204 RMB ($437) at June 30, 2019.
14
Table of Contents
Long-term debt at June 30, 2019 and December 30, 2018 consisted of following:

June 30,

December 31,

2019

2018

Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.8% as of June 30, 2019 and December 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.
$ 4,004 $ 4,253

China letter of credit arrangement
437 -

Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019
- 156

Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019
- 203
4,441 4,612

Discount on Devicix Notes Payable
- (23 )
Debt issuance Costs
(162 ) (185 )

Total long-term debt
4,279 4,404
Current maturities of long-term debt
(878 ) (780 )
Long-term debt - net of current maturities
$ 3,401 $ 3,624
15
Table of Contents
NOTE 5. LEASES
We have operating leases for certain manufacturing sites, office space, and ~~2017, respectively~~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 ~~$70~~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 June 30, 2019, we do not have material lease commitments that have not commenced.
The components of lease expense were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Lease Cost

2019

2019

Operating lease cost
$ 253 $ 532
Finance lease interest cost
16 33
Finance lease amortization expense
66 131
Total lease cost
$ 335 $ 696
Supplemental balance sheet information related to leases was as follows:

Balance Sheet Location

June 30, 2019

Assets

Operating lease assets
Operating lease assets
$ 5,202
Finance lease assets
Property, Plant and Equipment
1,292
Total leased assets
6,494

Liabilities

Current

Current operating lease liabilities
Current Portion of Operating Lease Obligations
826

Current finance lease liabilities
Current Portion of Finance Lease Obligations
364
Noncurrent

Long-term operating lease liabilities
Long Term Operating Lease Liabilities, Net
4666
Long term finance lease liabilities
Long Term Finance Lease Obligations, Net
776
Total lease liabilities
$ 6,632
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Table of Contents
Supplemental cash flow information related to leases was as follows:

Three Months Ended June 30,

2019

Operating leases

Cash paid for amounts included in the measurement of lease liabilities
$ 200
Right-of-use assets obtained in exchange for lease obligations
$ —
Maturities of lease liabilities were as follows:

Operating
Leases

Finance Leases

Total

Remaining 2019
$ 447 $ 213 $ 660
2020
858 398 1,256
2021
722 398 1,120
2022
726 223 949
2023
738 2 740
Thereafter
3,380 — 3,380
Total lease payments
$ 6,871 $ 1,234 $ 8,105
Less: Interest
(1,379
)
(94 ) (1,473
)
Present value of lease liabilities
$ 5,492 $ 1,140 $ 6,632
The lease term and $0discount rate at June 30, 2019 were as follows:
Weighted-average remaining lease term (years)
Operating leases
8.1
Finance leases
3.5
Weighted-average discount rate
Operating leases
4.8
%
Finance leases
5.4
%
Rent expense for our operating leases the ~~nine~~three and six months ended ~~September~~June 30, 2018 as accounted under ASC 840, Leases, was $319 and 2017, respectively. Depreciation expense related to the leased assets was $41 and $0 for the three months ended September 30, 2018 and 2017, respectively and $122 and $0 for the nine months ended September 30, 2018 and 2017,$654, respectively.

~~Approximate~~The future minimum lease ~~payments~~commitments as of December 31, 2018, under ~~non-cancelable capital leases subsequent to September 30, 2018~~ASC 840 are as ~~follows (in thousands):~~follows:

Year

Amount

Remainder of 2018

$
121

Operating Leases

2019

398

$ 1,024
2020

398

858
2021

398

722
2022

223

726
2023
738
Thereafter

2

3,380
Total noncancelable future lease commitments

$
1,540

Less: interest

(153
)
Present value of obligations under capital leases

$
1,387

Total minimum obligations
$ 7,448
17
Table of Contents
NOTE 5.6. INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full ~~fiscal~~calendar 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~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~24%~~(4%) and ~~49%, respectively. Our effective tax~~the rate for the three and ~~nine~~six months ended September 30, 2017 was 61.5% and 110.2%, respectively. Our effective tax rate for the year ended December 31, 2018 is expected to be 51% compared to (18%) for the year ended December 31, 2017. The increase is due mainly to the effects of the tax reform changes that were enacted on December 22, 2017, and the increase in the effective tax rate expected in China.
~~There was no unrecognized tax benefit as of September~~June 30, 2018 was 26% and the $52 of unrecognized tax benefits as of December 31, 2017, included amounts which, if ultimately recognized, will reduce our annual effective tax rate. The amount has been netted against the applicable deferred tax asset as any adjustment would reduce the recorded asset.
~~NOTE 6. COMMITMENTS AND CONTINGENCIES~~
~~We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on various dates through 2028.~~
~~Rent expense for the three months ended September 30, 2018 and 2017 amounted to approximately $297 and $299 respectively and $951 and $948 for the nine months ended September 2018 and 2017,~~101%, respectively.

~~Approximate future minimum lease payments under non-cancelable leases subsequent to September 30, 2018 are as follows (in thousands):~~
18
Table of Contents

Years Ending

December 31,

Amount

2018

$
208

2019

935

2020

768

2021

622

2022

676

Thereafter

4,118

Total

$
7,327

~~NOTE 7. PLANT CLOSURE~~
On January 31, 2017 the Company closed its manufacturing operations in Augusta, Wisconsin. On March 31, 2017, the Company closed on the sale of the Augusta building and building improvements for $715. The Augusta building and building improvements had a net book value of $314, recognizing a gain on the sale, net of related expenses, of $354, and applied the net proceeds of $668 towards the outstanding real estate term note.
~~NOTE 8. RELATED PARTY TRANSACTIONS~~
During 2016, the Company entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became the Chief Operating Officer of the Company on May 20, 2017 and as noted below resigned from the Company on October 5, 2018. For the three months ended September 30, 2018 and 2017, expenses were incurred in the amounts of $25, and $22 respectively and $54 and $97 for the nine months ended September 30, 2018 and 2017, respectively.
On February 22, 2018, the Company entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, formerly an independent director of the Company. Mr. Murray resigned from this position in May 2018. The term of the Consulting Agreement was three months and ended in the second quarter of 2018. For the three and nine months ended September 30, 2018, expenses were incurred in the amount of $0 and $68, respectively.
~~NOTE 9. SUBSEQUENT EVENT~~
Effective October 5, 2018, Matt Mahmood resigned as the Company’s Chief Operating Officer. The Company will pay severance benefits per his employment and separation agreements of $235 over the next 12 months, which will be fully expensed in the fourth quarter of 2018.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the aerospace and defense, medical, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Eden Prairie, Mankato, Merrifield, 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

