Nortech Systems Inc 10-K for FY2024
Nortech Systems Inc (NSYS)
About this 10-K
Nortech Systems Inc filed this 10-K on March 31, 2025, covering the fiscal year ended December 31, 2024 (FY2024).
Headline figures
Fiscal year ended December 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.37M
- up 7.0% from $13.43M a year earlier
- Net loss
- $1.3M
- compared with net income of $6.87M a year earlier
- Diluted EPS
- -$0.47
- compared with $2.38 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
| Annual
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The
aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of $13.65 per share, was
$
Shares of common stock outstanding as of February 28, 2025: .
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DOCUMENTS INCORPORATED BY REFERENCE
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NORTECH SYSTEMS INCORPORATED
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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NORTECH SYSTEMS INCORPORATED
FORM 10-K
For the Year Ended December 31, 2024
PART I
Item 1. Business
General
Nortech Systems Incorporated, (“the Company”, “we”, “our”) organized in December 1990, is a provider of engineering design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou, China.
We offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing, testing, prototyping, manufacturing, supply chain management and post-market services. Our manufacturing and engineering services include complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. In the design phase, we provide technical support, subject matter expertise in design for manufacturing and testing capabilities that allow our customer programs to get to production faster while meeting both their quality and cost requirements.
Our breadth of manufacturing, technical expertise and experience make us attractive to our broad customer base. Our customers are original equipment manufacturers (“OEMs”) in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets. The diversity in the markets we serve is an advantage to mitigate the effects of fluctuations from the economy and competition. Our customers rely on our experience and capabilities in manufacturing and supply chain to manage and reduce total overall cost over the life cycle of their products. This requires a strong relationship with our customers based on a trusting partnership as we perform as an extension of their operations. Most of our net sales are derived from products built to the customer’s unique design specifications.
Our quality systems and processes are based on ISO standards with all facilities certified to at least one of the following: ISO 9001, ISO 13485 or AS9100. These certifications and registrations provide our customers assurance of our capabilities and proven processes. Our Milaca operation is a U.S. Food and Drug Administration (“FDA”) registered facility, and our Suzhou operation is a China National Medical Imaging Administration certified facility. In addition to industry standard certifications, we actively manage quality metrics throughout product life cycle at all levels of the organization to provide real-time, pro-active support to our customers and their projects. Process validation is performed through the strict phases of installation qualification, operation qualification and performance qualification.
Business Segment
The Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets with over 50% of its net sales coming from the medical-related markets. All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services (“EMS”) industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Our financial information is evaluated regularly on a consolidated basis by the chief operating decision maker in assessing performance and allocating resources.
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Business Strategy
The EMS industry has evolved into a dynamic, high-tech, regulated global electronics contract services industry. We continue to expand our capabilities and footprint to better meet these changing market requirements. Along with offering technical expertise in our quality processes, engineering design applications and testing, we continue to transform our business model from one that is less transactional, and price/commodity driven to a solution-based model. Our model is focused on value-added customer and supplier-managed inventory solutions and the underlying cost drivers throughout the global supply chain. We continue to pursue strategic opportunities that may include acquisitions, mergers, and/or joint ventures with complementary companies to expand our service offering, advance our competitive edge, grow our customer base and increase net sales. Our strategic objectives and our history have been based on both organic and acquired growth.
We are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, we have invested in equipment, plant capacity studies, people, enterprise resource planning systems, lean manufacturing and supply chain management techniques at our facilities. We have also invested in fiber optic technologies to provide a lighter weight, data-driven and environmentally cleaner solution to our customers. We are committed to continuous improvement and have invested in training our people to identify and act on improvement opportunities. We maintain a diversified customer base and expand into other capabilities and services when there is a fit with our core competencies and strategic vision.
Marketing
We concentrate our marketing efforts in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets. Our marketing strategy emphasizes our breadth, expertise and experience in each of our markets. Our expertise helps our customers save time and money and also reduces their risks. The breadth of our manufacturing, supply chain, engineering services and complete turnkey solutions assist our customers in getting their products to market quickly while managing the total cost solution. Our strength is managing low to moderate volume components and assemblies with high mix customer demand. This requires us to have close customer relationships and operational flexibility to manage the variation of product demands.
Our customer emphasis continues to be on companies that require an electronic manufacturing partner with a high degree of manufacturing and quality sophistication, including statistical process control, statistical quality control, ISO standards, military specifications, AS9100 and FDA facility registration. We continue efforts to penetrate our existing customer base and expand market opportunities with participation in industry forums and selected trade shows. We target customers who value proven manufacturing performance, design, project management and application engineering expertise and who value the flexibility to manage the supply chain of a high mix of products and services. We market our services through a mix of traditional marketing outreach, a specialized business development team and in limited circumstances, independent manufacturers’ representatives. For more information on our marketing and service offerings see our website at www.nortechsys.com. The information on our Company’s website is not part of this filing.
Sources and Availability of Materials
We currently purchase most of our electronic components globally and directly from electronic component manufacturers and large electronic distributors. During the COVID pandemic, we, like many other companies in our industries, experienced significant supply chain and shipping disruptions. More recently, we are experiencing shifts in customer order patterns as they seek to reduce fulfillment times, which requires changes to our procurement strategies and inventory investments. We attempt to overcome these changes through advanced supply chain solutions we develop in partnership with our customers, a commitment to strong supplier partnerships and risk management tools.
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Major Customers
One customer individually, accounted for at 27.7% of net sales for the year ended December 31, 2024, and two customers, individually, accounted for 25.7% and 10.3%, respectively, of net sales for the year ended December 31, 2023.
Patents and Licenses
Our success depends on our technical expertise, trade secrets, supply chain and manufacturing skills. During the normal course of business, we obtain or develop proprietary product requiring licensing, patent, copyright or trademark protection.
Competition
The contract manufacturing EMS industry’s competitive makeup includes small closely held contract manufacturing companies, large global full-service contract manufacturers, company-owned in-house manufacturing facilities and foreign contract manufacturers. We do not believe that the small closely held operations pose a significant competitive threat in the markets and customers we serve, as they generally do not have the complete manufacturing and engineering services or capabilities required by our target customers. We believe the larger global full service and foreign manufacturers are more focused on higher volume customer engagements and we do not see them as our primary competition. We continue to see opportunities with OEM companies that have their own in-house electronic manufacturing capabilities as they evaluate their internal costs and investments against outsourcing to contract manufacturers like us. We see trends of the low volume, high mix customer demand going to a regional supply base. This is a good fit with our operations in US, Mexico and China. We continue to study and investigate other regions and global alternatives to meet our competitive challenges and customer requirements.
Research and Development
We perform research and development for customers on an as requested, project and program basis for development of conceptual engineering and design activities as well as products moving into production. We spent approximately $1.2 million on product research and development in each of the years ended December 31, 2024 and 2023. We continue to explore opportunities for developing proprietary manufacturing methods or products, particularly in complex wire and cable interconnect technologies.
Environmental Law Compliance
We believe that our manufacturing facilities are currently operating in compliance with local, state, and federal environmental laws. We plan to continue acquiring environmentally efficient equipment and incurring the expenditures we deem necessary for compliance with applicable laws. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital expenditures, earnings or competitive position.
Government Regulation
As a medical device manufacturer, we have additional compliance requirements. We are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality Management System Regulation (“QMSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring by the FDA. To support the quality requirements of our Aerospace and Defense market customers, all our US locations are International Traffic in Arms Regulations (“ITAR”) compliant.
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Human Capital Resources
We have 701 full-time and 43 part-time/temporary employees as of December 31, 2024, none which are covered by union agreements. Manufacturing personnel, including direct, indirect support and sales functions, comprise 657 employees, while general administrative employees total 44.
Foreign
Operations and Export Sales from Our Domestic Operations
We have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China. Monterrey, Mexico has approximately $687,000 and $747,000 in long-term assets, and $1,758,000 and $2,123,000 of net operating lease assets as of December 31, 2024 and 2023, respectively. Suzhou, China has approximately $812,000 and $861,000 in long-term assets, and $685,000 and $278,000 of net operating lease assets as of December 31, 2024 and 2023, respectively. Export sales from our U.S. domestic operations represented 3.4% and 4.1% of net sales for the years ended December 31, 2024 and 2023, respectively.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available free of charge, as soon as reasonably practicable, after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (“SEC”). These reports are available on our website at http://www.nortechsys.com and on the SEC’s website at http://www.sec.gov. Information included on our website is not deemed to be incorporated into this Annual Report on Form 10-K.
Item 1A. Risk Factors
In evaluating our Company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and/or financial condition, as well as adversely affect the value of an investment in our common stock. In addition to the following disclosures, please refer to the other information contained in this report, including our consolidated financial statements and the related notes.
Risks Related to our Business
A large percentage of our net sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us.
One customer accounted for at 27.7% of net sales for the year ended December 31, 2024, and two customers, individually, accounted for 25.7% and 10.3%, respectively, of net sales for the year ended December 31, 2023. The loss of a substantial portion of net sales to our largest customers could have a material adverse effect on us.
We are dependent on suppliers for components and raw materials and may experience shortages, extended lead times, cost premiums and shipment delays that would adversely affect our customers and us.
We purchase raw materials, commodities and components for use in our production process. Increased costs of these materials could have an adverse effect on our production costs if we are unable to pass along price increases or reduce the other cost of goods produced through cost improvement initiatives. Fuel and energy cost increases could also adversely affect our freight and operating costs. Due to customer specifications and requirements, we are dependent on suppliers to provide critical electronic and other components and materials for our operations that could result in shortages of some of the components needed for production. Component shortages may result in an inability to deliver products on time or at all, expedited freight, overtime premiums and increased component costs. In addition to the financial impact on operations from lost net sales and increased cost, there could potentially be harm to our customer relationships. To reduce the effects of supply chain disruption for our customers, we purchase and hold raw material and finished goods inventory, which results in a reduction of cash available. If we are unable to sell such inventory or sell such inventory within a reasonable timeframe, it may adversely affect our operations and financial results.
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Our customers cancel orders, change order quantity, timing and specifications that if not managed would have an adverse effect on the timing of net sales and inventory carrying costs.
We face, through the normal course of business, customer cancellations and rescheduled orders and are not always successful in recovering the costs of such cancellations or rescheduling. With every new product or substantial redesign of a product, we utilize our new product introduction process. Such process is intended to improve the manufacturability, compliance with customer specifications and quality standards relating to the product but may result in delays in commencement of production impacting the timing of net sales. In addition, excess and obsolete inventory losses as a result of customer order changes, cancellations, product changes and contract termination could have an adverse effect on our operations. We record inventory at the lower of cost or net realizable value in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for exposures related to the estimated impact from these possibilities.
We depend heavily on our people and may from time to time have difficulty attracting and retaining skilled employees and the cost of labor may continue to increase.
Our operations depend upon the continued contributions of our key management, marketing, technical, financial, accounting, product development engineers, salespeople and operations personnel. We also believe that our continued success will depend upon our ability to attract, retain and develop highly skilled managerial and technical resources and direct labor resources within our highly competitive industries. Not being able to attract or retain these employees could have a material adverse effect on net sales and earnings. In addition, the cost of attracting and retaining direct and indirect labor may continue to increase, which will increase our operating costs and may reduce our profitability.
Our engineering net sales depend on our ability to deliver quality value-added engineering services required by our customers.
The markets for our engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business to generate engineering net sales will depend upon our ability to hire and retain qualified engineering personnel and maintain and enhance our technological leadership. Although we believe that we currently can provide the value-added engineering services that are required by our customers, there is no certainty that we will develop the capabilities required by our customers in the future. The emergence of new technology, industry standards or customer requirements may render the engineering services we currently provide obsolete or uncompetitive. The acquisition and implementation of new engineering knowledge, technical skills and related equipment may require significant expense that could adversely affect our operating results, as could our failure to anticipate and adapt to our customers’ changing technological requirements.
We operate in highly competitive industries, and we depend on continuing outsourcing by Original Equipment Manufacturers (“OEM”).
We compete against many companies that engineer and manufacture complex electromedical and electromechanical medical device, medical imaging, aerospace and defense, and industrial products. The larger global competitors have more resources and greater economies of scale and have more geographically diversified international operations. We also compete with OEM operations that are continually evaluating manufacturing products internally against the advantages of outsourcing or delaying their decision to outsource. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with excess capacity, lower cost structures and availability of lower cost labor.
