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Note 1 - Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2023
Notes to Financial Statements |
Basis of Presentation and Significant Accounting Policies [Text Block] | NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates. Principles of Consolidation The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold. Stock-Based Awards Stock Options In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. Subsequent to this approval, an additional 325,000 shares have been authorized by the shareholders. We granted 25,000 and 54,000 service-based stock options during the three and nine months ended September 30, 2023, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2023 was $6.13 and $5.88, respectively. There were no market-based stock options granted during the three and nine months ended September 30, 2023. We granted 0 and 21,000 market-based stock options during the three and nine months ended September 30, 2022, respectively. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. We granted 3,000 and 69,000 service-based options during the three and nine months ended September 30, 2022, respectively. Total option grants for the three and nine months ended September 30, 2022 were 3,000 and 90,000, respectively. Total compensation expense related to stock options was $42 and $184 for the three and nine months ended September 30, 2023, respectively. Total compensation expense related to stock options was $62 and $168 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was $724 of unrecognized compensation which will be recognized over a weighted average period of 3.8 years. Following is the status of all stock options as of September 30, 2023:
|  | Shares |  |  | Weighted- Average Exercise Price Per Share |  |  | Weighted- Average Remaining Contractual Term (in years) |  |  | Aggregate Intrinsic Value (in thousands) |
Outstanding - January 1, 2023 |  |  | 452,700 |  |  | $ | 5.97 |  |  |  |  |  |  |  |  |
Granted |  |  | 54,000 |  |  |  | 9.63 |  |  |  |  |  |  |  |  |
Exercised |  |  | (38,244 | ) |  |  | 4.09 |  |  |  |  |  |  |  |  |
Cancelled |  |  | (43,956 | ) |  |  | 7.50 |  |  |  |  |  |  |  |  |
Outstanding - September 30, 2023 |  |  | 424,500 |  |  | $ | 6.45 |  |  |  | 6.48 |  |  | $ | 1,375 |
Exercisable - September 30, 2023 |  |  | 242,800 |  |  | $ | 4.44 |  |  |  | 5.16 |  |  | $ | 1,197 |
Restricted Stock Units During the three months and nine months ended September 30, 2023, we granted 0 and 18,000 restricted stock units (“RSUs”), respectively under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. The RSUs granted in the three and nine months ended September 30, 2023 had an average grant price of $9.37 per share. Total compensation expense related to the RSUs was $38 and $115 for the three and nine months ended September 30, 2023, respectively. Total unrecognized compensation expense related to the RSUs was $154, which will vest over a weighted average period of 1.2 years. During the three months and nine months ended September 30, 2022, we granted 0 and 21,000 restricted stock units, respectively to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $31 and $66 for the three and nine months ended September 30, 2022, respectively. Following is a status of all RSUs as of September 30, 2023:
|  | Shares |  |  | Weighted- Average Grant Date Fair Value |  |  | Weighted- Average Remaining Contractual Term (in years) |  |  | Aggregate Fair Value (in thousands) |
Outstanding - January 1, 2023 |  |  | 21,000 |  |  | $ | 12.00 |  |  |  |  |  |  |  |  |
Granted |  |  | 18,000 |  |  |  | 9.37 |  |  |  |  |  |  |  |  |
Vested |  |  | (10,500 | ) |  |  | 12.00 |  |  |  |  |  |  |  |  |
Forfeited |  |  | (6,000 | ) |  |  | 10.93 |  |  |  |  |  |  |  |  |
Outstanding - September 30, 2023 |  |  | 22,500 |  |  | $ | 10.18 |  |  |  | 9.23 |  |  | $ | 208 |
Net Income per Common Share Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Dilutive net income per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding, unless their effect is antidilutive. All stock options and restricted stock units, while outstanding, are considered common stock equivalents. For the three and nine months ended September 30, 2023, stock options of 150,783 and 171,723, respectively were included in the computation of diluted net income per common share as their impact were dilutive. For the three and nine months ended September 30, 2022, stock options of 212,643 and 202,479, respectively were included in the computation of diluted net income per share as their impact were dilutive. We had outstanding stock options totaling 47,538 and RSUs totaling 16,784 that are not included in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended September 30, 2023. We had average outstanding stock options totaling 37,869 and RSUs totaling 15,027 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2023. We had outstanding stock options totaling 34,211 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended September 30, 2022. We had average outstanding stock options totaling 44,070 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2022. Restricted Cash Cash and cash equivalents classified as restricted cash on our consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. As of September 30, 2023, we had outstanding letters of credit for $300. Restricted cash as of