Three Months Ended

Six Months Ended

September 30,

September 30,

June 30,

June 30,

2018

2017

2018

2017

2019

2018

2019

2018

Net Sales

100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Cost of Goods Sold

88.5

87.6

87.9

88.5

91.5 86.6 90.5 87.6
Gross Profit

11.5

12.4

12.1

11.5

8.5 13.4 9.5 12.4

Selling Expenses

2.4

4.0

3.3

4.2

2.9 3.6 2.8 3.8
General and Administrative Expenses

6.8

7.4

7.3

7.1

10.0 7.2 9.1 7.6
Gain on Sale of Property and Equipment

0.0

0.0

0.0

(0.4
)
Income from Operations

2.3

1.0

1.5

0.6

(4.4 ) 2.6 (2.4 ) 1.0

Other Expenses

(0.7
)
(0.6
)
(0.7
)
(0.7
)
(1.0 ) (0.7 ) (0.9 ) (0.7 )
Income (Loss) Before Income Taxes

1.6

0.4

0.8

(0.1
)
(5.4 ) 1.9 (3.3 ) 0.3

Income Tax Expense (Benefit)

0.4

0.2

0.4

(0.2
)
0.2 0.5 0.1 0.4
Net Income

1.2
%
0.2
%
0.4
%
0.1
%
Net Income (Loss)
(5.6 %) 1.4 % (3.4 %) (0.1 %)

Net Sales

Net sales were ~~$29.6~~$27.3 million in the ~~third~~second quarter of ~~2018, an increase~~2019, as compared to $28.5 million in the second quarter of the prior year, a decrease of $1.2 million or ~~4.4% as compared to the third quarter of the prior year. Our 2018 third quarter amount includes $1.9 million of additional sales related to the change in the revenue recognition policy.~~4.2%. Net sales results were varied by ~~markets. The~~markets, the medical market increased by $1.5 million or ~~12.0%~~11.6% with medical ~~component products~~devices accounting for ~~86%~~most of ~~the increase and medical devices the remaining 14%.~~that increase. The industrial market decreased by ~~$0.4~~$3.1 million or ~~3.8%~~25.8% of sales in the ~~third~~second quarter of ~~2018~~2019 as compared to the same quarter of ~~2017.~~2018. Net sales from the aerospace and defense markets increased by ~~$0.2~~$0.4 million or ~~3.9%~~7.3% in the ~~third~~second quarter of ~~2018~~2019 as compared to the ~~third~~second quarter of ~~2017.~~2018.

Net sales were ~~$84.5~~$55.5 million in the ~~nine~~six months ended ~~2018, a decrease of $2.2 million~~2019, as compared to $55.0 million in the prior year, ~~comparable period. Our 2018 amounts include $4.2~~an increase of $0.5 million ~~of additional sales related to the change in the revenue recognition policy.~~or 0.9%. Net sales results were varied by ~~markets. The~~markets, the medical market ~~decreased~~increased by ~~$4.2~~6.2 million, or ~~10.2%~~27.5% with medical component products accounting for ~~28%~~42% of the ~~decrease~~increase and medical devices ~~the remaining 72%~~58%. The industrial market decreased by ~~$0.2~~$5.4 million ~~or 0.7%~~ of sales ~~for the nine months ended 2018 as compared to the same period of 2017.~~or 23.3%. Net sales from the aerospace and defense markets ~~increased by $2.2~~decreased $0.4 million or ~~19.4% for the nine months ended 2018 as compared to the same period of 2017.~~
~~Net sales by our major EMS industry markets for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):~~4.4%.

Three Months Ended

Nine Months Ended

2018

2017

%

2018

2017

%

$

$

Change

$

$

Change

Aerospace and Defense

4,184

4,027

3.9

13,444

11,264

19.4

Medical

14,280

12,753

12.0

36,838

41,009

(10.2
)
Industrial

11,094

11,530

(3.8
)
34,261

34,489

(0.7
)
Total Net Sales

29,558

28,310

4.4

84,543

86,762

(2.6
)
19
Table of Contents

Net sales by our major EMS industry markets for the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~to the pro-forma amounts for the same period had the previous guidance been in effect~~were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

Nine Months Ended

2019

2018

%

2019

2018

%

As Reported
2018

Pro forma as if
the previous
accounting
guidance was
in effect

% Change

As Reported
2018

Pro forma as if
the previous
accounting
guidance was
in effect

% Change

$ $
Change
$ $
Change

Aerospace and Defense

$
4,184

$
3,979

5.2

$
13,444

$
12,848

4.6

4,582 4,269 7.3 8,827 9,230 (4.4 )
Medical

14,280

13,071

9.2

36,838

34,702

6.2

14,024 12,565 11.6 28,963 22,715 27.5
Industrial

11,094

10,615

4.5

34,261

32,773

4.5

8,686 11,704 (25.8 ) 17,667 23,040 (23.3 )
Total Net Sales

$
29,558

$
27,665

6.8

$
84,543

$
80,323

5.3

27,292 28,538 (4.4 ) 55,457 54,985 0.9

Net sales by timing of transfer of goods and services for the three and ~~nine~~six months ended ~~September~~June 30, 2019 is as follows (in thousands):

