UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, ~~2019~~2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

Executive Offices: 7550 Meridian Circle N., Suite # 150, Maple Grove, MN 55369

Telephone number: (952) 345-2244

Securities registered pursuant to Section 12(b) of the ~~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 ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐		Accelerated Filer ☐
Non-accelerated Filer ☒		Smaller Reporting Company ☒
Emerging growth company ☐

~~Emerging growth company ☐~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

No Number of shares of $.01 par value common stock outstanding at August ~~5, 2019~~7, 2020 was ~~2,657,314.~~2,657,530.

~~Table of Contents~~

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			~~PAGE~~
			PAGE
~~PART I~~ - ~~FINANCIAL INFORMATION~~

	Item 1		- Financial Statements

		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3

		Condensed Consolidated Balance Sheets	4

		Condensed Consolidated Statements of Cash Flows	5

		Condensed Consolidated Statements of Shareholders’ Equity	6

		Condensed Notes to Consolidated Financial Statements	7-18

	Item 2	- ~~Management’s~~Management's Discussion and Analysis of Financial Condition And Results of Operations	~~19-24~~ 19-26

	Item 3	- Quantitative and Qualitative Disclosures About Market Risk	24 26

	Item 4	- Controls and Procedures	25 26

PART II - OTHER INFORMATION

	Item 1	- Legal Proceedings	26 27

	Item 1A.	- Risk Factors	26 27

	Item 2	- Unregistered Sales of Equity Securities, Use of Proceeds	26 27

	Item 3	- Defaults on Senior Securities	26 27

	Item 4	- Mine Safety Disclosures	26 27

	Item 5	- Other Information	26 27

	Item 6	- Exhibits	27 28

SIGNATURES			28 29

~~Table of Contents~~

PART 1

ITEM 1. FINANCIAL STATEMENTS

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

	THREE MONTHS ENDED						SIX MONTHS ENDED						THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,						JUNE 30,						JUNE 30,
	2019			2018			2019			2018			2020			2019			2020			2019

Net Sales	$	27,292		$	28,538		$	55,457		$	54,985		$	26,461		$	27,292		$	53,901		$	55,457

Cost of Goods Sold		24,967			24,721			50,171			48,140			24,020			24,967			48,455			50,171

Gross Profit		2,325			3,817			5,286			6,845			2,441			2,325			5,446			5,286

Operating Expenses
Selling Expenses		797			1,037			1,558			2,075			730			797			1,351			1,558
General and Administrative Expenses		2,737			2,046			5,041			4,155			1,662			2,737			3,655			5,041

Total Operating Expenses		3,534			3,083			6,599			6,230			2,392			3,534			5,006			6,599

(Loss) Income From Operations		(1,209	)		734			(1,313	)		615
Income (Loss) From Operations														49			(1,209	)		440			(1,313	)

Other Expense
Interest Expense		(279	)		(209	)		(524	)		(382	)		(176	)		(279	)		(400	)		(524	)

(Loss) Income Before Income Taxes		(1,488	)		525			(1,837	)		233			(127	)		(1,488	)		40			(1,837	)

Income Tax Expense		64			135			78			235
Income Tax (Benefit) Expense														(4	)		64			26			78

(Net Loss) Income	$	(1,552	)	$	390		$	(1,915	)	$	(2	)
Net (Loss) Income													$	(123	)	$	(1,552	)	$	14		$	(1,915	)

(Net Loss) Income Per Common Share - Basic and Diluted	$	(0.58	)	$	0.14		$	(0.72	)	$	(0.00	)
Net (Loss) Income Per Common Share - Basic													$	(0.05	)	$	(0.58	)	$	0.01		$	(0.72	)

Weighted Average Number of Common Shares Outstanding - Basic and Diluted		2,676,449			2,695,994			2,672,758			2,708,234
Weighted Average Number of Common Shares Outstanding - Basic														2,657,530			2,676,449			2,657,530			2,672,758

Other comprehensive income (loss)
Net (Loss) Income Per Common Share - Diluted													$	(0.05	)	$	(0.58	)	$	0.01		$	(0.72	)

Weighted Average Number of Common Shares Outstanding - Diluted														2,657,530			2,676,449			2,666,532			2,672,758

Other comprehensive loss
Foreign currency translation		(56	)		(126	)		-			(54	)		19			(56	)		(42	)		–
Comprehensive (Loss) Income, net of tax	$	(1,608	)	$	264		$	(1,915	)	$	(56	)
Comprehensive Loss, net of tax													$	(104	)	$	(1,608	)	$	(28	)	$	(1,915	)

See A~~ccompanying~~ Accompanying Condensed N~~otes~~Notes to C~~onsolidated~~ F~~inancial~~ S~~tatements~~Condensed Consolidated Financial Statements