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Competitive factors in our targeted markets are believed to be product and service pricing, quality, the ability to meet delivery schedules, customer service, value-added engineering, technology solutions and geographic location. We also expect that our competitors will continue to improve the performance of their current products or services, to reduce their current products or service sales prices and improve services that may be offered. Any of these could cause a decline in net sales, loss of market share, or lower profit margin.
The availability of excess manufacturing capacity of our competitors also creates competitive pressure on price and winning new business. We must continue to provide a quality product, be responsive and flexible to customers’ requirements, and deliver to customers’ expectations. Our lack of execution could have an adverse effect on our results of operations and financial condition.
The manufacture and sale of products carries potential risk for product liability claims and warranty claims.
We generally are required to represent and warrant to our customers that the goods and services we deliver are free from defects in material and workmanship generally for one year. Certain customers require longer warranty periods. If a product liability claim results in our being liable, it could have a material adverse effect on our business and financial position. We have insurance coverage for product liability claims, but there can be no assurances that the amount of coverage will be adequate or that insurance proceeds will be available for a particular claim. Our insurance may not cover claims for non-conformance or defective products that are not product liability claims from customers.
The Company is majority owned by one group of shareholders, and those shareholders may be able to take actions that do not reflect the will or best interests of other shareholders.
Curtis Squire, Inc. and the Kunin family, collectively as a group, own a majority of our common stock. As a result, our majority shareholder group will have the ability to elect all of the members of our Board of Directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our articles of incorporation, as amended and amended and restated bylaws and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with interests of other shareholders.
In addition, the majority shareholder group may have an interest in pursuing transactions that, in its judgment, could enhance its investment, even though such transactions might be inconsistent with your investment objectives.
As a majority owned or controlled company, NASDAQ does not require the Company to comply with certain corporate governance rules including that we are not required to have a majority of independent directors on the board, an independent compensation committee, or an independent nominating and corporate governance committee. The Company is required to have an audit committee comprised of independent directors. Having fewer independent directors or fewer independent members of the Compensation and Talent Committee or the Nominating and Corporate Governance Committee may result in increased influence of the majority ownership group over business operations.
Operating in foreign countries exposes our operations to risks that could adversely affect our operating results.
We operate manufacturing facilities in Mexico and China. Our operations in those countries are subject to risks that could adversely impact our financial results and costs, such as economic or political volatility, foreign legal and regulatory requirements, international trade relations factors (such as tariffs, trade sanctions, duties, export controls and other trade restrictions), protection of our and our customers’ intellectual property and proprietary technology in certain countries, potentially burdensome taxes, crime, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations. Legal and regulatory requirements in Mexico and China are continually changing which may and has affected our ability to predict timing and/or whether we will receive applicable tax refunds such as VAT tax refunds. The changing regulatory environment may impact negatively the timing and recognition of such net sales and/or whether we ultimately collect cash from these net sales.
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We face risks arising from the restructuring of our operations.
In recent years, we have undertaken initiatives to restructure our business operations with the intention of improving utilization and realizing cost savings. These initiatives have included reducing the size of our workforce, changing the number and location of our production facilities in an effort to align our capacity and infrastructure with current and anticipated customer demand. The process of restructuring entails, among other activities, moving production between facilities, transferring programs from higher cost geographies to lower cost geographies, closing facilities, reducing size of our workforce, realigning our business processes and reorganizing our management.
Restructurings could adversely affect us, including a decrease in employee morale, delays encountered in finalizing the scope of, and implementing, the restructurings, failure to achieve targeted cost savings, and failure to meet operational targets and customer requirements due to the restructuring process. These risks are further complicated by our extensive international operations, which subject us to different legal and regulatory requirements that govern the extent and speed of our ability to reduce our manufacturing capacity and workforce.
We have and may be required to take additional restructuring charges in the future to align our operations and cost structures with global economic conditions, market demands, cost competitiveness, and our geographic footprint as it relates to our customers’ production requirements or following divestitures. We may consolidate or divest certain manufacturing facilities or transfer certain of our operations to other geographies. If we are required to take additional restructuring charges in the future, our operating results, financial condition, and cash flows could be adversely impacted.
Risks Related to our Assets
We are dependent on our information technology systems for order, inventory and production management, financial reporting, communications and other functions. If our information systems fail or experience major interruptions due to physical damage or loss of power on our business and our financial results could be adversely affected.
We rely on our information technology systems to effectively manage our operational and financial functions. Our computer systems, web sites, telecommunications, and data networks are vulnerable to damage or interruption from power loss, natural disasters and other sources of physical damage or disruption to the equipment which maintains, stores and hosts our information technology systems. We have taken steps to protect and create redundancies for the equipment that facilitates the use of our management information systems, but these steps may not be adequate to ensure that our operations are not disrupted by events within and outside of our control.
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Disruptions to our information systems, including security breaches, losses of data or outages, cyber attacks and other security issues, have and could in the future adversely affect our operations and/or financial results.
We rely on information systems, some of which are managed by third parties, to store, process and transmit confidential information, including financial reporting, inventory management, procurement, invoicing and electronic communications, belonging to our customers, our suppliers, our employees and/or us. We monitor and mitigate our exposure to cybersecurity issues and modify our systems when warranted and we have implemented certain business continuity items, including leveraging our multiple sites for redundancies, as well as backup and restore methods inclusive of off-site, secure hosted and cloud based third-party providers. Nevertheless, these systems are vulnerable to, and at times have suffered from, among other things, damage from power loss or natural disasters, computer system and network failures, loss of telecommunication services, physical and electronic loss of data, terrorist attacks, computer viruses, cyberattacks and security breaches, ranging from uncoordinated individual attempts to gain unauthorized access to our information technology systems to sophisticated and targeted measures. These include data theft, malware, phishing, ransomware attacks, or other cybersecurity threats or incidents. The increased use of mobile technologies and the internet of things can heighten these and other operational risks. If we, or the third parties who own and operate certain of our information systems, are unable to prevent such breaches, losses of data and outages, our operations could be disrupted. Also, the time and funds spent on monitoring and mitigating our exposure and responding to breaches, including the training of employees, the purchase of protective technologies and the hiring of additional employees and consultants to assist in these efforts could adversely affect our financial results. The increasing sophistication of cyberattacks requires us to continually evaluate the threat landscape and new technologies and processes intended to detect and prevent these attacks. There can be no assurance that the security measures and systems configurations we choose to implement will be sufficient to protect the data we manage. Any theft or misuse of information resulting from a security breach could result in, among other things, loss of significant and/or sensitive information, litigation by affected parties, financial obligations resulting from such theft or misuse, higher insurance premiums, governmental investigations, negative reactions from current and potential future customers (including potential negative financial ramifications under certain customer contract provisions) and negative publicity and any of these could adversely affect our financial results.
In addition, we must comply with increasingly complex regulations intended to protect business and personal data in the U.S. and globally. In many cases, these laws apply not only to third-party transactions, but also restrict transfers of personal information among the Company and its international subsidiaries. Several jurisdictions have passed laws in this area, and additional jurisdictions are considering imposing additional restrictions or have laws that are pending. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements causes the Company to incur substantial costs and has required and may in the future require the Company to change its business practices. Compliance with these regulations can be costly and any failure to comply could result in legal and reputational risks as well as penalties, fines and damages that could adversely affect our financial results.
We are investing in new technologies which are inherently risky.
We have made investments in research and development (“R&D”) of new technologies that we believe if successful will strengthen our relationships with customers. Our intent is that the Company own intellectual property arising from R&D activities. To the extent that those investment efforts are unsuccessful, our competitive position may be harmed, and we may not realize a return on our investments.
To compete more successfully, we believe it is advantageous to maintain an effective R&D program to develop new products and manufacturing processes that will benefit our customers. Our R&D efforts are currently funded through investment of capital generated from operations, and we incurred R&D expenses of approximately $1.2 million in each of the years ended December 31, 2024 and 2023. We are focusing our R&D efforts across several key areas, including development of fiber optic technologies for a wide range of applications like active optical cables, expanded beam technology and physical contact cables.
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We do not expect all our R&D investments to be successful. Some of our efforts to develop and market new products and technologies fail or fall short of our expectations, or will not be well-received by customers, who may adopt competing technologies.
Our investments in new products and technologies are inherently risky and are a departure from historical business operations.
Developing Company owned technology and products is different than our historical manufacturing business. While we believe that this is an important step to further cultivate relationships with customers and partners, the Company has not historically developed its own technologies or products; rather, it has historically developed and manufactured products designed by our customers.
Development of new products and technologies may expose us to potential product liability risks that are inherent in the design, manufacture and marketing of those products. As a result, we face an inherent risk of damage to our reputation if one or more of our products or technologies are, or are alleged to be, defective. Although we carry product liability insurance, we may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Product liability, warranty and recall costs may have a material adverse effect on our business, financial condition and results of operations.
Financial Risks
If we fail to comply with the covenants contained in our credit agreement, we may be unable to secure additional financing and repayment obligations on our outstanding indebtedness may be accelerated.
Our credit agreement contains financial and operating covenants with which we must comply. Effective as of February 29, 2024, we entered into a new credit agreement with Bank of America (the “Revolver”.) Our Revolver contains financial and operating covenants with which we must comply. Our compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We received a waiver of the Mexican operating expenses event of default from the bank in August 2024. On March 27, 2025, we amended the Revolver agreement to waive the leverage ratio and minimum charge coverage ratio events of default as of December 31, 2024 and March 31, 2025 and to further defer the Company’s compliance with these ratios until the third quarter of 2025, and reset compliance thresholds for our covenant ratios for 2025. We have included the Amendment No. 1 to Credit Agreement, Waiver, and Consent as an exhibit to this filing and any description of that document contained in this risk factor is only a summary and is qualified by its entirety by the Amendment No. 1 to Credit Agreement, Waiver, and Consent. If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be unable to borrow funds and any outstanding indebtedness could become immediately due and payable, which could materially harm our business.
Our exposure to financially troubled customers, start-up businesses or suppliers may adversely affect our financial results.
We provide manufacturing services to companies and industries that have in the past, and may in the future, experience financial difficulty. Also, we provide services and products to new and high growth companies. If our customers experience financial difficulty or lack of funding for operations, we could have difficulty recovering amounts owed to us from these customers, or demand for our services or products from these customers could decline. Additionally, if our suppliers experience financial difficulty, we could have difficulty sourcing supply necessary to fulfill production requirements and meet scheduled shipments. If one or more of our customers were to become insolvent or otherwise were unable to pay for the services provided by us on a timely basis, or at all, our operating results and financial condition could be adversely affected. Such adverse effects could include one or more of the following: an increase in expenses for expected accounts receivable credit losses and inventory write-offs, a reduction in net sales, and an increase in our working capital requirements due to higher inventory levels and in days our accounts receivables are outstanding.
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Changes in foreign currency translation rates could adversely impact our net sales and earnings.
Changes in foreign currency exchange rates will impact our reported net sales and earnings. Substantially all our net sales are transacted in U. S. Dollars. A majority of our manufacturing and cost structure is based in the United States and transacted in U.S. Dollars. We have exposures to local currencies for certain net sales in China denominated in Chinese Yuan, value added tax receivables denominated in the Mexican Peso, as well as certain costs incurred at our facilities in China and Mexico that are denominated in their respective local currencies. Significant fluctuations in foreign exchange rates between the U.S. dollar and foreign currencies may adversely affect our results of operations.
Our Mexico facility operates as a maquiladora, and its financial records are kept in Mexican Pesos. As the function currency of the maquiladora is the U. S. Dollar, we translate the Mexican Pesos financial records into U. S. Dollars and record a currency translation gain or loss in the statement of operations. These translation gains or losses may be material to the financial results of the Company. For the years ended December 31, 2024 and 2023, we recorded translation losses of $137 thousand and $54 thousand, respectively. The majority of these losses were related to the translation of value added tax receivables denominated in Mexican Pesos.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends; investors must rely on stock appreciation for any return on investment in our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to, our financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize certain returns on their investment. As a result, investors must rely on stock appreciation and a liquid trading market for any return on investment in our common stock.
We expect volatility in the price of our common stock, which may subject us to securities litigation.
The market for our common stock may be characterized by significant price volatility when compared to other issuers, and we expect that our share price will be more volatile than other issuers for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. Any failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results or cause us to fail to meet our reporting obligations. As we expand our business operations both within the United States and internationally, we will need to maintain effective internal controls over financial reporting and disclosure controls and procedures.