Three Months Ended June 30, 2019

Product/ Service
Transferred
Over Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense
$ 4,155 $ 222 $ 205 $ 4,582
Medical
13,145 218 661 14,024
Industrial
7,428 878 380 8,686
Total net sales
$ 24,728 $ 1,318 $ 1,246 $ 27,292

Six Months Ended June 30, 2019

Product/ Service
Transferred
Over Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense
$ 8,258 $ 242 $ 327 $ 8,827
Medical
27,640 253 1,070 28,963
Industrial
15,568 1,475 624 17,667
Total net sales
$ 51,466 $ 1,970 $ 2,021 $ 55,457
20
Table of Contents
Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2018 is as follows (in thousands):

Three Months Ended September 30, 2018

Three Months Ended June 30, 2018

Product/ Service
Transferred Over
Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Product/ Service
Transferred
Over Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense

$
3,931

$
50

$
203

$
4,184

$ 4,001 $ 72 $ 196 $ 4,269
Medical

13,461

151

668

14,280

11,934 87 544 12,565
Industrial

9,486

1,116

492

11,094

10,023 1,206 475 11,704
Total net sales

$
26,878

$
1,317

$
1,363

$
29,558

$ 25,958 $ 1,365 $ 1,215 $ 28,538

Nine Months Ended September 30, 2018

Product/ Service
Transferred Over
Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense

$
12,675

$
170

$
599

$
13,444

Medical

34,513

720

1,605

36,838

Industrial

29,698

3,165

1,398

34,261

Total net sales

$
76,886

$
4,055

$
3,602

$
84,543

Six Months Ended June 30, 2018

Product/ Service
Transferred
Over Time

Product
Transferred at
Point in Time

Noncash
Consideration

Total Net Sales
by Market

Aerospace and Defense
$ 8,717 $ 120 $ 393 $ 9,230
Medical
21,201 569 945 22,715
Industrial
20,089 2,049 902 23,040
Total net sales
$ 50,007 $ 2,738 $ 2,240 $ 54,985
~~Backlog~~Backlog

Our 90-day shipment backlog as of ~~September~~June 30, ~~2018~~2019 was ~~$27.7~~$31 million, ~~a 16.0% increase~~flat from the beginning of the quarter and a ~~36.6%~~31.4% increase as compared to the prior year. Backlog for our medical customers has ~~increased 19.7%~~decreased 3.2% from the beginning of the quarter and increased ~~63.4% compared to~~55.0% from the prior year. The aerospace and defense backlog ~~remained flat~~increased 13.4% from the beginning of the quarter and increased ~~22.2%~~22.7% from the prior year. Our industrial customers’ backlog ~~increased 22.9%~~decreased 3.3% from the beginning of the quarter and increased ~~18.1%~~4.1% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

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

Shipment Backlog as of the Quarter Ended

Shipment Backlog as of the Period Ended

September 30,

June 30,

September 30,

June 30,

March 31,

June 30,

2018

2018

2017

2019

2019

2018

Aerospace and Defense

$
5,530

$
5,568

$
4,524

$ 6,833 $ 6,027 $ 5,568
Medical

12,902

10,776

7,897

16,701 17,256 10,776
Industrial

9,279

7,552

7,860

7,863 8,130 7,552
Total Backlog

$
27,711

$
23,896

$
20,281

$ 31,397 $ 31,413 $ 23,896

Our 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. Our total shipment backlog was $58.7 million at June 30, 2019 compared to $40.1 million at June 30, 2018.

21
Table of Contents
Gross Profit

Gross profit as a percent of net sales for the three months ended ~~September~~June 30, 2019 and 2018 was 8.5% and ~~2017,~~13.4%, respectively. Gross profit as a percentage of sales for the six months ended June 30, 2019 and 2018 was ~~11.5%~~9.5% and 12.4%, respectively. The decline in gross profit ~~in the third quarter of 2018~~both comparisons was driven by ~~customer~~product mix and ~~product mix. In addition, we recognized revenue of $1.4 million related~~operational inefficiencies due to ~~the noncash consideration recorded at zero margin as a result of implementing revenue recognition.~~component shortages.

Gross profit as a percentage of sales for the nine months ended September 30, 2018 and 2017 was 12.1% and 11.5% respectively. The year to date improvement in gross profit was driven by customer and product mix, operational efficiencies and cost improvements as we adjusted to current revenue levels. In addition, we recognized revenue of $3.6 million related to the noncash consideration recorded at zero margin as a result of implementing revenue recognition.
Selling Expense

Selling expenses for the three months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ was ~~$0.7~~$0.8 million or ~~2.4%~~2.9% of sales and ~~$1.1~~$1.0 million or ~~4.0%~~3.6% of sales, respectively. Selling expense for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ was ~~$2.8~~$1.6 million or ~~3.3%~~2.8% of sales and ~~$3.7~~$2.1 million or ~~4.2%~~3.8% of sales, respectively. The decrease in both the three and ~~nine~~six month periods is due to lower sales incentives and timing of ~~events and volume dependent expenses.~~events.

General and Administrative Expense

General and administrative expenses for the three months ended ~~September~~June 30, 2019 and 2018 were $2.7 million or 10.0% of sales and ~~2017, were~~ $2.0 million or ~~6.8% of sales and $2.1 million or 7.4%~~7.2% of sales, respectively. General and administrative expenses for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017,~~ were ~~$6.2~~$5.0 million or ~~7.3%~~9.1% of sales and ~~$6.2~~$4.2 million or ~~7.1%~~7.6% of sales, respectively. The ~~year over year comparison is consistent~~increase in both comparisons was due to additional spend related to our ~~adjustment of spending based on customer demands.~~
~~Gain from Sale of Property~~recently implemented ERP system and ~~Equipment~~one-time expenditures to improve operations.