~~Table of Contents~~

See A~~ccompanying~~ Accompanying Condensed N~~otes~~Notes to Condensed C~~onsolidated~~ F~~inancial~~ S~~tatement~~sConsolidated Financial Statements

⁽¹⁾The balance sheet at December 31, ~~2018~~2019 has been derived from the audited financial statements at that date

~~Table of Contents~~

	SIX MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2019			2018			2020			2019
Cash Flows From Operating Activities
Net Loss	$	(1,915	)	$	(2	)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities
Net Income (Loss)							$	14		$	(1,915	)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used In) Operating Activities
Depreciation and Amortization		1,096			1,108			1,131			1,096
Compensation on Stock-Based Awards		191			45			75			191
Change in Accounts Receivable Allowance		40			(5	)		56			40
Change in Inventory Reserves		54			73			(92	)		54
Changes in Current Operating Items
Accounts Receivable		(646	)		(1,886	)		(699	)		(646	)
Inventories		670			(594	)		(1,105	)		670
Contract Assets		(798	)		(88	)		1,260			(798	)
Prepaid Expenses and Other Current Assets		(395	)		(130	)		357			(395	)
Income Taxes								(117	)		-
Accounts Payable		(1,087	)		3,722			(728	)		(1,087	)
Accrued Payroll and Commissions		596			374			(610	)		596
Other Accrued Liabilities		(49	)		124			930			(49	)
Net Cash (Used in) Provided by Operating Activities		(2,243	)		2,741
Net Cash Provided by (Used in) Operating Activities								472			(2,243	)
Cash Flows from Investing Activities
Purchase of Intangible Asset		(25	)		(4	)		(6	)		(25	)
Purchases of Property and Equipment		(545	)		(557	)		(241	)		(545	)
Net Cash Used in Investing Activities		(570	)		(561	)		(247	)		(570	)
Cash Flows from Financing Activities
Net Change in Line of Credit		3,469			(1,361	)		(5,696	)		3,469
Proceeds from Long-term Debt								6,077			-
Principal Payments on Long-Term Debt		(584	)		(545	)		(238	)		(584	)
Principal Payments on Finance Leases		(96	)		(150	)		(274	)		(96	)
Stock Option Exercises		7			-			-			7
Share Repurchases		(126	)		(186	)		-			(126	)
Net Cash Provided By (Used in) Financing Activities		2,670			(2,242	)

Effect of Exchange Rate Changes on Cash		-			(46	)
Net Cash (Used in) Provided By Financing Activities								(131	)		2,670

Net Change in Cash		(143	)		(108	)		94			(143	)
Cash - Beginning of Period		948			779			660			948

Cash - Ending of Period	$	805		$	671		$	754		$	805

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	399		$	437		$	345		$	399
Restricted Cash		406			234			409			406
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	805		$	671		$	754		$	805

Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	477		$	317		$	394		$	477
Cash Paid and Refunded During the Period for Income Taxes		(47	)		167
Cash Paid and (Refunded) During the Period for Income Taxes								72			(47	)

Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		180			284			237			180
Equipment Acquired under Finance Lease								395			-

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

~~Table of Contents~~

								Accumulated																Accumulated
					Additional			Other			Retained			Total							Additional			Other						Total
	Preferred		Common		Paid-In			Comprehensive			Earnings			Shareholders'			Preferred		Common		Paid-In			Comprehensive			Retained			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
																	Stock		Stock		Capital			Loss			Earnings			Equity

BALANCE MARCH 31, 2019	$	250	$	27	$	15,757		$	(177	)	$	5,073		$	20,930		$	250	$	27	$	15,757		$	(177	)	$	5,073		$	20,930
Net Loss		-		-		-			-			(1,552	)		(1,552	)		-		-		-			-			(1,552	)		(1,552	)
Foreign currency translation adjustment		-		-		-			(56	)		-			(56	)		-		-		-			(56	)		-			(56	)
Compensation on stock-based awards		-		-		31			-			-			31			-		-		38			-			-			38
Share repurchases		-		-		(113	)		-			-			(113	)		-		-		(113	)		-			-			(113	)
Stock option exercises		-		-		7			-			-			7

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

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

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


BALANCE MARCH 31, 2020																	$	250	$	27	$	15,787		$	(318	)	$	4,345		$	20,091
Net Loss																		-		-		-			-			(123	)		(123	)
Foreign currency translation adjustment																		-		-		-			19			-			19
Compensation on stock-based awards																		-		-		36			-			-			36