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Our services involve other inventory risk.
Our production services primarily provide that we purchase some, or all, of the required materials and components based on customer forecasts or orders. Although, in general, our contracts with our customers obligate our customers to ultimately purchase inventory ordered to support their forecasts or orders, we generally finance these purchases initially. In addition, suppliers may require us to purchase materials and components in minimum order quantities that may exceed customer requirements. A customer’s cancellation, delay or reduction of forecasts or orders can also result in excess inventory or additional expense to us. Engineering changes by a customer or a product’s end-of-life may result in obsolete materials or components. While we attempt to cancel, return or otherwise mitigate excess and obsolete inventory, as well as require customers to reimburse us for these items and/or price our services to address related risks, we may not actually be reimbursed timely or in full, be able to collect on these obligations or adequately reflect such risks in our pricing. In addition to increasing inventory in certain instances to support new program ramps, we may also increase inventory if we experience component shortages or longer lead-times for certain components in order to maintain a high level of customer service. In such situations, we may procure components earlier, which leads to an increase in inventory in the short term and may lead to increased excess or obsolete inventory in the future. Excess or obsolete inventory, the need to acquire increasing amounts of inventory due to shortages, customer demand or otherwise, or other failures to manage our working capital, could adversely affect our operating results, including our return on invested capital.
In addition, we provide managed inventory programs for some of our customers under which we hold and manage finished goods or work-in-process inventories. These managed inventory programs may result in higher inventory levels, further reduce our inventory turns and increase our financial exposure with such customers. In addition, our inventory may be held at a customer’s facility or warehouse, or elsewhere in a location outside of our control, which may increase the risk of loss. Even though our customers generally have contractual obligations to purchase such inventories from us, we remain subject to customers’ credit risks as well as the risk of potential customer default and the need to enforce those obligations.
Market Risks
The economic conditions around the world could adversely affect demand for our products and services and the financial health of our customers.
Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, construction, tariffs, taxes, consumer spending and confidence, financing availability, employment rates, interest rates, inflation, defense spending levels, global politics and conflict, and the profits, capital spending, and liquidity of industrial companies.
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An economic downturn or financial market turmoil may depress demand for our products and/or services in all major geographies and markets. If customers are unable to purchase our products or services because of unavailable credit or unfavorable credit terms, depressed end-user demand, or are simply unwilling to purchase our products or services, our net sales and earnings will be adversely affected. Also, we are subject to the risk that our customers will have financial difficulties, which could harm their ability to satisfy their obligation to pay accounts receivable. Further, an economic downturn may affect our ability to satisfy the financial covenants in our financing arrangements.
Pandemics or disease outbreaks could adversely affect our operations, supply chains, financial condition and results of operations.
Outbreaks of epidemic, pandemic, or contagious diseases, such as, historically, the COVID-19 virus, Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could cause a disruption to our business. Business disruptions could include temporary closures of our facilities or the facilities of our suppliers, reduced demand from customers, unavailability or restricted availability of our material portions of our workforce, raw materials or components necessary to manufacture our products, or disruptions or restrictions on our ability to travel or to distribute our products. Any disruption of our operations, our suppliers or our customers would likely impact our net sales and operating results. In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and services. Any of these events could negatively impact our net sales and have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Legal and Regulatory Risks
We are subject to extensive government regulations and industry standards and the terms of complex contracts; a failure to comply with current and future regulations and standards, or the terms of our contractual arrangements, could have an adverse effect on our business, customer relationships, reputation and profitability.
We are subject to extensive government regulation and industry standards relating to the products we manufacture as well as how we conduct our business, including regulations and standards relating to labor and employment practices, workplace health and safety, the environment, sourcing and import/export practices, the market sectors we support, privacy and data protection, the regulations that apply to government contracts, and many other facets of our operations. The regulatory climate in the U.S. and other countries has become increasingly complex and fragmented, and regulatory activity has increased in recent periods. Failure or noncompliance with such regulations or standards could have an adverse effect on our reputation, customer relationships, profitability and results of operations. In addition, we regularly enter into a large number of complex contractual arrangements as well as operate pursuant to the terms of a significant number of ongoing intricate contractual arrangements. Our failure or our customers’ failure to comply with the terms of such arrangements could expose us to claims or other demands and could have an adverse effect on our reputation, customer relationships, profitability and results of operations.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes which could have an adverse effect on our business.
We are registered with the FDA and are subject to periodic inspection by the FDA for compliance with its Quality Management System Regulation/Medical Device Good Manufacturing Practices requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures.
Also, our US facilities are ITAR compliant which is required for our manufacturing of defense related products. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring. If any inspection reveals noncompliance with these regulations, it could adversely affect our operations.
Our international operations are, and will continue to be, subject to risks relating to changes in foreign legal and regulatory requirements.
It can be costly and time-consuming for the Company and our customers to obtain and maintain regulatory approvals and certifications to operate in these markets. Product approvals subject to regulations might not be granted for new medical devices on a timely basis, if at all. Proposed new regulations or changes to regulations could result in the need to incur significant additional costs to comply. Failure of the Company or any of its customers operating in these markets to effectively respond to changes to applicable laws and regulations or comply with existing and future laws and regulations may have a negative effect on the Company’s business, financial condition, results of operations and cash flows.
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Complying with securities laws, tax laws, accounting policies and regulations, and subsequent changes, may be costly for us and adversely affect our financial statements.
New or changing laws, regulations, policy and standards relating to corporate governance and public disclosure, including SEC and Nasdaq regulations, domestic or international tax legislation and the implementation of significant changes in U.S. GAAP, present challenges due to complexities, assumptions and judgements required to implement. We apply judgments based on our understanding, interpretation and analysis of the relevant facts, circumstances, historical experience and valuations, as appropriate. As a result, actual amounts could differ from those estimated at the time the financial statements are issued. In addition, implementation may change the financial accounting or reporting standards that govern the preparation of our financial statements or authoritative entities could reverse their previous interpretations or positions on how various financial accounting or reporting standards should be applied. These changes may be difficult to predict and implement and could materially or otherwise impact how we prepare and report our estimates, uncertainties, financial statements, operating results and financial condition. Our efforts to comply with evolving laws, regulations, accounting policies and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention from net sales-generating activities to compliance activities and may have an adverse effect on our financial statements, including cash flows.
Anti-Corruption and Trade Laws - We may incur costs and suffer damages if our employees, agents, or suppliers violate anti-bribery, anti-corruption or trade laws and regulations.
Laws and regulations related to bribery, corruption and trade, and enforcement thereof, are increasing in frequency, complexity and severity on a global basis. The continued geographic expansion of our business into China and Mexico increases our exposure to, and cost of complying with, these laws and regulations. If our internal controls and compliance program do not adequately prevent or deter our employees, agents, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions.
Non-compliance with environmental laws may result in restrictions and could adversely affect operations.
Our operations are regulated under a number of federal, state, and foreign environmental and safety laws and regulations that govern the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of such materials. These laws and regulations include the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as well as similar federal, state and foreign laws. Compliance with these environmental laws is a major consideration for us due to our manufacturing processes and materials. It is possible we may be subject to potential financial liability for costs associated with the investigation and remediation at our sites; this may have an adverse effect on operations. We have not incurred significant costs related to compliance with environmental laws and regulations and we believe that our operations comply with all applicable environmental laws.
Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. We operate in environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes or restrictions on discharge limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capital investment or relocation. It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition, and results of operations.
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Global climate change and related regulations could negatively affect the Company.
Changes in environmental and climate change laws or regulations, including laws relating to Green House Gas (“GHG”) emissions, could lead to new or additional investment in the Company’s facilities and could increase environmental compliance expenditures. Changes in climate change concerns including GHG emissions, and the regulation of such concerns including climate-related disclosures, could subject the Company to additional costs and restrictions, including increased energy and raw material costs and other compliance requirements which could negatively impact the Company’s reputation, business, capital expenditures, results of operations and financial position.
Natural disasters, such as tornadoes and earthquakes, and possible future changes in climate could negatively impact our business and supply chain. Our properties may be exposed to rare catastrophic weather events, such as severe storms and/or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase.
If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We are subject to Federal, State, and local laws, rules and regulations governing the use, discharge, storage, handling, and disposal of biological material, chemicals, and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, remediation costs, and any related penalties or fines. This liability could exceed our resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could have a significant impact on our operating results.
If we are not able to comply with Department of Defense cybersecurity requirements, our net sales from defense contractors could be reduced.
In 2019, the U.S. Department of Defense announced the development of Cybersecurity Maturity Model Certification (“CMMC”) as a framework to assess and enhance the cybersecurity posture of the Defense Industrial Base (“DIB”), particularly as it relates to controlled unclassified information within the supply chain. CMMC is designed to ensure that contractors providing services to the U.S. Department of Defense have implemented cybersecurity controls and processes to adequately protect information that resides on DIB systems and networks. We are working to comply with CMMC requirements with the intention of seeking CMMC level 2 compliance in 2025. If we are unsuccessful in our efforts to timely comply with CMMC requirements, our ability to maintain contracts with customers that are defense contractors and resulting net sales may be impacted negatively.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 1C. Cybersecurity
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| ● | Multi-Layered
Defense and Continuous Monitoring – We work to protect our computing environments and products from cybersecurity threats
through multi-layered defenses and apply lessons learned from our defense and monitoring efforts to help prevent future attacks.
We utilize data analytics to detect anomalies and search for cyber threats. |
| ● | Third-Party Risk Assessments – We conduct information security assessments before sharing or allowing the hosting of sensitive data in computing environments managed by third parties. |
| ● | Training and Awareness – We provide awareness training to our employees to help identify, avoid and mitigate cybersecurity threats. Our employees with network access participate periodically in required training, including phishing, spear phishing and other security and awareness training. |
| ● | Supplier Engagement – We review critical third-party systems at least annually, including the various System and Organizational Controls (“SOC”) reports or perform risk assessments. |
Item 2. Properties
Administration
Our corporate headquarters consists of an approximately 14,000 square feet building located in Maple Grove, Minnesota, a northwestern suburb of Minneapolis, Minnesota, and its lease expires August 2033.
Manufacturing facilities
Our manufacturing facilities are in good operating condition, and we believe our overall production capacity is sufficient to handle our foreseeable manufacturing needs and customer requirements. The following are our manufacturing facilities as of December 31, 2024:
| Manufacturing Space | Office Space | Total | ||||||||||||||||
| Location | Own/Lease | Lease End Date | Square Feet | Square Feet | Square Feet | |||||||||||||
| Bemidji, MN | Lease | August 31, 2035 | 56,000 | 13,000 | 69,000 | |||||||||||||
| Blue Earth, MN (1) | Own | 92,000 | 48,000 | 140,000 | ||||||||||||||
| Milaca, MN | Lease | June 30, 2030 | 15,000 | 5,000 | 20,000 | |||||||||||||
| Mankato, MN | Lease | August 31, 2035 | 43,000 | 15,000 | 58,000 | |||||||||||||
| Monterrey, Mexico | Lease | January 24, 2029 | 67,000 | 10,000 | 77,000 | |||||||||||||
| Suzhou, China | Lease | February 28, 2024 | 27,000 | 3,000 | 30,000 | |||||||||||||
| Suzhou, China | Lease | January 20, 2027 | 15,000 | - | 15,000 | |||||||||||||
| Suzhou, China | Lease | October 17, 2026 | 15,000 | - | 15,000 | |||||||||||||
| Suzhou, China | Lease | November 22, 2028 | 2,000 | - | 2,000 | |||||||||||||
| (1) | In December 2024 we ceased manufacturing at our Blue Earth, MN facility and are currently seeking to sell this facility and underlying land. |
Item 3. Legal Proceedings
From time to time, we are involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 12, 2025, there were 590 shareholders of record. Our stock is listed on the NASDAQ Capital Market under the symbol “NSYS”. We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in the foreseeable future. We did not declare or pay a cash dividend in 2024 or 2023. Future dividend policy and payments, if any, will depend upon earnings, our financial condition, our need for funds, limitations on payments of dividends present in our current or future debt agreements and other factors.