~~There was no sales of property and equipment recorded for the three and nine months ended September 30, 2018. Net gain~~Loss from ~~sale of property and equipment for the nine months ended September 30, 2017 was $0.4 million from the sale of the Augusta building and building improvements (see Note 7).~~Operations

~~Income from Operations~~
~~Third~~Second quarter ~~2018 income~~2019 loss from operations was ~~$0.6~~$1.2 million compared to income of ~~$0.3~~$0.7 million for the ~~third~~second quarter in ~~2017.~~2018. The increase in ~~income from operations for the period was due to operational efficiencies and spending control.~~
~~Income from operations for the first nine months in 2018 was $1.3 million as compared to $0.5 million for the same comparable period in 2017. The increase in income~~loss from operations for the period was due to the gross profit ~~improvement~~decline and ~~cost containment activities.~~higher general and administrative expenses.

Loss from operations for the first six months in 2018 was $1.3 million as compared to income of $0.6 million for the same comparable period in 2018. The decrease to a loss from operations for the period was due to the gross profit decline and higher general and administrative expenses.
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~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~24%~~(4%) and ~~49%, respectively. Our effective tax~~the rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~61.5%~~26% and ~~110.2%~~101%, respectively. ~~Our effective tax rate~~
Net Income (Loss)
Net loss for the ~~year~~three and six months ended December 31, 2018 is expected to be 51% compared to (18%) for the year ended December 31, 2017. The increase is due mainly to the effects of the tax reform changes that were enacted on December 22, 2017,June 30, 2019 was $1.6 million and ~~the increase in the effective tax rate expected in China.~~
~~Net Income~~
$1.9 million, respectively. Net income for the three months ended ~~September~~June 30, 2018 was $0.4 million ~~or $0.14 per basic~~ and ~~diluted common share, compared to a~~ net ~~income~~loss for ~~the three months September 30, 2017 of $43 thousand or $0.02 per basic and diluted common share. Net income for the nine months~~six month ended ~~September~~June 30, 2018 was ~~$0.4 million or $0.13 per basic and diluted common share compared to net income for the nine months ended September 30, 2017 of $13 thousand with no earnings per basic and diluted common share.~~$0.2 million.

22
Table of Contents
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended June 30, 2019 was $2.2 million. The increase in accounts receivable and unbilled revenue and decrease in accounts payable drove this cash outflow, partially offset by a decrease inventory.

Net cash provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, 2018 was ~~$2.6~~$2.7 million. The noncash addback of depreciation and amortization, along with an increase in accounts payable, has positively impacted cash flows, offset by an increase in accounts ~~receivable and inventories.~~
~~Net cash used in investing activities of $1.0 million for the nine months ended September 30, 2018, was the result of property and equipment purchases to support the business.~~receivable.

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA contain 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 availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

On ~~September~~June 30, ~~2018,~~2019, we had outstanding advances of ~~$8.1~~$12.3 million under the line of credit and unused availability of ~~$4.8~~$3.7 million supported by our borrowing ~~base compared to December 31, 2017 outstanding advances of $8.5 million and unused availability of $4.2 million.~~base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was ~~$20.2~~$21.9 million and ~~$19.7~~$21.0 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The ~~Bank of America~~BofA credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. ~~In addition,~~As of June 30, 2019 we did not meet the fixed charge cover ratio which was waived by BofA in the second amendment to the credit agreement requires that the Company comply with certain minimum levels of cumulative EBITDA for measurement periods during fiscal 2018, including cumulative EBITDA of $2.0 million for the twelve months ending December 31, 2018.received on August 13, 2019.

~~Cash conversion cycle:~~

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2017

September 30, 2018

September 30, 2017

Days in trade accounts receivable

58

55

58

53

Days in inventory

54

79

52

77

Days in accounts payable

(54
)
(52
)
(49
)
(52
)
Cash conversion cycle

58

82

61

78

Cash conversion cycle without adoption of ASU 2014-09

57

82

61

78

~~We calculate days in accounts receivable as accounts receivable~~In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for ~~the respective quarter divided by annualized sales for the respective quarter by day. We calculate days in inventory~~a line of credit arrangement of 6,000,000 Renminbi (RMB) that expires on April 3, 2021. This line of credit bears an interest rate of 6% and ~~accounts payable as each balance sheet line item for the respective quarter divided by annualized cost~~we had borrowings of sales for the respective quarter by day. We calculate cash conversion cycle as the sum of days in receivable and inventory less days in accounts payable. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, timing of cash collections and cash payments, changes in payment terms and the timing of revenue recognition and inventory purchases within the period. Days in inventory for the three months and nine months ended September3,006,204 RMB ($437) at June 30, 2018 decreased as compared to the three and nine months ended September 30, 2017 primarily related to the adoption of ASU 2014-09 and the recognition of revenue over time rather than upon shipment of inventory. The increase in days in accounts receivable related to increased payment terms requested by our customers and a decrease in days in accounts payable for the quarter, as a result of the timing of payments.2019.

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, 2017. There has been significant changes to our critical accounting policies since December 31, 2017, related to the implementation of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), refer to Note 1 and Note 3. The adoption of the new revenue standard had a significant impact on our results of operations, cash flows, and financial position.2018. 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.

23
Table of Contents
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. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

♦
General economic, financial and business conditions that could affect our financial condition and results of operations;
♦
Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;
♦
Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;
♦
Changes in the reliability and efficiency of operating facilities or those of third parties;
♦
Risks related to availability of labor;
♦
Increase in certain raw material costs such as copper and oil;
♦
Commodity and energy cost instability;
♦
Risks related to quality, regulatory, securities laws and debt covenant noncompliance;
♦
Loss of a major customer or changes to customer orders;
♦
Increased or unanticipated costs related to compliance with securities and environmental regulation; and
♦
·                  ~~Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;~~
·                  ~~Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;~~
·                  ~~Changes in the reliability and efficiency of operating facilities or those of third parties;~~
·                  ~~Risks related to availability of labor;~~
·                  ~~Increase in certain raw material costs such as copper and oil;~~
·                  ~~Commodity and energy cost instability;~~
·                  ~~Risks related to FDA noncompliance;~~
·                  ~~Loss of a major customer;~~
·                  ~~Increased or unanticipated costs related to compliance with securities and environmental regulation;~~
·                  ~~General economic, financial and business conditions that could affect our financial condition and results of operations; and~~
·Disruption of global or local information management systems due to natural disaster or cyber-security incident.