BALANCE JUNE 30, 2020																	$	250	$	27	$	15,823		$	(299	)	$	4,222		$	20,023

BALANCE DECEMBER 31, 2019																	$	250	$	27	$	15,748		$	(257	)	$	4,208		$	19,976
Net Income																		-		-		-			-			14			14
Foreign currency translation adjustment																		-		-		-			(42	)		-			(42	)
Compensation on stock-based awards																		-		-		75			-			-			75

BALANCE JUNE 30, 2020																	$	250	$	27	$	15,823		$	(299	)	$	4,222		$	20,023

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

~~Table of Contents~~

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, ~~2018.~~2019. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

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

Revenue Recognition

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

~~Table of Contents~~

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

Following is the status of all stock options as of June 30, ~~2019:~~2020:

	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, 2019		224,750		$	3.44
Outstanding - January 1, 2020											372,200		$	3.85
Granted		169,500			4.44						11,300			2.95
Exercised		(2,250	)		3.20						-
Cancelled		(23,250	)		3.85						(4,000	)		3.29
Outstanding - June 30, 2019		368,750		$	3.88		9.01	$	134
Exercisable - June 30, 2019		111,817		$	3.46		7.06	$	64
Outstanding - June 30, 2020											379,500		$	3.83		8.13	$	218
Exercisable - June 30, 2020											182,240		$	3.72		7.70	$	119

~~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.~~400,000 shares, an additional 50,000 shares were authorized in March 2020. There were ~~137,500 and 169,500~~11,300 stock options granted during the ~~three and~~ six months ended June 30, ~~2019, respectively.~~2020.

Total compensation expense related to stock options for the three months ended June 30, 2020 and 2019 was $36 and ~~2018 was $32 and $25,~~$38, respectively and $75 and ~~$45~~$191 for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. As of June 30, ~~2019,~~2020, there was ~~$444~~$292 of unrecognized compensation which will vest over the next ~~3.26~~2.69 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 six months ended June 30, 2018, no additional Units were granted.~~

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

During the six months ended June 30, 2019, there were ~~25,000 restricted shares awarded that vested immediately that had expense of $116~~137,500 units granted. There were no units granted during the ~~first quarter.~~six months ended June 30, 2020.

For the three months ended June 30, 2020, all stock options are deemed to be antidilutive and therefore, were not included in the computation of incomer per common share amount. For the six months ended June 30 ,2020, stock options of 9,002 were included in the computation of diluted income per common share amount as their impact were dilutive. For both the three months and six months ended June 30, 2019, ~~and 2018,~~ all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

As of June 30, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 28,363 and 31,740 shares in the open market transactions totaling $113 and $126 for the three and six months ended June 30, 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.

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 June 30, ~~2019~~2020 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 June 30, ~~2019,~~2020, we had no outstanding letters of credit.

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 ~~$262~~$391 at June 30, ~~2019~~2020 and ~~$222~~$335 at December 31, ~~2018.~~2019.

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.

~~Table of Contents~~

Other intangible assets at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows (in thousands):

Amortization expense for the three and six months ended June 30, ~~2019~~2020 was ~~$55~~$47 and ~~$109,~~$98, respectively.

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

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 six months ended June 30, ~~2018~~2020 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 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.

~~Table of Contents~~

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 six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

~~Recently~~Accounting Pronouncements Issued ~~Accounting Standards~~But Not Yet Adopted

~~On January 1, 2019, we adopted~~In June 2016, the FASB issued ASU No. ~~2016-02, Leases (Topic 842). This ASU requires lessees~~2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize ~~lease assets~~an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and ~~lease liabilities on~~ the ~~balance sheet. Under~~amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new ~~guidance, lessor accounting~~CECL model is ~~largely unchanged.~~based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after December 15, 2022; early adoption is permitted. We ~~have elected to adopt~~are currently evaluating 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~~this guidance on our financial condition and results of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had no impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Shareholders’ Equity.operations.

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 ~~$399~~$754 in cash at June 30, ~~2019,~~2020, approximately ~~$333~~$318 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 six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. One division accounted for approximately ~~21%~~20% and 22% of net sales for the three and six months ended June 30, ~~2019,~~2020, respectively, and approximately 21% and ~~20%~~22% for both the three and six months ended June 30, ~~2018.~~2019, respectively. The other division accounted for approximately 3% and 2% of net sales for ~~both~~ the three months and six ended June 30, ~~2019,~~2020, respectively, and approximately 1%2% net sales for both the three and six months ended June 30, ~~2018.~~2019, respectively. Together they accounted for approximately 23% and 24% of net sales for the three and six months ended June 30, ~~2019,~~2020, respectively, and approximately ~~22%~~23% and ~~21%~~24% of net sales for the three and six months ended June 30, ~~2018,~~2019, respectively. Accounts receivable from the customer at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 represented approximately ~~22%~~40% and ~~16%~~36% of our total accounts receivable, respectively.