Stock price comparisons (NASDAQ):
| During the Three Months Ended | Low | High | ||||||
| March 31, 2024 | $ | 9.13 | $ | 14.35 | ||||
| June 30, 2024 | $ | 10.19 | $ | 19.15 | ||||
| September 30, 2024 | $ | 11.00 | $ | 15.55 | ||||
| December 31, 2024 | $ | 9.53 | $ | 13.90 | ||||
| March 31, 2023 | $ | 10.37 | $ | 16.52 | ||||
| June 30, 2023 | $ | 9.00 | $ | 11.26 | ||||
| September 30, 2023 | $ | 8.76 | $ | 10.89 | ||||
| December 31, 2023 | $ | 7.45 | $ | 10.27 | ||||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In May 2024, our Board of Directors approved a share repurchase program authorizing up to $100,000 in share repurchases. This share repurchase program commenced in August 2024 and expired in October 2024 upon completion of the program. We purchased 8,185 shares of the Company’s common stock at an average price of $12.09 per share.
Equity Compensation Plan Information
Certain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. As of December 31, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and are currently seeking to sell this facility. We also have facilities in Monterrey, Mexico and Suzhou, China.
Our net sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support. Quality, on-time delivery, and reliability are of upmost importance. Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.
Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.
All dollar amounts are stated in thousands of U.S. dollars.
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Operating Results
Net Sales. Net sales for the year ended December 31, 2024 and 2023 were $128,133 and $139,332, respectively, a year over year decrease of $11,199 or 8.0%. The following is a summary of net sales by our major industry markets:
Year Ended December 31, | ||||||||||||||||
| 2024 | 2023 | Increase (Decrease) | ||||||||||||||
| Medical Device | $ | 34,636 | $ | 38,758 | $ | (4,122 | ) | (10.6 | )% | |||||||
| Medical Imaging | 37,492 | 39,908 | (2,416 | ) | (6.1 | )% | ||||||||||
| Industrial | 35,517 | 40,113 | (4,596 | ) | (11.5 | )% | ||||||||||
| Aerospace and Defense | 20,488 | 20,553 | (65 | ) | (0.3 | )% | ||||||||||
| Total net sales | $ | 128,133 | $ | 139,332 | $ | (11,199 | ) | (8.0 | )% | |||||||
| ● | Medical Device: Net sales to our Medical Device customers decreased $4,122, or 10.6%, in the year ended December 31, 2024 as compared with the same period in 2023. The decrease was primarily due to inventory re-balancing with existing customers and timing of customer product launches. | |
| ● | Medical Imaging: Net sales to our Medical Imaging customers decreased $2,416, or 6.1%, in the year ended December 31, 2024 as compared with the same period in 2023. The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower average sales prices as we moved several programs to our Monterrey, Mexico facility. | |
| ● | Industrial: Net sales to our Industrial customers decreased $4,596, or 11.5%, in the year ended December 31, 2024 as compared with the same period in 2023. The decrease in net sales was primarily due to Industrial customers’ efforts to reduce their inventory investments, delayed program launches with several customers as well as sales headwinds in several markets for which we provide products for these customers. | |
| ● | Aerospace and Defense: Net sales to our Aerospace and Defense customers decreased $65, or 0.3%, in the year ended December 31, 2024, as compared with the same period in 2023. Growth in this market was negatively impacted by the closure of Blue Earth facility in December 2024 and the movement of these customers programs to our Bemidji facility as well as the timing of customer approvals to approve this move. As a result, fourth quarter net sales in this market decreased from $6,055 in 2023 to $2,609 in 2024. |
Backlog. Our 90-day shipment backlog as of December 31, 2024 was $26,451, down 24.8% from December 31, 2023. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.
Our total order backlog as of December 31, 2024 was $65,852, a 28.2% decrease from December 31, 2023. As the supply chain lead times have normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. We continue to experience reduced visibility to net sales in the next several quarters as customers are rebalancing their inventories and, therefore, deferring the placement of some orders, as well as shortening their order to fulfilment lead teams.
90-day and total shipment backlog by our major industry markets are as follows:
| December 31, 2024 | December 31, 2023 | % Change | ||||||||||||||||||||||
| 90 Day | Total | 90 Day | Total | 90 Day | Total | |||||||||||||||||||
| Medical Device | $ | 6,953 | $ | 21,706 | $ | 10,350 | $ | 34,471 | (32.8 | )% | (37.0 | )% | ||||||||||||
| Medical Imaging | 7,168 | 10,353 | 7,757 | 13,122 | (7.6 | )% | (21.1 | )% | ||||||||||||||||
| Industrial | 5,173 | 7,306 | 8,644 | 13,857 | (40.2 | )% | (47.3 | )% | ||||||||||||||||
| Aerospace and Defense | 7,157 | 26,487 | 8,416 | 30,234 | (15.0 | )% | (12.4 | )% | ||||||||||||||||
| Total backlog | $ | 26,451 | $ | 65,852 | $ | 35,167 | $ | 91,684 | (24.8 | )% | (28.2 | )% | ||||||||||||
The 90-day and total backlog as of December 31, 2024 includes orders already recognized in net sales and included in the contract asset value of $13,792.
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Operating Costs and Expenses.
Net sales, cost of goods sold, gross profit, and operating costs were as follows:
| Year Ended December 31, | ||||||||||||||||
| 2024 | 2023 | Increase/(Decrease) | ||||||||||||||
| Net sales | $ | 128,133 | $ | 139,332 | $ | (11,199 | ) | (8.0 | )% | |||||||
| Cost of goods sold | 111,411 | 116,228 | (4,817 | ) | (4.1 | )% | ||||||||||
| Gross profit | 16,722 | 23,104 | (6,382 | ) | (27.6 | )% | ||||||||||
| Gross margin percentage (1) | 13.1 | % | 16.6 | % | (353 ) | bpc(2) | ||||||||||
| Selling | 3,446 | 3,598 | (152 | ) | (4.2 | )% | ||||||||||
| % of Net sales | 2.7 | % | 2.6 | % | ||||||||||||
| General and administrative | 11,709 | 12,354 | (645 | ) | (5.2 | )% | ||||||||||
| % of Net sales | 9.1 | % | 8.9 | % | ||||||||||||
| Research and development | 1,191 | 1,199 | (8 | ) | (0.7 | )% | ||||||||||
| % of Net sales | 0.9 | % | 0.9 | % | ||||||||||||
| Restructuring charges | 571 | - | 571 | - | % | |||||||||||
| % of Net sales | 0.4 | % | - | % | ||||||||||||
| Operating (loss) income | (195 | ) | 5,953 | (6,148 | ) | (103.3 | )% | |||||||||
| % of Net sales | (0.2 | )% | 4.3 | % | ||||||||||||
| (1) | Gross margin percentage is defined as gross profit as a percentage of net sales. | |
| (2) | Basis points change in gross margin percentage. |
Gross profit and gross margins. Gross profit as a percent of net sales was 13.1% and 16.6% for the years ended December 31, 2024 and 2023, respectively. The decrease in gross profit as a percentage of net sales in 2024 as compared with the same prior-year periods was the result of lower net sales, as discussed above, and corresponding lower operating leverage from reduced production at a number of our manufacturing facilities, as well as incremental costs associated included in costs of goods sold related to the closure of our Blue Earth facility and moving production to our Bemidji facility.
Selling expenses. Selling expenses decreased slightly in the year ended December 31, 2024 as compared with 2023 as the result of lower incentive compensation expense in 2024.
General and administrative expenses. General and administrative expenses decreased $645, or 5.2% in the year ended December 31, 2024 as compared with the 2023 as the result of lower incentive compensation expense in 2024.
Restructuring charges. Restructuring charges were $571 in the year ended December 31, 2024 for employee retention bonuses, disposal and moving costs associated with the closure of our Blue Earth facility.
Operating (loss) income. Operating (loss) income for the years ended December 31, 2024 and 2023 were $(195), or (0.2)% of net sales, and as compared with $5,953, or 4.3% of net sales, respectively. The decreases were driven by lower in net sales and resulting gross margin, incremental costs associated with the closure of the Blue Earth facility included in costs of sales as well as restructuring expense, offset by lower incentive compensation of $1,643 in 2024 as we did not meet our bonus objectives.
Other expense
Interest expense. Interest expense was $744 and $487 for the years ended December 31, 2024 and 2023, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Income taxes. Our effective tax rates for the years ended December 31, 2024 and 2023 were (37.9)% and 25.8%, respectively. The primary drivers of the change in the effective tax rates relate to changes in pretax book income between the years and the 2023 recording of a $2.6 million tax benefit from the reduction of our valuation allowance for deferred tax assets.
Net (Loss) Income. Our net loss in 2024 was $1,295 or $0.47 per diluted and basic common share. Our net income in 2023 was $6,874 or $2.38 per diluted and $2.53 per basic common share.
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Liquidity and Capital Resources
We believe that our existing financing arrangements, anticipated cash flows from operations, and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next year from the date of this filing with the Securities and Exchange Commission.
Credit Facilities
On February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.
The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Further, the Amendment defers the Company’s compliance with these ratios until the third quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 3.5 times or less in the third quarter of 2025, and 2.5 times or less for each subsequent quarter; and (b) a minimum fixed charge coverage ratio to 1.25 times for the third quarter of 2025 and each quarter thereafter. The Company must also maintain EBITDA (earnings before interest, taxes depreciation and amortization) as of the end of the second quarter and third quarter of at least $1,600. In addition, the Amendment requires the Company to maintain unrestricted cash and Revolver availability of at least $2.5 million at each month end in the second quarter of 2025, $2.75 million at month end July 2025 and $3.0 million at the end of August and September 2025. The Amendment also requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. We have included the Amendment No. 1 to Credit Agreement, Waiver, and Consent as an exhibit to this filing and any description of that document contained in this risk factor is only a summary and is qualified by its entirety by the Amendment No. 1 to Credit Agreement, Waiver, and Consent.
Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 7.7% and 8.3% as of December 31, 2024 and 2023, respectively. We had borrowings on our line of credit of $8,695 and $5,846 outstanding as of December 31, 2024 and 2023, respectively. As of December 31, 2024 we had unused availability on the line of credit of $6,305.
The Company has an interim funding agreement as of December 31, 2024 with a bank related to $345 of deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of December 31, we have $345 outstanding on the interim funding agreement for equipment.
The line of credit is shown net of debt issuance costs of $61 and $31 on the consolidated balance sheets as of December 31, 2024 and December 31, 2023, respectively.
Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000 Renminbi (RMB) (approximately 1.4 million USD) that expires on September 9, 2025. No amounts were outstanding under this financing arrangement as of December 31, 2024 or 2023. The interest rate as of December 31, 2024 was approximately 4%.
| 22 |
Cash flows for the years ended December 31, 2024 and 2023 are summarized as follows:
| 2024 | 2023 | |||||||
| Cash flows provided by (used in): | ||||||||
| Operating activities | $ | (2,250 | ) | $ | 1,769 | |||
| Investing activities | (1,263 | ) | (1,284 | ) | ||||
| Financing activities | 2,765 | (1,281 | ) | |||||
| Effect of exchange rate changes on cash | (11 | ) | (10 | ) | ||||
| Net change in cash and cash equivalents | $ | (759 | ) | $ | (806 | ) | ||
Cash used in operating activities for the year ended December 31, 2024 was $2,250 compared with cash provided by operations of $1,769 for the year ended December 31, 2023. In 2024, the cash used in operating activities was driven by the timing of accounts payable payments and the payment of accrued bonus expenses. In 2023, the cash provided by operating activities was driven by net income.
Net cash used in investing activities was $1,263 for the year ended December 31, 2024 and net cash used in investing activities was $1,284 for the year ended December 31, 2023. Cash used in investing activities in both years primarily relates to the purchase of property and equipment.
Net cash provided by financing activities in 2024 of $2,765 consisted primarily of net proceeds from the line of credit of $2,849 and proceeds from notes payable of $345. The cash used by financing activities in 2023 of $1,281 consisted primarily of net payments on the line of credit of $1,050 and capital lease payments of $390.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, the reported amounts of net sales and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, valuation allowance for inventories, allowance for credit losses, realizability of deferred tax assets and long-lived asset impairment testing.
We base our estimates and assumptions on our historical experience and on various other information available to us at the time that these estimates and assumptions are made. We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from our estimates primarily due to incorrect sales forecasting. We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions. If, for any reason, those estimates, and assumptions vary substantially it would also impact our financial results.
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Our accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements.
Revenue
Recognition
Our net sales are comprised of product, engineering services and repair services. All net sales are 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 net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales. 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. Most of our contracts have a single performance obligation and require that we provide services and products that are unique to each customer’s designed products and have no alternative usage. As of December 31, 2024, the Company has recorded a contract asset of $13,792 for unbilled customer net sales included in net sales. Net sales are 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 consolidated statements of operations and comprehensive (loss) income. Sales, value added, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from net sales) 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.