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-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
24
Table of Contents
ITEM 4.4. 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~~Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), 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.
25
Table of Contents
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.” Other than as noted below, 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, 2017.
~~We may experience difficulties implementing our new global enterprise resource planning system.~~
We are engaged in an implementation of a new global enterprise resource planning system (ERP). The ERP is designed to efficiently maintain our books and records and provide information important to the operation of our business to our management team. The ERP implementation has and will continue to require significant investment of human and financial resources. In implementing the ERP, we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. While we have invested significant resources in planning, project management and training, additional and significant implementation issues may arise. In addition, our efforts to adjust and centralize various business processes and functions within our organization in connection with our ERP implementation may disrupt our operations and negatively impact our business, results of operations and financial condition.

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

The table below sets forth information regarding the repurchases we made of our common stock during the periods indicated.

Period

Total Number
of Shares
Purchased

Average
Price Paid
Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plan

Total Number
of Shares
Purchased

Average
Price Paid
Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

Maximum Dollar
Value of Shares that
May Yet Be Purchased
Under the Plan

July 1- July 31, 2018

2,277

$
3.46

2,277

$
—

April 1 - April 30, 2019
- $ - - $ 153,148
May 1 - May 30, 2019
11,976 $ 3.99 11,976 $ 104,130
June 1 - June 30, 2019
16,387 $ 3.96 16,387 $ 37,661
Total

2,277

2,277

28,363 $ 3.87 28,363 $ 37,661

As of ~~September~~June 30, ~~2018, we had a $250,000 share repurchase program which was authorized by our Board of Directors in August 2017 and expired in July 2018 with no authorized repurchases remaining under this program.~~
Period

Total Number
of Shares
Purchased

Average
Price Paid
Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plan

August 1 - August 31, 2018

7,470

$
4.00

7,470

$
219,373

September 1 - September 30, 2018

1,170

$
4.00

1,170

$
214,576

Total

8,640

8,640

~~In August 2018, the Board of Directors approved an additional $250,000 share repurchase program.~~ ~~As of September 30, 2018~~2019, we had a $250,000 share repurchase program with ~~$214,576~~$37,661 remaining under this program.

ITEM 3. DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.
26
Table of Contents

ITEM 6. EXHIBITS
Exhibits

~~Exhibits~~10.1*
Second Amendment to Loan and Security Agreement and Waiver.

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~~June 30, ~~2018,~~2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive ~~Income,~~Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

*Filed herewith
27
Table of Contents
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

~~Nortech Systems Incorporated and Subsidiaries~~

Date: ~~November~~August 14, ~~2018~~2019
by
/s/ ~~Richard G. Wasielewski~~Jay D. Miller

Jay D. Miller
~~Richard G. Wasielewski~~
Chief Executive Officer and President
Nortech Systems Incorporated

Date: ~~November~~August 14, ~~2018~~
2019
by
/s/ Constance M. Beck

Constance M. Beck
Vice President and Chief Financial Officer
Nortech Systems Incorporated

28

	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2019			2018			2019			2018

Net Sales	$	27,292		$	28,538		$	55,457		$	54,985

Cost of Goods Sold		24,967			24,721			50,171			48,140

Gross Profit		2,325			3,817			5,286			6,845

Operating Expenses
Selling Expenses		797			1,037			1,558			2,075
General and Administrative Expenses		2,737			2,046			5,041			4,155

Total Operating Expenses		3,534			3,083			6,599			6,230

(Loss) Income From Operations		(1,209	)		734			(1,313	)		615

Other Expense
Interest Expense		(279	)		(209	)		(524	)		(382	)

(Loss) Income Before Income Taxes		(1,488	)		525			(1,837	)		233

Income Tax Expense		64			135			78			235

(Net Loss) Income	$	(1,552	)	$	390		$	(1,915	)	$	(2	)

(Net Loss) Income Per Common Share - Basic and Diluted	$	(0.58	)	$	0.14		$	(0.72	)	$	(0.00	)

Weighted Average Number of Common Shares Outstanding - Basic and Diluted		2,676,449			2,695,994			2,672,758			2,708,234

Other comprehensive income (loss)
Foreign currency translation		(56	)		(126	)		-			(54	)
Comprehensive (Loss) Income, net of tax	$	(1,608	)	$	264		$	(1,915	)	$	(56	)

	JUNE 30,			DECEMBER 31,
	2019				2018⁽¹⁾
ASSETS	(Unaudited)
Current Assets
Cash	$	399		$	480
Restricted Cash		406			467
Accounts Receivable, less allowances of $262 and $222		20,691			20,093
Inventories		16,273			17,004
Contract Assets		7,228			6,431
Prepaid Expenses and Other Current Assets		1,776			1,381
Total Current Assets		46,773			45,856

Property and Equipment, Net		9,512			10,178
Operating Lease Assets		5,202			-
Goodwill		2,375			2,375
Other Intangible Assets, Net		1,439			1,523
Other Non Current Assets		28			28
Total Assets	$	65,329		$	59,960

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	878		$	780
Current Portion of Finance Lease Obligation		364			337
Current Portion of Operating Lease Obligations		826			-
Accounts Payable		16,845			18,142
Accrued Payroll and Commissions		3,118			2,747
Other Accrued Liabilities		2,793			2,886
Total Current Liabilities		24,824			24,892

Long-Term Liabilities
Long Term Line of Credit		12,297			9,264
Long-Term Debt, Net		3,401			3,624
Long Term Finance Lease Obligation, Net		776			951
Long-Term Operating Lease Obligation, Net		4,666			-
Other Long-Term Liabilities		118			139
Total Long-Term Liabilities		21,258			13,978