Export sales represented approximately ~~17%~~9% and ~~21%~~17% of net sales for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Export sales represented ~~18%~~11% and ~~20%~~18% of net sales for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

~~Table of Contents~~

NOTE 3. REVENUE

Revenue recognition

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%~~84.6% and 86.1% of our revenue for both the three and six months ended June 30, ~~2019.~~2020, respectively. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

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

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

~~Table of Contents~~

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the ~~three and~~ six months ended June 30, ~~2019~~2020 was as follows (in thousands):

Six Months Ended June 30, 2019
Outstanding at January 1, 2019	$	6,431
Six Months Ended June 30, 2020
Outstanding at January 1, 2020				$	7,659
Increase (decrease) attributed to:
Transferred to receivables from contract assets recognized		(4,985	)		(6,277	)
Product transferred over time		5,782			5,017
Outstanding at June 30, 2019	$	7,228
Outstanding at June 30, 2020				$	6,399

We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, ~~2019,~~2020, 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 six months ended June 30 ~~2019~~ (in thousands):

~~Table of Contents~~

	Six Months Ended June 30, 2020
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	25,084	$	2,601	$	1,048	$	28,733
Aerospace and Defense		8,944		379		367		9,690
Industrial		12,390		2,563		525		15,478
Total net sales	$	46,418	$	5,543	$	1,940	$	53,901

	Six Months Ended June 30, 2019
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration		Total Net Sales by Market
Medical	$	27,640	$	253	$	1,070	$	28,963
Aerospace and Defense		8,258		242		327		8,827
Industrial		15,568		1,475		624		17,667
Total net sales	$	51,466	$	1,970	$	2,021	$	55,457

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.

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 ~~5.8%~~3.2% and ~~4.5%~~5.8% as of June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. We had borrowings on our line of credit of ~~$12,297~~$4,392 and ~~$9,264~~$10,088 outstanding as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 ~~BofA credit agreement as amended~~Bank of America Credit Agreement provides for, among other things, a ~~fixed charge coverage ratio~~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~~three months ending December 31, ~~2018. As of~~2019, six months ending March 31, 2020, nine months ending June 30, ~~2019 we did not meet~~2020 and twelve months ending September 30, 2020 and each Fiscal Quarter end thereafter. The Company met the ~~fixed charge coverage ratio which was waived by BofA in~~covenants for the ~~second amendment to the credit agreement received on August 13, 2019.~~period ended June 30, 2020.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At June 30, ~~2019,~~2020, we had unused availability under our line of credit of ~~$3,703,~~$8,311, supported by our borrowing base. The line is secured by substantially all of our assets.

~~As part of the July 1, 2015 Devicix acquisition~~

On April 15, 2020, we entered into ~~two unsecured subordinated promissory notes payable to the seller in the principal amounts~~a Promissory Note with Bank of ~~$1,000 and $1,300, which was fully paid off during the three months ended June 30, 2019.~~

~~In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank~~America, N.A. (the “Promissory Note”), which provides for ~~a line~~an unsecured loan of ~~credit arrangement~~$6,077 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of ~~6,000,000 Renminbi (RMB) that expires~~which; funds were received on April ~~3, 2021. This line~~22, 2020. The Promissory Note has a term of ~~credit bears an~~2 years with a 1% per annum interest ~~rate~~rate. Payments are deferred for 10 months after the end of 6%the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we ~~had borrowings~~can apply for forgiveness of ~~3,006,204 RMB ($437) at June 30, 2019.~~

~~Table~~the Promissory Note after 60 days. Forgiveness of ~~Contents~~

the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

Long-term debt at June 30, ~~2019~~2020 and December 30, ~~2018~~2019 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

	June 30,			December 31,
	2020			2019
Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of June 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.	$	3,518		$	3,755

Promissory Note		6,077			-

		9,595			3,755

Debt issuance Costs		(105	)		(132	)

Total long-term debt		9,490			3,623
Current maturities of long-term debt		(444	)		(444	)
Long-term debt - net of current maturities	$	9,046		$	3,179

~~Table of Contents~~

NOTE 5. LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At June 30, ~~2019,~~2020, 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		Balance Sheet Location	June 30, 2020
Assets
Operating lease assets	Operating lease assets	$	5,202	Operating lease assets	$	4,446
Finance lease assets	Property, Plant and Equipment		1,292	Property, Plant and Equipment		2,842
Total leased assets	Total leased assets		6,494	Total leased assets	$	7,288

Liabilities
Current

Current operating lease liabilities	Current Portion of Operating Lease Obligations		826	Current Portion of Operating Lease Obligations		791