September 30, 2023 was $422. The September 30, 2023 and December 31, 2022 restricted cash balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. Accounts Receivable Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Allowance for Credit Losses When we record customer receivables and contract assets arising from revenue transactions, we record an allowance for credit losses for the current expected credit losses (CECL) inherent in the asset over its expected life. The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets. We estimate expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics. Changes in the relevant information may significantly affect the estimates of expected credit losses. Assets are written off when we determine them to be uncollectible. Write-offs are recognized as a deduction from the allowance for credit losses. Inventories Inventories are stated at the lower of average cost (which approximates first-in, first out) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs. Inventories are as follows:
|  | September 30, |  |  | December 31, |
|  | 2023 |  |  | 2022 |
Raw Materials |  | $ | 20,551 |  |  | $ | 21,673 |
Work in Process |  |  | 1,220 |  |  |  | 1,238 |
Finished Goods |  |  | 828 |  |  |  | 671 |
Reserves |  |  | (1,132 | ) |  |  | (1,144 | )
Total |  | $ | 21,467 |  |  | $ | 22,438 |
Other Intangible Assets Other intangible assets at September 30, 2023 and December 31, 2022 are as follows:
|  | Customer Relationships |  |  | Patents |  |  | Total |
Balance at January 1, 2022 |  | $ | 360 |  |  | $ | 141 |  |  | $ | 501 |
Additions |  |  | - |  |  |  | 71 |  |  |  | 71 |
Amortization |  |  | 144 |  |  |  | 6 |  |  |  | 150 |
Balance at December 31, 2022 |  |  | 216 |  |  |  | 206 |  |  |  | 422 |
Amortization |  |  | 108 |  |  |  | 11 |  |  |  | 119 |
Balance at September 30, 2023 |  | $ | 108 |  |  | $ | 195 |  |  | $ | 303 |
Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted-average remaining amortization period of our intangible assets is 1.1 years. Of the patents value at September 30, 2023, $85 are being amortized and $110 are in process and a patent has not yet been received. Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2023 was $39 and $119, respectively. Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $40 and $111, respectively. Estimated future annual amortization expense (not including patents in process of $110) related to these assets is approximately as follows:
Year |  | Amount |
Remainder of 2023 |  | $ | 40 |
2024 |  |  | 87 |
2025 |  |  | 14 |
2026 |  |  | 14 |
Thereafter |  |  | 38 |
Total |  | $ | 193 |
Adoption of New Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asses is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. On January 1, 2023, we adopted the guidance prospectively with a cumulative adjustment to retained earnings. We have not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023. At adoption, we recognized an allowance for credit losses related to accounts receivable and contract assets of $30, net of tax, and a decrease in retained earnings of $30 associated with the increased estimated credit losses. Revision and Immaterial Correction of an Error in Previously Issued Financial Statements The Company identified an error related to the classification of the activity on our line of credit facility with Bank of America at December 31, 2022 as reported on Form 10-K. In our September 30, 2022 condensed consolidated financial statements, we incorrectly classified borrowings and payments on our line of credit facility on a net basis within the financing section of the condensed consolidated cash flow statement; this activity should be shown on a gross basis. This change in presentation to the condensed consolidated cash flow statement does not impact total operating, investing, or financing cash flows. There was no change to the condensed consolidated statement of income or condensed consolidated balance sheet. In accordance with ASC 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company’s 2022 audited financial statements. Since these revisions were not material to any prior period financial statements, no amendments to previously filed financial statements are required. Consequently, the Company has corrected these immaterial errors by revising the September 30, 2022 consolidated financial statements presented herein. The tables below present the effect of the financial statement adjustments related to the revision discussed above of the Company’s previously reported financial statements as of and for the period ended September 30, 2022:
Condensed Consolidated Statements of Cash Flows |  |  |  |  |  |  |  |  |
|  | September 30, 2022 |
CASH FLOWS FROM FINANCING ACTIVITIES |  | As reported |  |  | Adjustment |  |  | As revised |
Net Proceeds from Line of Credit |  |  | 857 |  |  |  | (857 | ) |  |  | - |
Proceeds from Line of Credit |  |  | - |  |  |  | 88,673 |  |  |  | 88,673 |
Payments to Line of Credit |  |  | - |  |  |  | (87,816 | ) |  |  | (87,816 | )
Principal Payments on Long-Term Debt |  |  | - |  |  |  | - |  |  |  | - |
Principal Payments on Financing Leases |  |  | (326 | ) |  |  | - |  |  |  | (326 | )
Stock Option Exercises |  |  | 51 |  |  |  | - |  |  |  | 51 |
Net Cash Provided by Financing Activities |  |  | 582 |  |  |  | - |  |  |  | 582 |

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