Long-Lived Assets Impairment
We evaluate long-lived assets, primarily property and equipment, 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. As of December 31, 2024, the Company’s common stock was trading at a value less than the Company’s net equity value. As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was required as of December 31, 2024.
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Inventory Valuation
Inventory are recorded at the lower of cost or net realizable value for inventory that may have a lower net realizable value than cost or quantities in excess of future production needs. Certain raw material inventories are purchased solely to meet a customer’s unique manufacturing requirements. We seek to require our customers to prepay for end of life or certain inventory in excess of current customer order quantities. We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis. This process includes an evaluation of our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers. We periodically review the underlying inventory reserve assumptions based on recent trends. As of December 31, 2024, we had an inventory reserve of $1,446.
Income Taxes
Significant judgment is required in evaluating our tax positions and in determining income tax expense, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. We evaluate the recoverability of deferred tax assets based on available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. We establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of the deferred tax assets will not be realized. In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period. Future adjustments (either increases or decreases) to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets. In 2023, we recorded a $2,600 tax benefit as we reversed a previously established valuation allowance against our net U.S. deferred tax assets. During 2024, we concluded that it was more likely than not we would realize our recorded net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income or tax liability in either the carryback or carry-forward periods under the tax law. Due to significant estimates used to establish the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record additional adjustments to the valuation allowance in future reporting periods that could have a material effect on our results of operations.
We establish reserves for uncertain tax positions when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. If we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our results of operations. Our reserve for uncertain tax positions aggregated $97 as of December 31, 2024.
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New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases. 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. Discussion of these factors is incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Item 8. Financial Statements and Supplementary Data
(The remainder of this page was intentionally left blank.)
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Nortech Systems Incorporated and Subsidiaries:
Opinion on the Financial Statements
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved or are especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/
We have served as the Company’s auditor since 2017.
March 31, 2025
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
(IN THOUSANDS, EXCEPT SHARE DATA)
| 2024 | 2023 | |||||||
| Net sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Restructuring charges | ||||||||
| Total operating expenses | ||||||||
| (Loss) income from operations | ( | ) | ||||||
| Other expense | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| (Loss) income before income taxes | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Net (loss) income per common share: | ||||||||
| Basic (in dollars per share) | $ | ( | ) | $ | ||||
| Weighted average number of common shares outstanding - basic (in shares) | ||||||||
| Diluted (in dollars per share) | $ | ( | ) | $ | ||||
| Weighted average number of common shares outstanding – diluted (in shares) | ||||||||
| Other comprehensive (loss) income | ||||||||
| Foreign currency translation | ( | ) | ( | ) | ||||
| Comprehensive (loss) income, net of tax | $ | ( | ) | $ | ||||
See accompanying notes to consolidated financial statements.
| 29 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2024 AND 2023
(IN THOUSANDS, EXCEPT SHARE DATA)
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, less allowances of $ | ||||||||
| Inventories, net | ||||||||
| Contract assets | ||||||||
| Prepaid assets and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets | ||||||||
| Deferred tax assets | ||||||||
| Other intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and commissions | ||||||||
| Customer deposits | ||||||||
| Current portion of operating leases | ||||||||
| Current portion of finance lease obligations | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term line of credit | ||||||||
| Long-term operating lease obligations, net of current portion | ||||||||
| Long-term finance lease obligations, net of current portion | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
(IN THOUSANDS)
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Compensation on stock-based awards | ||||||||
| Deferred taxes | ( | ) | ( | ) | ||||
| Change in accounts receivable allowance | ( | ) | ||||||
| Change in inventory reserves | ||||||||
| Gain on disposal of property and equipment | ( | ) | ||||||
| Changes in current operating items | ||||||||
| Accounts receivable | ( | ) | ||||||
| Employee retention credit receivable | ||||||||
| Inventories | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Income taxes | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued payroll and commissions | ( | ) | ( | ) | ||||
| Customer deposits | ||||||||
| Other accrued liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of property and equipment | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit | ||||||||
| Payments to line of credit | ( | ) | ( | ) | ||||
| Proceeds from notes payable | ||||||||
| Principal payments on financing leases | ( | ) | ( | ) | ||||
| Share repurchases | ( | ) | ||||||
| Stock option exercises | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents - beginning of year | ||||||||
| Cash and cash equivalents - end of year | $ | $ | ||||||
| Reconciliation of cash and restricted cash reported within the consolidated balance sheets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash reported in the consolidated statements of cash flows | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Supplemental noncash investing and financing activities: | ||||||||
| Property and equipment purchases in accounts payable | $ | $ | ||||||
| Property acquired under operating leases | ||||||||
| Equipment acquired under finance leases | ||||||||
See accompanying notes to consolidated financial statements.
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
(IN THOUSANDS)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Stock option exercises | - | |||||||||||||||||||||||||||||||
| Cumulative adjustment related to adoption of ASC 326 (current expected credit loss) | - | - | ( |
( | ) | ( | ) | |||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | ( |
$ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
| Balance | $ | $ | ( |
$ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Stock option exercises | - | |||||||||||||||||||||||||||||||
| Stock repurchases | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Nortech Systems Incorporated and Subsidiaries (“the Company”, “we”, “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Nature of Business
The Company, organized in December 1990, is a provider of engineering design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou, China.
Principles of Consolidation
The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited as well as its wholly-owned subsidiary, Nortech Systems Suzhou Company, Limited. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Estimates also affect the reported amounts of net sales and expense during the reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, allowance for doubtful accounts, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.
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. Restricted cash as of December 31, 2023 was $
| 33 |
Accounts Receivable and Allowance for Expected Losses
We
grant credit to customers in the normal course of business. Accounts receivable is unsecured and presented net of an allowance for doubtful
accounts. The allowance for expected losses was $
When we record customer receivables and contract assets arising from net sales 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 write-offs of bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms 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 consist of finished goods, raw materials and work-in-process and 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 production of our products. Inventory reserves are maintained for inventories that may have a lower value than stated or quantities in excess of future production needs.
We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions.
Inventories are as follows as of December 31:
SCHEDULE OF INVENTORIES
| 2024 | 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Reserves | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 34 |
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows:
SCHEDULE OF ESTIMATED USEFUL LIVES
| (in years) | ||
| Building | ||
| Leasehold improvements | ||
| Manufacturing equipment | ||
| Office and other equipment |
Property and equipment as of December 31, 2024 and 2023:
SCHEDULE OF PROPERTY AND EQUIPMENT
| 2024 | 2023 | |||||||
| Land | $ | $ | ||||||
| Building and leasehold improvements | ||||||||
| Manufacturing equipment | ||||||||
| Office and other equipment | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Long-Lived Asset Impairment
We
evaluate long-lived assets, primarily property and equipment, 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. As of December 31, 2024, the Company’s common stock was trading at a value less than the Company’s
net equity value. As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was
required as of December 31, 2024.
Assets Held for Sale
We classify long-lived assets as held-for-sale when the criteria for such classification are met. These criteria include management’s commitment to a plan to sell the asset, the asset being available for immediate sale in its present condition, an active program to locate a buyer, the sale being probable and expected to be completed within one year, and the asset being actively marketed for sale at a price that is reasonable in relation to its current fair value.
Preferred Stock
Preferred
stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of
Revenue Recognition
Our net sales are comprised of product, engineering services and repair services. All net sales are 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 net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales. 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.
Net sales are measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, net sales are 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 net sales) basis. Shipping and handling costs are included in cost of goods sold.
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The
majority of our net sales are 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 net sales are recognized at a point in time,
generally upon shipment. Net sales under contract manufacturing agreements that was recognized over time accounted for approximately
Accounting for contract manufacturing agreements involves the use of various techniques to estimate total net sales and costs. We estimate profit on these agreements as the difference between total estimated net sales 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 contractual 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 net sales 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 net sales as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.
Contract Assets
Contract assets, recorded as such in the consolidated balance sheets, consist of unbilled amounts related to net sales recognized over time. Changes in the contract assets balance during the years ended December 31, 2024 and 2023 were as follows:
SCHEDULE OF CONTRACT ASSETS
| Balance outstanding as of December 31, 2022 | $ | |||
| Increase (decrease) attributed to: | ||||
| Amounts transferred over time to contract assets | ||||
| Allowance for current expected credit losses | ( | ) | ||
| Amounts invoiced during the period | ( | ) | ||
| Balance outstanding as of December 31, 2023 | $ | |||
| Increase (decrease) attributed to: | ||||
| Amounts transferred over time to contract assets | ||||
| Allowance for current expected credit losses | ||||
| Amounts invoiced during the period | ( | ) | ||
| Balance outstanding as of December 31, 2024 | $ |
We expect substantially all the remaining performance obligations for the contract assets recorded as of December 31, 2024, 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.
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The following tables summarize our net sales by market for the years ended December 31, 2024 and 2023:
SCHEDULE OF NET SALES BY MARKET
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
| Year Ended December 31, 2024 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | $ | $ | $ | ||||||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
| Year Ended December 31, 2023 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | $ | $ | $ | ||||||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
Noncash consideration represents material provided by the customer used in the build of the product.
Product Warranties
We provide limited warranty for the replacement or repair of defective product within a specified time period after the sale at no cost to our customers. We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including, without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred under our limited warranty and provide a reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claim costs are not material given the nature of our products and services.
Advertising
Advertising
costs are charged to operations as incurred and aggregated to $
Income Taxes
We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally three years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
| 37 |
We use a Black-Scholes option-pricing model to determine the grant date fair value of our service-based incentive awards and recognize the expense on a straight-line basis over the vesting period. We determine the grant date fair value of our market-based incentive awards using a lattice simulation model and recognize the expense on a straight-line basis over the vesting period. The grant date fair value of restricted stock units is determined based on the closing market price of the Company’s common stock on the date of grant, with compensation expense recognized ratably over the applicable vesting period. See Note 8 – “Incentive Plans” for additional information.
Basic net (loss) income per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net (loss) 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 using the treasury stock method, unless their effect is antidilutive. For the years ended December 31, 2024 and 2023, there were restricted stock units and stock options totaling and , respectively, excluded from the computation of diluted weighted-average shares outstanding as their inclusion would be anti-dilutive. For the year ended December 31, 2023, the dilutive effect of outstanding stock options and non-vested restricted stock units were equivalent common shares and were included in the computation of diluted net income per common share.
Fair Value of Financial Instruments
The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash, accounts receivable, ERC receivable, accounts payable, and other assets and liabilities approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt and line of credit approximates its fair value.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability, reflecting the reporting entity’s own assumptions about the assumptions that market participants would use in pricing.
Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. We endeavor to use the best available information in measuring fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 3 – “Other Intangible Assets”, for more detail.
| 38 |
Foreign Currency Transactions
The
functional currency for our Mexico subsidiary is the US dollar. Foreign exchange transaction gains and losses attributable to exchange
rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a
long-term investment nature are recorded in general and administrative expense. The functional currency for our China subsidiary is the
Renminbi (“RMB”). Assets and liabilities of the China subsidiary are translated from RMB into U.S. dollars at period-end rates,
while income and expense are translated at the weighted-average exchange rates for the period. The related translation adjustments are
reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within shareholders’ equity. Foreign
currency translation losses decreased consolidated shareholders’ equity by $
Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the consolidated statements of operations and comprehensive (loss) income. Net foreign currency
transaction losses included in the determination of net (loss) income was $
Adoption of New Accounting Standards
In
June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 assets
are 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 U.S. 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
and recognized an allowance for credit losses related to accounts receivable and contract assets of $
| 39 |
In November 2023, the FASB issued ASU 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure. The ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses We adopted ASU 2023-07 during the year ended December 31, 2024. See Note 9 – “Segment Information” in the accompanying notes to these consolidated financial statements.
Recently Issued New Accounting Standards
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
In November 2024, the FASB issued ASU No. 2024-03 (Subtopic 220-40), Disaggregation of Income Statement Expenses. The ASU requires public entities to disaggregate, in a tabular presentation, certain income statement expenses into different categories, such as purchases of inventory, employee compensation, depreciation, and intangible asset amortization. The guidance is effective for fiscal years beginning after December 15, 2026, with early adoption permitted, and may be applied retrospectively. The Company is currently evaluating the impact of adopting the new ASU on its consolidated financial statements and related disclosures.