Current finance lease liabilities	Current Portion of Finance Lease Obligations		364	Current Portion of Finance Lease Obligations		643
Noncurrent
Long-term operating lease liabilities	Long Term Operating Lease Liabilities, Net		4666	Long Term Operating Lease Liabilities, Net		4,132
Long term finance lease liabilities	Long Term Finance Lease Obligations, Net		776	Long Term Finance Lease Obligations, Net		1,486
Total lease liabilities	Total lease liabilities	$	6,632	Total lease liabilities	$	7,052

~~Table of Contents~~

Supplemental cash flow information related to leases was as follows:

	Three Months Ended June 30,		Three Months Ended June 30,
	2019		2020
Operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	200	$	215
Right-of-use assets obtained in exchange for lease obligations	$	—	$	—

~~Rent expense for our operating leases the three and six months ended June 30, 2018 as accounted under ASC 840,~~ ~~Leases~~~~, was $319 and $654, respectively.~~

~~The future minimum lease commitments as of December 31, 2018, under ASC 840 are as follows:~~

Operating Leases

2019
$ 1,024
2020
858
2021
722
2022
726
2023
738
Thereafter
3,380
Total minimum obligations
$ 7,448

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

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.

In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID-19”) as a pandemic. While the COVID-19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.

The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations.

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota. Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions.

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5 million. The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position. At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

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

Net sales were ~~$27.3~~$26.5 million in the second quarter of ~~2019,~~2020, as compared to ~~$28.5~~$27.3 million in the second quarter of the prior year, a decrease of ~~$1.2~~$0.8 million or ~~4.2%~~3.0%. Net sales results were varied by markets, the medical market ~~increased~~decreased by ~~$1.5~~$0.7 million or ~~11.6%~~4.7% with medical devices accounting for most of that ~~increase. The industrial market decreased by $3.1 million or 25.8% of sales in the second quarter of 2019 as compared to the same quarter of 2018.~~decrease. Net sales from the aerospace and defense markets increased by ~~$0.4~~$0.3 million or ~~7.3%~~7.1% in the second quarter of ~~2019~~2020 as compared to the second quarter of ~~2018.~~2019. The industrial market decreased by $0.5 million or 5.8% of sales in the second quarter of 2020 as compared to the same quarter of 2019.

Net sales were ~~$55.5~~$53.9 million in the six months ended ~~2019,~~2020, as compared to ~~$55.0~~$55.5 million in the prior year, ~~an increase~~a decrease of ~~$0.5~~$1.6 million or ~~0.9%~~2.8%. Net sales results were varied by markets, the medical market ~~increased~~decreased by ~~6.2~~$0.2 million, or ~~27.5% with medical component products accounting for 42% of the increase and medical devices 58%. The industrial market decreased by $5.4 million of sales or 23.3%~~0.8%. Net sales from the aerospace and defense markets ~~decreased $0.4~~increased $0.9 million or ~~4.4%~~9.8%.

Net sales by our major EMS industry markets for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 were as follows (in thousands):

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2020 is as follows (in thousands):

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

~~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):~~

Our 90-day shipment backlog as of June 30, ~~2019~~2020 was ~~$31~~$23.3 million, ~~flat~~a decrease of 15.3% from the beginning of the quarter and a ~~31.4% increase~~25.8% decrease as compared to the prior year. Backlog for our medical customers has decreased ~~3.2%~~16.4% from the beginning of the quarter and ~~increased 55.0%~~decreased 28.2% from the prior year. The aerospace and defense backlog increased ~~13.4%~~1.3% from the beginning of the quarter and increased ~~22.7%~~1.0% from the prior year. Our industrial customers’ backlog decreased ~~3.3%~~30.7% from the beginning of the quarter and ~~increased 4.1%~~decreased 44.0% 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):

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~~$46.6 million at June 30, ~~2019~~2020 compared to ~~$40.1~~$58.7 million at the end of June 30, ~~2018.~~2019.

Gross profit as a percent of net sales for the three months ended June 30, 2020 and 2019 was 9.2% and ~~2018 was~~ 8.5% ~~and 13.4%~~, respectively. Gross profit as a percentage of sales for the six months ended June 30, 2020 and 2019 was 10.1% and ~~2018 was~~ 9.5% ~~and 12.4%~~, respectively. The ~~decline~~increase in gross profit in both comparisons was driven by product ~~mix and operational inefficiencies due to component shortages.~~mix.

Selling expenses for the three months ended June 30, 2020 and 2019 was $0.7 million or 2.7% of sales and ~~2018 was~~ $0.8 million or 2.9% ~~of sales and $1.0 million or 3.6%~~ of sales, respectively. Selling expense for the six months ended June 30, 2020 and 2019 was $1.4 million or 2.5% of sales and ~~2018 was~~ $1.6 million or 2.8% ~~of sales and $2.1 million or 3.8%~~ of sales, respectively. The decrease in both the three and six month periods is due ~~to lower sales incentives and timing of events.~~cost reduction measures taken in prior year.