Total Liabilities		46,082			38,870

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: 2,658,559 and 2,663,049 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		15,682			15,610
Accumulated Other Comprehensive Loss		(233	)		(233	)
Retained Earnings		3,521			5,436
Total Shareholders' Equity		19,247			21,090
Total Liabilities and Shareholders' Equity	$	65,329		$	59,960

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2018			2017			2018			2017

Net Sales	$	29,558		$	28,310		$	84,543		$	86,762

Cost of Goods Sold	26,171			24,794			74,311			76,789

Gross Profit	3,387			3,516			10,232			9,973

Operating Expenses
Selling Expenses	717			1,144			2,792			3,676
General and Administrative Expenses	2,021			2,088			6,177			6,152
Gain on Sale of Property and Equipment	—			—			—			(355		)
Total Operating Expenses	2,738			3,232			8,969			9,473

Income From Operations	649			284			1,263			500

Other Expense
Loss on Extinguishment of Debt	—			—			—			(175		)
Interest Expense	(170		)	(172		)	(551		)	(453		)

Income (Loss) Before Income Taxes	479			112			712			(128		)

Income Tax Expense (Benefit)	115			69			350			(141		)

Net Income	$	364		$	43		$	362		$	13

Net Income Per Common Share:

Basic (in dollars per share)	$	0.14		$	0.02		$	0.13		$	0.00
Weighted Average Number of Common Shares Outstanding - Basic (in shares)	2,680,684			2,747,168			2,698,950			2,747,608

Diluted (in dollars per share)	$	0.14		$	0.02		$	0.13		$	0.00
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)	2,682,901			2,748,533			2,702,503			2,748,973

Other comprehensive income (loss)
Foreign currency translation	(83		)	—			(137		)	(3		)
Comprehensive income, net of tax	$	281		$	43		$	225		$	10

	SEPTEMBER 30,			DECEMBER 31,
	2018			2017(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	397		$	473
Restricted Cash	236			306
Accounts Receivable, less allowances of $204 and $209	18,979			17,417
Inventories	15,236			18,527
Contract Assets	7,076			—
Prepaid Expenses and Other Current Assets	1,380			1,044
Total Current Assets	43,304			37,767

Property and Equipment, Net	10,097			10,176
Goodwill	2,375			2,375
Other Intangible Assets, Net	1,578			1,739
Other Non Current Assets	27			28
Total Assets	$	57,381		$	52,085

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	871		$	1,003
Current Portion of Capital Lease Obligation	350			295
Accounts Payable	16,887			11,699
Accrued Payroll and Commissions	2,526			2,900
Other Accrued Liabilities	2,475			2,148
Total Current Liabilities	23,109			18,045

Long-Term Liabilities
Long-Term Line of Credit	8,058			8,503
Long-Term Debt, Net	3,735			4,353
Long-Term Capital Lease Obligation, Net	1,037			1,222
Other Long-Term Liabilities	159			137
Total Long-Term Liabilities	12,989			14,215

Total Liabilities	36,098			32,260

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:
2,675,411 and 2,739,250 Shares Issued and Outstanding, respectively	27			27
Additional Paid-In Capital	15,612			15,760
Accumulated Other Comprehensive Loss	(238		)	(101		)
Retained Earnings	5,632			3,889
Total Shareholders’ Equity	21,283			19,825
Total Liabilities and Shareholders’ Equity	$	57,381		$	52,085

	NINE MONTHS ENDED
	SEPTEMBER 30,
	2018			2017
Cash Flows From Operating Activities
Net Income	$	362		$	13
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization	1,655			1,873
Compensation on Stock-Based Awards and Equity Appreciation Rights	80			22
Loss on Extinguishment of Debt	—			17
Deferred Taxes	1			15
Change in Contingent Consideration	—			(300		)
Change in Accounts Receivable Allowance	(5		)	(720		)
Change in Inventory Reserves	118			272
Gain on Disposal of Property and Equipment	—			(355		)
Changes in Current Operating Items
Accounts Receivable	(1,619		)	(272		)
Inventories	(1,959		)	(686		)
Contract Assets	(617		)	—
Prepaid Expenses and Other Current Assets	(278		)	(115		)
Accounts Payable	4,913			824
Accrued Payroll and Commissions	(374		)	(882		)
Other Accrued Liabilities	287			909
Net Cash Provided by Operating Activities	2,564			615
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment	17			669
Purchase of Intangible Asset	(3		)	(100		)
Purchases of Property and Equipment	(999		)	(574		)
Net Cash Used in Investing Activities	(985		)	(5		)
Cash Flows from Financing Activities
Net Change in Line of Credit	(445		)	1,166
Proceeds from Long-Term Debt	—			5,123
Principal Payments on Long-Term Debt	(819		)	(5,623		)
Principal Payments on Capital Leases	(231		)	—
Loss on Extinguishment of Debt	—			(158		)
Debt Issuance Costs	—			(268		)
Share Repurchases	(229		)	(16		)
Net Cash (Used in) Provided by Financing Activities	(1,724		)	224

Effect of Exchange Rate Changes on Cash	(1		)	(29		)

Net Change in Cash	(146		)	805
Cash - Beginning of Period	779			268

Cash - Ending of Period	$	633		$	1,073

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	397		$	531
Restricted Cash	236			542
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	633		$	1,073

Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	507		$	383
Cash Paid (Refunded) During the Period for Income Taxes	167			(22		)

Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	304			193
Equipment Acquired under Capital Lease	100			972

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

								Accumulated
					Additional			Other			Retained			Total
	Preferred		Common		Paid-In			Comprehensive			Earnings			Shareholders'

BALANCE MARCH 31, 2018	$	250	$	27	$	15,654		$	(29	)	$	4,880		$	20,782
Net Income		-		-		-			-			390			390
Cumulative Adjustment		-		-		-			-			(2	)		(2	)
Foreign currency translation adjustment		-		-		-			(126	)		-			(126	)
Compensation on stock-based awards		-		-		25			-			-			25
Share repurchases		-		-		(60	)		-			-			(60	)