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. We maintain
our excess cash balances in checking accounts at
We
have certain customers whose net sales individually represented 10% or more of net sales, or whose accounts receivable balances individually
represented 10% or more of total accounts receivable. One customer accounted for at
NOTE 3. OTHER INTANGIBLE ASSETS
Finite life intangible assets as of December 31, 2024 and 2023 are as follows:
SCHEDULE OF INTANGIBLE ASSETS
| Customer Relationships | Patents | Total | ||||||||||
| Balance as of January 1, 2023 | $ | $ | $ | |||||||||
| Amortization | ||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | |||||||||
| Balance | $ | $ | $ | |||||||||
| Amortization | ||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | |||||||||
| Balance | $ | $ | $ | |||||||||
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
Amortization
expense of finite life intangible assets was $
Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows:
SCHEDULE OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE
| Year | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
| 40 |
NOTE 4. FINANCING ARRANGEMENTS
We
had a $
On
February 29, 2024, we replaced the asset backed line of credit agreement with a $
The
Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges
coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month
results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding
borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting
requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual
capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We
were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in
the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we
amended (the “Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge
ratio as of December 31, 2024, and March 31, 2025. Further, the Amendment defers the Company’s compliance with these ratios
until the third quarter of 2025 at which time the Company must maintain
Under
the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index
rate. Under the prior asset backed line of credit agreement with Bank of America, the line of credit borrowing availability was
restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY)
index rate. Our line of credit bears interest at a weighted-average interest rate of
The
Company has an interim funding agreement as of December 31, 2024 with a bank related to $
Our
China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of
| 41 |
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 to
The components of lease expense were as follows for the years ended December 31:
SCHEDULE OF COMPONENTS OF LEASE EXPENSE
| Lease Cost | 2024 | 2023 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease interest cost | ||||||||
| Finance lease amortization expense | ||||||||
| Total lease cost | $ | $ | ||||||
Supplemental balance sheets information related to leases was as follows as of December 31:
SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS INFORMATION RELATED TO LEASES
| Balance Sheets Location | 2024 | 2023 | ||||||||
| Assets | ||||||||||
| Operating lease assets | Operating lease assets | $ | $ | |||||||
| Finance lease assets | Property, plant and equipment | |||||||||
| Total leased assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Current operating lease liabilities | Current portion of operating lease obligations | $ | $ | |||||||
| Current finance lease liabilities | Current portion of finance lease obligations | |||||||||
| Noncurrent | ||||||||||
| Long-term operating lease liabilities | Long term operating lease liabilities, net | |||||||||
| Long term finance lease liabilities | Long term finance lease obligations, net | |||||||||
| Total lease liabilities | $ | $ | ||||||||
Supplemental cash flow information related to leases was as follows for the years ended December 31:
SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION
| 2024 | 2023 | |||||||
| Operating Leases | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Operating lease assets obtained in exchange for lease obligations | $ | $ | ||||||
The operating lease assets obtained in exchange for lease obligations in the year ended December 31, 2024 was largely due to the renewal of our lease in Maple Grove and Milaca, Minnesota, as well as leasing of additional space in our Suzhou, China facility.
Future maturities of lease liabilities were as follows:
SCHEDULE OF FUTURE PAYMENTS OF LEASE LIABILITIES
Operating Leases | Finance Leases | Total | ||||||||||
Operating Leases | Finance Leases | Total | ||||||||||
| 2025 | $ | $ | $ | |||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| 2029 | ||||||||||||
| Thereafter | ||||||||||||
| Total lease payments | $ | $ | $ | |||||||||
| Less: interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
| 42 |
The lease term and discount rate as of December 31, 2024 were as follows:
SCHEDULE OF LEASE TERM AND DISCOUNT RATE
| Weighted-average remaining lease term (years) | ||||
| Operating leases | ||||
| Finance leases | ||||
| Weighted-average discount rate | ||||
| Operating leases | % | |||
| Finance leases | % | |||
NOTE 6. INCOME TAXES
The income tax expense consists of the following for the years ended December 31:
SCHEDULE OF INCOME TAX EXPENSE
| 2024 | 2023 | |||||||
| Current | ||||||||
| Federal | $ | ( | ) | $ | ||||
| State | ||||||||
| Foreign | ||||||||
| Deferred | ||||||||
| Federal | ( | ) | ||||||
| State | ( | ) | ( | ) | ||||
| Foreign | ( | ) | ||||||
| Income tax expense (benefit) | $ | $ | ( | ) | ||||
The statutory rate reconciliation is as follows for the years ended December 31:
SCHEDULE OF INCOME TAX STATUTORY RATE RECONCILIATION
| 2024 | 2023 | |||||||
| Statutory rate | $ | ( | ) | $ | ||||
| State income tax | ( | ) | ||||||
| Effect of foreign operations | ( | ) | ( | ) | ||||
| Research and development | ( | ) | ( | ) | ||||
| Valuation allowance | ( | ) | ||||||
| Maquiladora tax | ||||||||
| US permanent differences | ( | ) | ( | ) | ||||
| Global intangible low-taxed income effect | ||||||||
| Withholding tax | ||||||||
| Other | ( | ) | ||||||
| Income tax expense (benefit) | $ | $ | ( | ) | ||||
Income and loss from operations before income taxes was derived from the following jurisdictions for the years ended December 31:
SCHEDULE OF INCOME AND LOSS FROM OPERATIONS BEFORE INCOME TAX
| 2024 | 2023 | |||||||
| United States | $ | ( | ) | $ | ||||
| Foreign | ||||||||
| Total | $ | ( | ) | $ | ||||
| 43 |
Deferred tax assets (liabilities) consist of the following for the years ended December 31:
SCHEDULE OF DEFERRED TAX ASSETS (LIABILITIES)
| 2024 | 2023 | |||||||
| Deferred tax assets | ||||||||
| Inventory | $ | $ | ||||||
| Net operating losses | ||||||||
| Accrued bonus | ||||||||
| Stock-based compensation | ||||||||
| Other accruals | ||||||||
| Lease accounting lease liability | ||||||||
| Capitalized research expenses | ||||||||
| Tax credit carryforwards | ||||||||
| Intangibles | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities | ||||||||
| Lease accounting lease asset | ( | ) | ( | ) | ||||
| Withholding tax | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Property and equipment | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
We regularly assess the need for a valuation allowance related to our deferred
income tax assets to determine, based on the weight of the available positive and negative evidence, whether it is more likely than not
that some or all of such deferred assets will not be realized. In our assessments, the Company considers recent financial operating results,
potential sources of taxable income, the reversal of existing taxable differences, taxable income in prior carryback years, if permitted
under tax law, and tax planning strategies. Based on our most recent assessment, for the year ended December 31, 2024, we
have concluded that our deferred income tax assets are more likely than not to be realized. Our consolidated balance sheets as of December 31, 2024 have a deferred tax asset of $
As
of December 31, 2024, for U.S. state purposes, we have a Minnesota research and development credit carry forward of $
The
Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017 and includes the requirement to capitalize and amortize
over years research and experimental expenditures beginning in 2022. As of December 31, 2024 and 2023 the deferred tax asset
associated with capitalized research and experimental expenditures was $
| 44 |
The tax effects from uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following tables set forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2024 and 2023:
SCHEDULE OF UNRECOGNIZED TAX BENEFIT LIABILITIES
| Balance as of January 1, 2023 | $ | |||
| Tax positions - additions | ||||
| Tax positions - reductions | ||||
| Balance as of December 31, 2023 | ||||
| Tax positions - additions | ||||
| Tax positions - reductions | ( | ) | ||
| Balance as of December 31, 2024 | $ |
Our policy is to accrue interest related to potential underpayment of income taxes with a corresponding increase in income tax expense. The liability for accrued interest as of December 31, 2024 and 2023 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our filed tax returns.
We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to federal and state and local income tax examinations for years before 2020.
NOTE 7. 401(K) RETIREMENT PLAN
We
have a 401(k) profit sharing plan (the “401(k) Plan”), a defined contribution plan, covering substantially all of our U.S.
employees. Employees are eligible to participate in the Plan after completing three months of service and attaining the age of
In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of shares. An additional , , and shares were authorized by the shareholders in March 2020, May 2022, May 2023 and May 2024, respectively.
Stock Options
We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the consolidated statements of operations and comprehensive (loss) income over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
| 45 |
We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding several subjective variables. These variables include, but are not limited to, our expected stock price, volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows:
| 2024 | 2023 | |||||||
| Stock option fair value assumptions: | ||||||||
| Risk-free interest rate | - | % | - | % | ||||
| Expected life (years) | .0 | |||||||
| Dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Weighted average grant date fair value of stock options granted | $ | $ | ||||||
Total compensation expense related to stock options was $ and $ for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, there was $ of unrecognized compensation which will vest and expense over the next years.
SCHEDULE OF OPTION ACTIVITY
| Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – January 1, 2023 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – December 31, 2024 | $ | $ | ||||||||||||||
| Exercisable on December 31, 2024 | $ | $ | ||||||||||||||
| 46 |
Restricted Stock Units (“RSUs”)
Total compensation expense related to the RSUs were $ and $ for the years ended December 31, 2024 and 2023, respectively. Total unrecognized compensation expense related to the RSUs was $, which will vest over the next years.
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| Shares | Weighted- Average Remaining Vesting Term (in years) | Aggregate Intrinsic Value | ||||||||||
| Outstanding – January 1, 2023 | ||||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ) | |||||||||||
| Outstanding – December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ) | |||||||||||
| Outstanding – December 31, 2024 | $ | |||||||||||
NOTE 9. SEGMENT INFORMATION
Our results of operations for the years ended December 31, 2024 and 2023 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. The Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets with over 50% of its net sales coming from the medical-related markets. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company servers. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Our chief operating decision maker (the “CODM”) is the Company’s President and Chief Executive Officer. The CODM regularly evaluates financial information on a consolidated basis to assess performance and allocate resources.
The following table presents selected financial information with respect to the Company’s single operating segment for the years ended December 31, 2024 and 2023:
SCHEDULE OF SEGMENT INFORMATION
| 2024 | 2023 | |||||||
| Net sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Restructuring charges | ||||||||
| Total operating expenses | ||||||||
| (Loss) income from operations | ( | ) | ||||||
| Other expense: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| (Loss) income before income taxes | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| 47 |
The Company’s long-lived tangible assets, including the Company’s operating lease assets recognized on the consolidated balance sheets were located as follows:
SCHEDULE OF LONG LIVED TANGIBLE ASSETS
| 2024 | 2023 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| China | ||||||||
| Total long-lived tangible assets | $ | $ | ||||||
Export net from our U.S. domestic operations
represent approximately
SCHEDULE OF NET SALES BY EMS INDUSTRY MARKETS
| 2024 | 2023 | |||||||
| Medical Device | $ | $ | ||||||
| Medical Imaging | ||||||||
| Industrial | ||||||||
| Aerospace and Defense | ||||||||
| Total net sales | $ | $ | ||||||
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with respect to these actions will not materially affect our consolidated financial statements or results of operations.
Change of Control Agreements
Since 2002, we entered into Change of Control Agreements (the Agreement(s)) with certain key executives (the Executive(s)). The Agreements provide an inducement for each Executive to remain as an employee in the event of any proposed or anticipated change of control in the organization, including facilitating an orderly transition, and to provide economic security for the Executive after a change in control has occurred.
In the event of an involuntary termination in connection with a change of control as defined in the agreements, each Executive would receive their base salary, annual bonus at time of termination, and continued participation in health, disability and life insurance plans for a period of three years for officers and two years for all other participants.
| 48 |
NOTE 11. RESTUCTURING CHARGES
During
the year ended December 31, 2024, we incurred restructuring charges of $
NOTE 12. EMPLOYEE RETENTION CREDIT AND PAYROLL TAX DEFERRAL
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for
the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. During the year ended December
31, 2023, the Company remitted $
NOTE 13. RELATED PARTY TRANSACTIONS
David
Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We had accounts receivable related to Abilitech of $
David
Kunin, our Chairman, is a minority owner (less than
NOTE 14. SUBSEQUENT EVENTS
On March 27, 2025, the Company amended its Revolver line of credit agreement as discussed in Note 4 – “Financing Arrangements.”
During February 2025, the Company determined its intent to sell the Blue Earth, Minnesota facility and classified the net book value of the property as held for sale. We are currently seeking to sell this facility in 2025.
| 49 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-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.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to management and the board of directors regarding the effectiveness of our internal control processes over the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2024. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework of 2013. Based on our assessment, we concluded that, as of December 31, 2024, our internal control over financial reporting was effective.