General and administrative expenses for the three months ended June 30, 2020 and 2019 were $1.7 million or 6.3% of sales and ~~2018 were~~ $2.7 million or 10.0% ~~of sales and $2.0 million or 7.2%~~ of sales, respectively. General and administrative expenses for the six months ended June 30, 2020 and 2019 were $3.7 million or 6.8% of sales and ~~2018 were~~ $5.0 million or 9.1% of sales, ~~and $4.2 million or 7.6% of sales,~~ respectively. The ~~increase~~decrease in both comparisons was due to ~~additional~~higher spend in the prior year related ~~to our recently implemented ERP system and~~ one-time expenditures to improve ~~operations.~~operations in 2019 and the benefits of those cost reduction measures in 2020.

Second quarter ~~2019 loss~~2020 Income from operations was ~~$1.2~~$0.1 million compared to ~~income~~loss of ~~$0.7~~$1.2 million for the second quarter in ~~2018. The increase in loss from operations for the period was due to the gross profit decline and higher general and administrative expenses.~~

~~Loss~~2019. Income from operations for the first six months in ~~2018~~2019 was ~~$1.3~~$0.4 million as compared to ~~income~~loss of ~~$0.6~~$1.3 million for the same comparable period in ~~2018.~~2019. The ~~decrease to a loss~~increase in income from operations ~~for the period~~in both comparison periods was due to increased gross margin as a percent of sales and the ~~gross profit decline and higher general and~~decreased administrative ~~expenses.~~expenses due to largely to cost reduction measures taken in the prior year.

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 six months ended June 30, ~~2019~~2020 was ~~(4%~~(3.2%) and 65.0%, respectively, and the rate for the three and six months ended June 30, ~~2018~~2019 was ~~26% and 101%, respectively.~~(4%).

Net loss for the three and net income for the six months ended June 30, 2020 was $0.1 million and $0.0 million, respectively. Net loss for the three months ended June 30, 2019 was $1.6 million and ~~$1.9 million, respectively. Net income for the three months ended June 30, 2018 was $0.4 million and net loss~~ for six month ended June 30, ~~2018~~2019 was ~~$0.2~~$1.9 million.

Our second quarter sales and shipment backlog were impacted by the COVID-19 pandemic. However, our focus on reducing costs, minimizing capital expenditures, and managing working capital mitigated the impact on liquidity. Due to the inherent uncertainty of this evolving situation, we are unable at this time to predict the likely impact of the COVID-19 pandemic on our future operations. However, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A. (BofA), funds available under a Promissory Note with BofA (“Promissory Note”) pursuant to the Paycheck Protection Program under the Coronavirus Aid and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

Net cash provided by operating activities for the six months ended June 30, 2020 was $0.5 million. Earnings adjusted for depreciation and amortization of $1.1 million drove the cash provided offset by an increase in working capital.

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 six months ended June 30, 2018 was $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.~~inventory.

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)~~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 June 30, ~~2019,~~2020, we had outstanding advances of ~~$12.3~~$4.4 million under the line of credit and unused availability of ~~$3.7~~$8.3 million supported by our borrowing 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 ~~$21.9~~$21.8 million and ~~$21.0~~$21.1 million as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

The ~~BofA credit agreement as amended~~Bank of America Credit Agreement provides for, among other things, a ~~fixed charge coverage ratio~~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~~three months ending December 31, ~~2018. As of~~2019, six months ending March 31, 2020, nine months ending June 30, ~~2019 we did not meet~~2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter. The Company met the ~~fixed charge cover ratio which was waived by BofA in~~covenants for the ~~second amendment to the credit agreement received on August 13, 2019.~~six months ended June 30, 2020.

~~In the second quarter of 2019, our China operations~~On April 15, 2020, we entered into a ~~line of credit arrangement with China Construction Bank~~Promissory Note, which provides for ~~a line~~an unsecured loan of ~~credit arrangement~~$6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of ~~6,000,000 Renminbi (RMB) that expires~~which; funds were received on April ~~3, 2021. This line~~22, 2020. The Promissory Note has a term of ~~credit bears an~~2 years with a 1% per annum interest ~~rate~~rate. Payments are deferred for 10 months after the end of 6%the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we ~~had borrowings~~can apply for forgiveness of ~~3,006,204 RMB ($437) at June 30, 2019.~~the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. We expect that all or a significant portion of the Promissory Note will be forgiven.

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

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, ~~2018.~~2019. 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.

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:

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, ~~2018.~~2019.