BALANCE JUNE 30, 2018	$	250	$	27	$	15,619		$	(155	)	$	5,268		$	21,009

BALANCE DECEMBER 31, 2017	$	250	$	27	$	15,760		$	(101	)	$	3,889		$	19,825
Net Loss		-		-		-			-			(2	)		(2	)
Cumulative Adjustment		-		-		-			-			1,381			1,381
Foreign currency translation adjustment		-		-		-			(54	)		-			(54	)
Compensation on stock-based awards		-		-		45			-			-			45
Share repurchases		-		-		(186	)		-			-			(186	)

BALANCE JUNE 30, 2018	$	250	$	27	$	15,619		$	(155	)	$	5,268		$	21,009


BALANCE MARCH 31, 2019	$	250	$	27	$	15,757		$	(177	)	$	5,073		$	20,930
Net Loss		-		-		-			-			(1,552	)		(1,552	)
Foreign currency translation adjustment		-		-		-			(56	)		-			(56	)
Compensation on stock-based awards		-		-		31			-			-			31
Share repurchases		-		-		(113	)		-			-			(113	)
Stock option exercises		-		-		7			-			-			7

BALANCE JUNE 30, 2019	$	250	$	27	$	15,682		$	(233	)	$	3,521		$	19,247

BALANCE DECEMBER 31, 2018	$	250	$	27	$	15,610		$	(233	)	$	5,436		$	21,090
Net Loss		-		-		-			-			(1,915	)		(1,915	)
Stock option exercises		-		-		7			-			-			7
Compensation on stock-based awards		-		-		191			-			-			191
Share repurchases		-		-		(126	)		-			-			(126	)

BALANCE JUNE 30, 2019	$	250	$	27	$	15,682		$	(233	)	$	3,521		$	19,247

	September 30,			December 31,			June 30,			December 31,
	2018			2017			2019			2018
Raw Materials	$	15,595		$	13,870		$	16,447		$	16,769
Work in Process	437			3,112				780			1,015
Finished Goods	166			2,389				212			332
Reserves	(962		)	(844		)		(1,166	)		(1,112	)

Total	$	15,236		$	18,527		$	16,273		$	17,004

		September 30, 2018								June 30, 2019
		Gross								Gross
		Carrying		Accumulated		Net Book				Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value		Years		Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	470	$	832		9	$	1,302	$	578	$	724
Trade Names	3	100		53		47			3		100		78		22
Intellectual Property	20	814		132		682			20		814		163		651
Patents	7	17		—		17			7		42		-		42
Totals		$	2,233	$	655	$	1,578			$	2,258	$	819	$	1,439

		December 31, 2017
		Gross
		Carrying		Accumulated		Net Book
	Years	Amount		Amortization		Value
Customer Relationships	9	$	1,302	$	361	$	941
Intellectual Property	3	100		28		72
Trade Names	20	814		102		712
Patents	7	14		—		14
Totals		$	2,230	$	491	$	1,739

			December 31, 2018
			Gross
			Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	506	$	796
Intellectual Property		3		100		61		39
Trade Names		20		814		143		671
Patents		7		17		-		17
Totals			$	2,233	$	710	$	1,523

Year	Amount		Amount
Remainder of 2018	$	164
2019	208
Remainder of 2019			$	109
2020	185			192
2021	185			185
2022	185			185
2023				185
Thereafter	634			541
Total	$	1,561	$	1,397

Nine Months Ended September 30, 2018
Outstanding at January 1, 2018	$	6,459
Six Months Ended June 30, 2019
Outstanding at January 1, 2019				$	6,431
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized	(5,727		)		(4,985	)
Product transferred over time	6,344				5,782
Outstanding at September 30, 2018	$	7,076
Outstanding at June 30, 2019				$	7,228

	Three Months Ended September 30, 2018								Three Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market		Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	3,931	$	50	$	203	$	4,184	$	4,155	$	222	$	205	$	4,582
Medical	13,461		151		668		14,280			13,145		218		661		14,024
Industrial	9,486		1,116		492		11,094			7,428		878		380		8,686
Total net sales	$	26,878	$	1,317	$	1,363	$	29,558	$	24,728	$	1,318	$	1,246	$	27,292

	Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
	As Reported		Pro forma as if the previous accounting guidance was in effect		As Reported		Pro forma as if the previous accounting guidance was in effect
Condensed Consolidated Statement of Operations
Net Sales	$	29,558	$	27,665	$	84,543	$	80,323
Cost of Goods Sold	26,171		24,454		74,311		70,291
Gross Profit	3,387		3,211		10,232		10,032

Income from Operations	649		472		1,263		1,063

Income Before Income Taxes	479		303		712		512

Income Tax Expense	115		115		350		350

Net Income	$	364	$	188	$	362	$	162

Net Income Per Common Share - Diluted	$	0.14	$	0.07	$	0.13	$	0.06

	As of September 30, 2018
	As Reported		Pro forma as if the previous accounting guidance was in effect
Condensed Consolidated Balance Sheet
Assets
Inventories	$	15,236	$	20,732
Contract Assets	$	7,076	$	—

Shareholders’ Equity
Retained Earnings	$	5,632	$	4,051

	Three Months Ended June 30,		Six Months Ended June 30,
Lease Cost	2019		2019
Operating lease cost	$	253	$	532
Finance lease interest cost		16		33
Finance lease amortization expense		66		131
Total lease cost	$	335	$	696

	Balance Sheet Location	June 30, 2019
Assets
Operating lease assets	Operating lease assets	$	5,202
Finance lease assets	Property, Plant and Equipment		1,292
Total leased assets			6,494

Liabilities
Current

Current operating lease liabilities	Current Portion of Operating Lease Obligations		826

Current finance lease liabilities	Current Portion of Finance Lease Obligations		364
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4666
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		776
Total lease liabilities		$	6,632

	Three Months Ended June 30,
	2019
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	200
Right-of-use assets obtained in exchange for lease obligations	$	—