Changes in Internal Controls
There was no change in the Company’s internal control over financial reporting that occurred during our most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Rule 10b5-1 Trading Plans
During
the three months ended December 31, 2024, none of the Company’s directors or Section 16 officers
| 50 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the directors and executive officers of the Registrant will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Our Board has adopted a Code of Business Conduct and Ethics (“Code of Conduct”) that applies to all of our officers, directors and employees. We have posted a copy of our Code of Conduct on our website at www.nortechsys.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the Code of Conduct by posting such information on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report.
Item 11. Executive Compensation
Information regarding executive compensation of the Registrant will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management of the Registrant will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Information regarding executive compensation plans (including individual compensation arrangements) as of the end of the last fiscal year, on two categories of equity compensation plans (that is, plans that have been approved by security holders and plans that have not been approved by security holders) will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
| 51 |
The following table provides information about our equity compensation plans (including individual compensation arrangements) as of December 31, 2024.
| Plan category | Number of securities to be issued upon the exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) (2) | |||||||||
| Equity compensation plans approved by security holders | 154,000 | $ | 6.79 | 146,782 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 154,000 | $ | 6.79 | 146,782 | ||||||||
| (1) | Represents common shares issuable upon the exercise of outstanding options granted under the 2017 Incentive Compensation Plan (the 2017 Plan). |
| (2) | Represents common shares remaining available for issuance under the 2017 Plan of 146,782. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
| 52 |
PART IV
Item 15. Exhibits and Financial Statements Schedules
| 1. | Consolidated Financial Statements - Consolidated Financial Statements and related Notes are included in Part II, Item 8, and are identified in the Index on Page 25. |
| 2. | Consolidated Financial Statement Schedule - The following financial statement schedule and the Auditors’ report thereon is included in this Annual Report on Form 10-K: |
| All schedules are omitted because it is not required information, or the information is presented in the consolidated financial statements or related notes. |
| 3. | The following exhibits are incorporated herein by reference: |
| 53 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Registrant
| By: | /s/ Jay D. Miller | March 31, 2025 |
| Jay D. Miller | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Jay D. Miller | March 31, 2025 |
| Jay D. Miller | ||
| President and Chief Executive Officer (principal executive officer) and Director | ||
| By: | /s/ Andrew D. C. LaFrence | March 31, 2025 |
| Andrew D. C. LaFrence | ||
| Chief Financial Officer (principal financial and accounting officer) | ||
| By: | /s/ David B. Kunin | March 31, 2025 |
| David B. Kunin, Chairman and Director | ||
| By: | /s/ Stacy A. Kruse | March 31, 2025 |
| Stacy A. Kruse, Director | ||
| By: | /s/ Ryan P. McManus | March 31, 2025 |
| Ryan P. McManus, Director | ||
| By: | /s/ Debarati Sen | March 31, 2025 |
| Debarati Sen, Director | ||
| By: | /s/ Amy Fredregill | March 31, 2025 |
| Amy Fredregill, Director | ||
| By: | /s/ Dan Sachs | March 31, 2025 |
| Dan Sachs, Director | ||
| By: | /s/ Jose A. Peris | March 31, 2025 |
| Jose A. Peris, Director | ||
| 54 |
INDEX TO EXHIBITS
DESCRIPTIONS OF EXHIBITS
| 55 |
Exhibit 10.12
AMENDMENT NO. 1 TO CREDIT AGREEMENT, WAIVER, AND CONSENT
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT, WAIVER, AND CONSENT (this “Amendment”) is made and entered into effective as of March 27, 2025, by and between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (“Borrower”), and BANK OF AMERICA, N.A., a national banking association (together with its successors and assigns, the “Lender”).
RECITALS:
A. Borrower and Lender are parties to a certain Credit Agreement dated as of February 29, 2024 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms not otherwise defined in this Amendment shall have the meanings assigned to them in the Credit Agreement.
B. Borrower has requested that Lender (i) amend and modify certain terms and provisions of the Credit Agreement, (ii) waive the Existing Defaults (as defined below), and (iii) consent to the Blue Earth Disposition (as defined below).
C. Lender has agreed to so amend the Credit Agreement, waive the Existing Defaults, and consent to the Blue Earth Disposition, in each case upon the terms and subject to the conditions set forth in this Amendment.
AGREEMENTS:
NOW, THEREFORE, in consideration of the premises herein set forth and for other good and valuable consideration, the nature, receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Recitals. Borrower and Lender agree that the Recitals set forth above are true and correct.
2. Waivers.
a. Pursuant to Section 7.11(a) of the Credit Agreement, the Borrower was required to maintain a Consolidated Leverage Ratio of not greater than 2.50 to 1.00 as of each of December 31, 2024 and March 31, 2025 for the Measurement Period ended on each such date. The Borrower has advised Lender that the Consolidated Leverage Ratio for the Measurement Period ended (i) December 31, 2024 was greater than 2.50 to 1.00 and (ii) March 31, 2025 is expected to be greater than 2.50 to 1.00. Such non-compliance constitutes an Event of Default under Section 8.01(b) of the Credit Agreement (collectively, the “Leverage Default”).
b. Pursuant to Section 7.11(b) of the Credit Agreement, the Borrower was required to maintain a Consolidated Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 as of each of December 31, 2024 and March 31, 2025 for the Measurement Period ended on each such date. The Borrower has advised Lender that the Consolidated Fixed Charge Coverage Ratio for the Measurement Period ended (i) December 31, 2024 was less than 1.25 to 1.00 and (ii) March 31, 2025 is expected to be less than 1.25 to 1.00. Such non-compliance constitutes an Event of Default under Section 8.01(b) of the Credit Agreement (collectively, the “FCCR Default”, and together with the Leverage Default, collectively, the “Existing Defaults”).
c. The Borrower has requested that the Lender waive the Existing Defaults, and, subject to satisfaction of the conditions set forth in Section 5 of this Amendment, the Lender hereby waives the Existing Defaults.
d. The waiver described herein is limited to the Existing Defaults. Nothing in this Amendment shall be construed as waiving, consenting to, or modifying any other term or condition of the Credit Agreement, which remains in full force and effect in accordance with the original terms thereof. Furthermore, the waiver described herein shall not be deemed a waiver of, or in prejudice to, any and all other rights of the Lender pursuant to any Loan Document, or any applicable laws.
3. Consent.
a. The Borrower has advised the Lender that it wishes to Dispose of the real property it owns at 1930 West 1st Street, Blue Earth, MN 56013 to a third party in an arms’ length transaction on or prior to May 31, 2025 (or such later date as Lender agrees in its sole discretion) (the “Blue Earth Disposition”). Pursuant to Section 7.05 of the Credit Agreement, no Loan Party is permitted to make any Disposition, subject to certain exceptions that do not apply in this circumstance. The Borrower has requested that, notwithstanding the restrictions set forth in Sections 7.05 of the Credit Agreement, the Lender consent that the Borrower may consummate the Blue Earth Disposition. Subject to the satisfaction of the conditions set forth in Section 5 hereof and receipt by Lender of the net cash proceeds of the Blue Earth Disposition, the Lender hereby consents to the Blue Earth Disposition.
b. Except as expressly provided herein, all provisions of the Loan Documents remain in full force and effect and the foregoing consent shall not apply to any other or subsequent failure to comply with any Section identified above or any other provision of the Credit Agreement or any other Loan Document.
4. Amendments.
a. Section 1.1 of the Credit Agreement is hereby amended by amending and restating or inserting in their proper alphabetical order, as applicable, the following defined terms in their entirety as follows:
“Amendment No. 1 Effective Date” means March 27, 2025.
“Applicable Rate” means, for any day, the rate per annum set forth below opposite the applicable Level then in effect (based on the Consolidated Leverage Ratio), it being understood that the Applicable Rate for (a) Revolving Loans that are Base Rate Loans shall be the percentage set forth under the column “Revolving Loans” and “Base Rate”, (b) Revolving Loans that are Term SOFR Loans shall be the percentage set forth under the column “Term SOFR for Revolving Loans & Letter of Credit Fee”, (c) the Letter of Credit Fee shall be the percentage set forth under the column “Term SOFR for Revolving Loans & Letter of Credit Fee”, and (d) the Commitment Fee shall be the percentage set forth under the column “Commitment Fee”:
| Applicable Rate | ||||||||
| Level | Consolidated Leverage Ratio | Term
SOFR for Revolving Loans |
Base Rate for Revolving Loans | Commitment Fee | ||||
| 1 | <2.50 | 1.75% | 0.75% | 0.20% | ||||
| 2 | ≥2.50 | 2.75% | 1.75% | 0.20% | ||||
As of the Amendment No. 1 Effective Date, the Applicable Rate shall be set at Level 2. Any increase or decrease in the Applicable Rate resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first (1st) Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(a); provided, that, if a Compliance Certificate is not delivered when due in accordance with Section 6.02(a), then, Pricing Level 2 shall apply unless otherwise agreed to by the Lender, in each case as of the first (1st) Business Day after the date on which such Compliance Certificate was required to have been delivered and in each case shall remain in effect until the first (1st) Business Day following the date on which such Compliance Certificate is delivered. Any adjustment in the Applicable Rate shall be applicable to all Credit Extensions then existing or subsequently made or issued. In addition, at all times while the Default Rate is in effect, the highest rate set forth in each column of the Applicable Rate shall apply.
“Consolidated EBITDA” means, for any period, the sum of the following determined on a Consolidated basis, without duplication, for the Borrower and its Subsidiaries in accordance with GAAP: (a) Consolidated Net Income for the most recently completed Measurement Period; plus (b) the following to the extent deducted in calculating such Consolidated Net Income (without duplication), (i) Consolidated Interest Charges, (ii) the provision for federal, state, local and foreign income taxes payable, (iii) depreciation and amortization expense, (iv) non-cash losses from the translation of Mexico operations from Mexican pesos and Dollars, and (v) non-recurring or one-time cash charges, losses, or expenses (including restructuring, integration, severance, relocation, facility closure) in an aggregate amount not to exceed (A) for any Measurement Period from January 1, 2025 through September 30, 2025 and solely including such charges, losses, or expenses incurred and/or paid from April 1, 2024 through March 31, 2025, $750,000, and (B) for any Measurement Period beginning October 1, 2025, the lesser of (1) $750,000 or (2) 10% of Consolidated EBITDA; less (c) without duplication, and to the extent reflected as a gain or otherwise included in the calculation of Consolidated Net Income for such period, non-cash items increasing Consolidated Net Income for such period (excluding any such non-cash gains to the extent (i) there were cash gains with respect to such gains in past accounting periods, or (ii) there is a reasonable expectation that there will be cash gains with respect to such gains in future accounting periods).
“Consolidated Fixed Charge Coverage Ratio” means, as of any date of determination, the ratio of: (a) (i) Consolidated EBITDA, plus (ii) rentals paid or required to be paid under leases of real or personal, or mixed, property, less (iii) the aggregate amount of all non-financed cash Capital Expenditures, less (iv) the aggregate amount of federal, state, local and foreign income taxes paid in cash, less (v) Restricted Payments paid in cash; to (b) the sum of (i) Consolidated Interest Charges to the extent paid in cash, (ii) the aggregate principal amount of all redemptions or similar acquisitions for value of outstanding debt for borrowed money or regularly scheduled principal payments (determined without giving effect to any reduction of such scheduled principal payments resulting from the application of any voluntary or optional prepayments made during such period), but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under Section 7.02, and (iii) rentals paid or required to be paid under leases of real or personal, or mixed, property, in each case, of or by the Borrower and its Subsidiaries for the most recently completed Measurement Period.
“Designated Conditions” means, for any Measurement Period beginning with the last day of the fiscal quarter ending March 31, 2025: (a) the Borrower shall have a Consolidated Fixed Charge Coverage Ratio of not less than 1.25 to 1.00 for such Measurement Period, (b) the Borrower shall have a Consolidated Leverage Ratio of not greater than 2.50 to 1.00 for such Measurement Period, and (c) the Borrower has delivered a Compliance Certificate pursuant to Section 6.02(a) demonstrating the foregoing clauses (a) and (b).