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.

~~Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), there~~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.

~~Table of Contents~~

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

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.~~2019.

We may be subject to additional regulatory scrutiny in the form of an audit or review as a result of our Paycheck Protection Program Promissory Note which would have an adverse effect on our liquidity

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP under the CARES Act. Subsequently, on April 28, 2020, the secretary of the Treasury and SBA announced that the government will review all PPP loans of more than $2 million for which a borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in legal and reputational costs as well as significant use of management time. While the Company believes that it acted in good faith and has complied with all requirements of the PPP, if we are audited and receive an adverse or negative finding in such audit, we could be required to return up to the full amount of the Promissory Note, which would reduce our liquidity by such amount and potentially subject us to fines and penalties.

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

As of June 30, ~~2019, we had a $250,000~~2020, our share repurchase program ~~with $37,661 remaining under this program.~~has expired, and no additional amounts are available for repurchase.

~~Table of Contents~~

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.

							JUNE 30,			DECEMBER 31,
	JUNE 30,			DECEMBER 31,			2020			2019⁽¹⁾
	2019				2018⁽¹⁾		(Unaudited)
ASSETS	(Unaudited)
Current Assets
Cash	$	399		$	480		$	345		$	351
Restricted Cash		406			467			409			309
Accounts Receivable, less allowances of $262 and $222		20,691			20,093
Accounts Receivable, less allowances of $391 and $335								19,219			18,558
Inventories		16,273			17,004			15,492			14,279
Contract Assets		7,228			6,431			6,399			7,659
Prepaid Expenses and Other Current Assets		1,776			1,381			1,785			2,128
Total Current Assets		46,773			45,856			43,649			43,284

Property and Equipment, Net		9,512			10,178			9,371			9,581
Operating Lease Assets		5,202			-			4,446			4,827
Goodwill		2,375			2,375			2,375			2,375
Other Intangible Assets, Net		1,439			1,523			1,237			1,343
Other Non Current Assets		28			28
Total Assets	$	65,329		$	59,960		$	61,078		$	61,410

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	$	878		$	780		$	444		$	444
Current Portion of Finance Lease Obligation		364			337			643			557
Current Portion of Operating Lease Obligations		826			-			791			858
Accounts Payable		16,845			18,142			13,523			14,014
Accrued Payroll and Commissions		3,118			2,747			3,294			3,493
Other Accrued Liabilities		2,793			2,886			3,188			2,866
Total Current Liabilities		24,824			24,892			21,883			22,232

Long-Term Liabilities
Long Term Line of Credit		12,297			9,264			4,392			10,088
Long-Term Debt, Net		3,401			3,624			9,046			3,179
Long Term Finance Lease Obligation, Net		776			951			1,486			1,451
Long-Term Operating Lease Obligation, Net		4,666			-			4,132			4,366
Other Long-Term Liabilities		118			139			116			118
Total Long-Term Liabilities		21,258			13,978			19,172			19,202

Total Liabilities		46,082			38,870			41,055			41,434

Commitments and Contingencies

Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding		250			250			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
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively								27			27
Additional Paid-In Capital		15,682			15,610			15,823			15,748
Accumulated Other Comprehensive Loss		(233	)		(233	)		(299	)		(257	)
Retained Earnings		3,521			5,436			4,222			4,208
Total Shareholders' Equity		19,247			21,090			20,023			19,976
Total Liabilities and Shareholders' Equity	$	65,329		$	59,960		$	61,078		$	61,410

	June 30,			December 31,			June 30,			December 31,
	2019			2018			2020			2019
Raw Materials	$	16,447		$	16,769		$	15,846		$	15,245
Work in Process		780			1,015			628			479
Finished Goods		212			332			412			41
Reserves		(1,166	)		(1,112	)		(1,394	)		(1,486	)

Total	$	16,273		$	17,004		$	15,492		$	14,279

			June 30, 2019								June 30, 2020
			Gross								Gross
			Carrying		Accumulated		Net Book				Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value		Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	578	$	724		9	$	1,302	$	723	$	579
Trade Names		3		100		78		22		3		100		100		-
Intellectual Property		20		814		163		651		20		814		203		611
Patents		7		42		-		42		7		47		-		47
Totals			$	2,258	$	819	$	1,439			$	2,263	$	1,026	$	1,237

			December 31, 2018								December 31, 2019
			Gross								Gross
			Carrying		Accumulated		Net Book				Carrying		Accumulated		Net Book
	Years		Amount		Amortization		Value		Years		Amount		Amortization		Value
Customer Relationships		9	$	1,302	$	506	$	796		9	$	1,302	$	651	$	651
Intellectual Property		3		100		61		39		3		100		95		5
Trade Names		20		814		143		671		20		814		183		631
Patents		7		17		-		17		7		56		-		56
Totals			$	2,233	$	710	$	1,523			$	2,272	$	929	$	1,343