	Operating Leases			Finance Leases			Total
Remaining 2019	$	447		$	213		$	660
2020		858			398			1,256
2021		722			398			1,120
2022		726			223			949
2023		738			2			740
Thereafter		3,380			—			3,380
Total lease payments	$	6,871		$	1,234		$	8,105
Less: Interest		(1,379	)		(94	)		(1,473	)
Present value of lease liabilities	$	5,492		$	1,140		$	6,632

Weighted-average remaining lease term (years)
Operating leases	8.1
Finance leases	3.5
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	5.4	%

Years Ending
December 31,	Amount
2018	$	208
2019	935
2020	768
2021	622
2022	676
Thereafter	4,118
Total	$	7,327

	Three Months Ended				Nine Months Ended				Three Months Ended						Six Months Ended
	September 30,				September 30,				June 30,						June 30,
	2018		2017		2018		2017		2019			2018			2019			2018
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold	88.5		87.6		87.9		88.5			91.5			86.6			90.5			87.6
Gross Profit	11.5		12.4		12.1		11.5			8.5			13.4			9.5			12.4

Selling Expenses	2.4		4.0		3.3		4.2			2.9			3.6			2.8			3.8
General and Administrative Expenses	6.8		7.4		7.3		7.1			10.0			7.2			9.1			7.6
Gain on Sale of Property and Equipment	0.0		0.0		0.0		(0.4	)
Income from Operations	2.3		1.0		1.5		0.6			(4.4	)		2.6			(2.4	)		1.0

Other Expenses	(0.7	)	(0.6	)	(0.7	)	(0.7	)		(1.0	)		(0.7	)		(0.9	)		(0.7	)
Income (Loss) Before Income Taxes	1.6		0.4		0.8		(0.1	)		(5.4	)		1.9			(3.3	)		0.3

Income Tax Expense (Benefit)	0.4		0.2		0.4		(0.2	)		0.2			0.5			0.1			0.4
Net Income	1.2	%	0.2	%	0.4	%	0.1	%
Net Income (Loss)										(5.6	%)		1.4	%		(3.4	%)		(0.1	%)

											Three Months Ended June 30,							Six Months Ended June 30,
	Three Months Ended					Nine Months Ended					2019		2018		%			2019		2018		%
	As Reported 2018		Pro forma as if the previous accounting guidance was in effect		% Change	As Reported 2018		Pro forma as if the previous accounting guidance was in effect		% Change	$		$		Change			$		$		Change
Aerospace and Defense	$	4,184	$	3,979	5.2	$	13,444	$	12,848	4.6		4,582		4,269		7.3			8,827		9,230		(4.4	)
Medical	14,280		13,071		9.2	36,838		34,702		6.2		14,024		12,565		11.6			28,963		22,715		27.5
Industrial	11,094		10,615		4.5	34,261		32,773		4.5		8,686		11,704		(25.8	)		17,667		23,040		(23.3	)
Total Net Sales	$	29,558	$	27,665	6.8	$	84,543	$	80,323	5.3		27,292		28,538		(4.4	)		55,457		54,985		0.9

	Three Months Ended September 30, 2018								Three Months Ended June 30, 2018
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market		Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	3,931	$	50	$	203	$	4,184	$	4,001	$	72	$	196	$	4,269
Medical	13,461		151		668		14,280			11,934		87		544		12,565
Industrial	9,486		1,116		492		11,094			10,023		1,206		475		11,704
Total net sales	$	26,878	$	1,317	$	1,363	$	29,558	$	25,958	$	1,365	$	1,215	$	28,538

	Six Months Ended June 30, 2018
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Aerospace and Defense	$	8,717	$	120	$	393	$	9,230
Medical		21,201		569		945		22,715
Industrial		20,089		2,049		902		23,040
Total net sales	$	50,007	$	2,738	$	2,240	$	54,985

	Shipment Backlog as of the Quarter Ended						Shipment Backlog as of the Period Ended
	September 30,		June 30,		September 30,		June 30,		March 31,		June 30,
	2018		2018		2017		2019		2019		2018
Aerospace and Defense	$	5,530	$	5,568	$	4,524	$	6,833	$	6,027	$	5,568
Medical	12,902		10,776		7,897			16,701		17,256		10,776
Industrial	9,279		7,552		7,860			7,863		8,130		7,552
Total Backlog	$	27,711	$	23,896	$	20,281	$	31,397	$	31,413	$	23,896

	♦	General economic, financial and business conditions that could affect our financial condition and results of operations;

	♦	Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;

	♦	Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;

	♦	Changes in the reliability and efficiency of operating facilities or those of third parties;

	♦	Risks related to availability of labor;

	♦	Increase in certain raw material costs such as copper and oil;

	♦	Commodity and energy cost instability;

	♦	Risks related to quality, regulatory, securities laws and debt covenant noncompliance;

	♦	Loss of a major customer or changes to customer orders;

	♦	Increased or unanticipated costs related to compliance with securities and environmental regulation; and

	♦	· ~~Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;~~ · ~~Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;~~ · ~~Changes in the reliability and efficiency of operating facilities or those of third parties;~~ · ~~Risks related to availability of labor;~~ · ~~Increase in certain raw material costs such as copper and oil;~~ · ~~Commodity and energy cost instability;~~ · ~~Risks related to FDA noncompliance;~~ · ~~Loss of a major customer;~~ · ~~Increased or unanticipated costs related to compliance with securities and environmental regulation;~~ · ~~General economic, financial and business conditions that could affect our financial condition and results of operations; and~~ ·Disruption of global or local information management systems due to natural disaster or cyber-security incident.

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan		Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan
July 1- July 31, 2018	2,277	$	3.46	2,277	$	—
April 1 - April 30, 2019								-	$	-		-	$	153,148
May 1 - May 30, 2019								11,976	$	3.99		11,976	$	104,130
June 1 - June 30, 2019								16,387	$	3.96		16,387	$	37,661
Total	2,277			2,277				28,363	$	3.87		28,363	$	37,661


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.