	Three Months Ended June 30, 2019								Three Months Ended June 30, 2020
	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
Medical									$	11,464	$	1,540	$	367	$	13,371
Aerospace and Defense	$	4,155	$	222	$	205	$	4,582		4,522		246		138		4,906
Medical		13,145		218		661		14,024
Industrial		7,428		878		380		8,686		6,395		1,593		196		8,184
Total net sales	$	24,728	$	1,318	$	1,246	$	27,292	$	22,381	$	3,379	$	701	$	26,461

Year	Amount		Amount
Remainder of 2019	$	109
2020		192
Remainder of 2020			$	93
2021		185		186
2022		185		185
2023		185		185
2024				113
Thereafter		541		428
Total	$	1,397	$	1,190

	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

	Operating Leases			Finance Leases			Total			Operating Leases			Finance Leases			Total
Remaining 2019	$	447		$	213		$	660
2020		858			398			1,256
Remaining 2020										$	435		$	391		$	826
2021		722			398			1,120			722			738			1,460
2022		726			223			949			726			575			1,301
2023		738			2			740			738			333			1,071
2024											798			277			1,075
Thereafter		3,380			—			3,380			2,582			20			2,602
Total lease payments	$	6,871		$	1,234		$	8,105		$	6,001		$	2,334		$	8,335
Less: Interest		(1,379	)		(94	)		(1,473	)		(1,078	)		(205	)		(1,283	)
Present value of lease liabilities	$	5,492		$	1,140		$	6,632		$	4,923		$	2,129		$	7,052

Weighted-average remaining lease term (years)
Operating leases	~~8.1~~7.5
Finance leases	~~3.5~~3.2
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	~~5.4~~4.9	%

	Operating Leases
2019	$	1,024
2020		858
2021		722
2022		726
2023		738
Thereafter		3,380
Total minimum obligations	$	7,448

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold		91.5			86.6			90.5			87.6
Gross Profit		8.5			13.4			9.5			12.4

Selling Expenses		2.9			3.6			2.8			3.8
General and Administrative Expenses		10.0			7.2			9.1			7.6
Income from Operations		(4.4	)		2.6			(2.4	)		1.0

Other Expenses		(1.0	)		(0.7	)		(0.9	)		(0.7	)
Income (Loss) Before Income Taxes		(5.4	)		1.9			(3.3	)		0.3

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

	Three Months Ended June 30,							Six Months Ended June 30,							Three Months Ended June 30,							Six Months Ended June 30,
	2019		2018		%			2019		2018		%			2020		2019		%			2020		2019		%
	$		$		Change			$		$		Change			$		$		Change			$		$		Change
Medical																13,371		14,024		(4.7	)		28,733		28,963		(0.8	)
Aerospace and Defense		4,582		4,269		7.3			8,827		9,230		(4.4	)		4,906		4,582		7.1			9,690		8,827		9.8
Medical		14,024		12,565		11.6			28,963		22,715		27.5
Industrial		8,686		11,704		(25.8	)		17,667		23,040		(23.3	)		8,184		8,686		(5.8	)		15,478		17,667		(12.4	)
Total Net Sales		27,292		28,538		(4.4	)		55,457		54,985		0.9			26,461		27,292		(3.0	)		53,901		55,457		(2.8	)

	Three 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	$	4,001	$	72	$	196	$	4,269
Medical		11,934		87		544		12,565
Industrial		10,023		1,206		475		11,704
Total net sales	$	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 Period Ended						Shipment Backlog as of the Period Ended
	June 30,		March 31,		June 30,		June 30,		March 31,		June 30,
	2019		2019		2018		2020		2020		2019
Medical							$	11,987	$	14,330	$	16,701
Aerospace and Defense	$	6,833	$	6,027	$	5,568		6,900		6,812		6,833
Medical		16,701		17,256		10,776
Industrial		7,863		8,130		7,552		4,401		6,352		7,863
Total Backlog	$	31,397	$	31,413	$	23,896	$	23,288	$	27,494	$	31,397

	♦	~~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~~of 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 our operating facilities or those of third parties;

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

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

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

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

	10.2*	Second Quarter 2020 Earnings Release

	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.

~~Date: August 14, 2019~~	by ~~/s/ Jay D. Miller~~ ~~Jay D. Miller~~ ~~Chief Executive Officer and President~~ Nortech Systems Incorporated and Subsidiaries
	---------------------------------------------------------


Date: August ~~14, 2019~~11, 2020		by /s/ Jay D. Miller

		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

Date: August 11, 2020		by /s/ Constance M. Beck

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