“Liquidity” means, at any time for the Borrower and its Subsidiaries on a consolidated basis, the sum of (a) cash and Cash Equivalents on the balance sheet at such time which is not restricted and which is unencumbered by any Liens other than (x) the Liens in favor of Lender and (y) inchoate Liens which arise by statute or operation of law, in each case, on an involuntary basis, plus (b) Availability at such time.
b. Section 5.05 of the Credit Agreement is hereby amended by inserting the following clause (d) in its proper order as follows:
(d) Monthly Financial Statements. The unaudited Consolidated balance sheets of the Borrower and its Subsidiaries most recently delivered pursuant to Section 6.01(b)(i), and the related Consolidated statements of operations for the fiscal month and year-to-date periods then ended (i) were prepared consistent with past practice of the Borrower, and (ii) fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations for the periods covered thereby.
c. Section 6.01(b) of the Credit Agreement is hereby amended and restated in its entirety as follows:
(b) as soon as available, and in any event within (i) from March 31, 2025 through August 31, 2025, 15 days after the end of each fiscal month of the Borrower that is not also a fiscal quarter end of the Borrower, an unaudited Consolidated balance sheet for Borrower and its Subsidiaries as of the end of such fiscal month and statements of operations for such fiscal month and year-to-date period of the Fiscal Year then elapsed, certified by the chief financial officer of Borrower as prepared consistent with past practice of the Borrower and fairly presenting the Consolidated financial position and results of operations for such period(s), and (ii) 45 days after the end of each fiscal quarter of the Borrower except the fourth quarter of each Fiscal Year, an unaudited Consolidated balance sheet for Borrower and its Subsidiaries as of the end of such fiscal quarter of the Borrower and the related statements of income and comprehensive income, and cash flows for such fiscal quarter and year-to-date period of the Fiscal Year then elapsed, setting forth in comparative form corresponding figures for the preceding Fiscal Year periods and certified by the chief financial officer of Borrower as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations for such period;
d. Section 6.02 of the Credit Agreement is hereby amended by amending and restating clause (a) in its entirety and inserting the following clause (n) in its proper order, in each case as follows:
(a) Compliance Certificate. Concurrently with the delivery of the financial statements referred to in clauses (a) and (b) of Section 6.01 (commencing with the delivery of the financial statements for the fiscal year ended December 31, 2023), (i) a duly completed Compliance Certificate signed by the chief executive officer, chief financial officer, treasurer or controller which is a Responsible Officer of the Borrower, and (ii) other than with financial statements referred to in clause (b)(i) of Section 6.01, a copy of management’s discussion and analysis with respect to such financial statements. Unless the Lender requests executed originals, delivery of the Compliance Certificate may be by electronic communication including fax or email and shall be deemed to be an original and authentic counterpart thereof for all purposes.
(n) 13-Week Cash Flow Forecast. Promptly, and no later than 5:00 pm on the first Business Day of each week until September 30, 2025, a 13-week cash flow forecast in form and substance satisfactory to Lender for such week.
e. Section 7.06 of the Credit Agreement is hereby amended by amending and restating clauses (b) and (d) in their entirety as follows:
(b) following the date on which the Designated Conditions are first satisfied, distributions consisting solely of redemptions of Equity Interests in the Borrower may be made in an aggregate amount not to exceed $300,000 during each calendar year;
(d) following the date on which the Designated Conditions are first satisfied, any Subsidiary that is not a Loan Party (and is not required to be a Loan Party under this Agreement) may make Restricted Payments to any Person that is not otherwise in violation of this Agreement.
f. Section 7.11 of the Credit Agreement is hereby amended and restated in its entirety as follows:
7.11 Financial Covenants.
(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio of the Borrower and its Subsidiaries as of the end of any Measurement Period ending as of the last day of any fiscal quarter of the Borrower, beginning with the fiscal quarter ending September 30, 2025, to be greater than the level set forth below for such date:
| Fiscal Quarter Ending | Consolidated Leverage Ratio | |
| September 30, 2025 | 3.50 to 1.00 | |
| December 31, 2025 and thereafter | 2.50 to 1.00 |
(b) Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated Fixed Charge Coverage Ratio of the Borrower and its Subsidiaries as of the end of any Measurement Period ending as of the last day of any fiscal quarter of the Borrower, beginning with the fiscal quarter ending September 30, 2025, to be less than 1.25 to 1.00.
(c) Consolidated EBITDA. Permit Consolidated EBITDA as of the end of the Measurement Periods ending June 30, 2025 and September 30, 2025 to be less than $1,600,000.
(d) Liquidity. Permit Liquidity as of the date set forth below to be less than the amount set forth below for such date:
| Month Ending | Minimum Liquidity | |
| April 30, 2025 through June 30, 2025 | $2,500,000 | |
| July 31, 2025 | $2,750,000 | |
| August 31, 2025 and September 30, 2025 | $3,000,000 |
g. Exhibit A (Form of Compliance Certificate) to the Credit Agreement is hereby amended and restated in its entirety as set forth in Exhibit A hereto.
5. Conditions Precedent. This Amendment shall become effective upon delivery to Lender of the following, each in form and substance acceptable to Lender:
a. this Amendment, duly executed by Borrower and Lender;
b. an amendment fee in the amount of $5,000, which fee shall be non-refundable when paid and wholly earned when received; and
c. such other documents, instruments and agreements as Lender may reasonably require.
6. Representations; No Default. Borrower represents and warrants that: (a) Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized the execution and delivery of this Amendment and other agreements and documents executed and delivered by Borrower in connection herewith, (b) neither this Amendment nor the agreements contained herein contravene or constitute a Default or Event of Default under the Credit Agreement or a default under any other agreement, instrument or indenture to which Borrower is a party or a signatory, or any provision of Borrower’s Articles of Incorporation or By-Laws or, to the best of Borrower’s knowledge, any other agreement or requirement of law, or result in the imposition of any lien or other encumbrance on any of its property under any agreement binding on or applicable to Borrower or any of its property except, if any, in favor of Lender, (c) no consent, approval or authorization of or registration or declaration with any party, including but not limited to any governmental authority, is required in connection with the execution and delivery by Borrower of this Amendment or other agreements and documents executed and delivered by Borrower in connection herewith or the performance of obligations of Borrower herein described, except for those which Borrower has obtained or provided and as to which Borrower has delivered certified copies of documents evidencing each such action to Lender, (d) no events have taken place and no circumstances exist at the date hereof which would give Borrower grounds to assert a defense, offset or counterclaim to the obligations of Borrower under the Credit Agreement or any of the other Loan Documents, (e) there are no known claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including attorneys’ fees) of any kind, character or nature whatsoever, fixed or contingent, which Borrower may have or claim to have against Lender, which might arise out of or be connected with any act of commission or omission of Lender existing or occurring on or prior to the date of this Amendment, including, without limitation, any claims, liabilities or obligations arising with respect to the indebtedness evidenced by any promissory note executed by Borrower in favor of Lender, (f) the representations and warranties of Borrower contained in the Credit Agreement are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, and (g) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing under the Credit Agreement.
7. Affirmation, Further References. Lender and Borrower each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement (except as amended by this Amendment) and of each of the other Loan Documents shall remain unmodified and in full force and effect. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment.
8. Severability. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction.
9. Successors. This Amendment shall be binding upon Borrower and Lender and their respective successors and assigns, and shall inure to the benefit of Borrower and Lender and to the respective successors and assigns of Lender.
10. Costs and Expenses. Borrower agrees to reimburse Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys’ fees and legal expenses of counsel for Lender) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of this Amendment and all other documents negotiated, prepared and executed in connection with this Amendment, and in enforcing the obligations of Borrower under this Amendment, and to pay and save Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment.
11. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment.
12. Counterparts; Digital Copies. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and any party to this Amendment may execute any such agreement by executing a counterpart of such agreement. A facsimile or digital copy (pdf) of this signed Amendment shall be deemed to be an original thereof.
13. Governing Law. This Amendment shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof.
14. Release of Rights and Claims. Borrower, for itself and its successors and assigns, hereby releases, acquits, and forever discharges Lender and its successors and assigns for any and all manner of actions, suits, claims, charges, judgments, levies and executions occurring or arising from the transactions entered into with Lender prior to entering into this Amendment whether known or unknown, liquidated or unliquidated, fixed or contingent, direct or indirect which Borrower may have against Lender.
15. No Waiver. Except as expressly set forth in Section 2 herein, nothing contained in this Amendment (or in any other agreement or understanding between the parties) shall constitute a waiver of, or shall otherwise diminish or impair, Lender’s rights or remedies under the Credit Agreement or any of the other Loan Documents, or under applicable law.
[Remainder of Page Intentionally Blank]
IN WITNESS WHEREOF, the parties hereto have entered into this Amendment as of the date first above written.
| BORROWER: | NORTECH SYSTEMS INCORPORATED | |
| By: | /s/ Andrew LaFrence | |
| Name: | Andrew LaFrence | |
| Title: | Chief Financial Officer and Senior Vice President of Finance | |
| BANK OF AMERICA, N.A. | ||
| LENDER: | By: | /s/ Laura Olson |
| Name: | Laura Olson | |
| Title: | Senior Vice President | |
Amendment No. 1 to Credit Agreement, Waiver, and Consent
Exhibit A
Form of Compliance Certificate
See attached.
Exhibit A
Form of Compliance Certificate
Financial Statement Date: [________, ____]
| TO: | Bank of America, N.A., as lender (the “Lender”) |
| RE: | Credit Agreement, dated as of February 29, 2024, by and among Nortech Systems Incorporated, a Minnesota corporation (the “Borrower”), the other Loan Parties party thereto, and the Lender (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”; capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement) |
| DATE: | [Date] |
The undersigned Responsible Officer hereby certifies as of the date hereof that such individual is the Chief Financial Officer of the Borrower, and that, as such, such individual is authorized to execute and deliver this Certificate to the Lender on the behalf of the Borrower and the other Loan Parties, and that:
[Use following paragraph 1 for fiscal year-end financial statements]
1. The Borrower has delivered (i) the year-end Consolidated audited financial statements required by Section 6.01(a) of the Credit Agreement for the fiscal year of the Borrower and its Subsidiaries ended as of the above date, together with the report and opinion of an independent certified public accountant required by such section and (ii) the Consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related Consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for such fiscal year. Such Consolidated statements are fairly stated in all material respects when considered in relation to the Consolidated financial statements of the Borrower and its Subsidiaries.
[Use following paragraph 1 for fiscal quarter-end financial statements]
1. The Borrower has delivered the unaudited Consolidated financial statements required by Section 6.01(b)(ii) of the Credit Agreement for the fiscal quarter of the Borrower ended as of the above date. Such Consolidated financial statements fairly present the Consolidated financial condition, results of operations and comprehensive income, Shareholders’ Equity and cash flows of the Borrower and its Subsidiaries in accordance with GAAP as at such date and for such period, and such Consolidated financial statements are fairly stated in all material respects when considered in relation to the Consolidated financial statements of the Borrower and its Subsidiaries.
[Use following paragraph 1 for fiscal month-end financial statements]
1. The Borrower has delivered the unaudited Consolidated financial statements required by Section 6.01(b)(i) of the Credit Agreement for the fiscal month of the Borrower ended as of the above date. Such Consolidated financial statements fairly present the Consolidated financial condition and results of operations of the Borrower and its Subsidiaries consistent with past practice of the Borrower as at such date and for such period and the year-to-date period of the Fiscal Year then elapsed.
2. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under such individual’s supervision, a detailed review of the transactions and condition (financial or otherwise) of the Borrower and its Subsidiaries during the accounting period covered by such Consolidated financial statements.
3. A review of the activities of the Borrower and its Subsidiaries during such fiscal period has been made under the supervision of the undersigned with a view to determining whether during such fiscal period the Borrower and each of the other Loan Parties performed and observed all its obligations under the Loan Documents, and
[select one:]
[to the best knowledge of the undersigned, during such fiscal period each of the Loan Parties performed and observed each covenant and condition of the Loan Documents applicable to it, and no Default has occurred and is continuing.]
—or—
[to the best knowledge of the undersigned, the following covenants or conditions have not been performed or observed and the following is a list of each such Default and its nature and status:]
4. The representations and warranties of the Borrower and each other Loan Party contained in Article V of the Credit Agreement or any other Loan Document, or which are contained in any document furnished at any time under or in connection therewith are true and correct on and as of the date hereof, and except that for purposes of this Compliance Certificate, the representations and warranties contained in subsections (a), (b) and (d) of Section 5.05 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) (with respect to subsection (a) of Section 5.05) and (b) (with respect to subsections (b) and (d) of Section 5.05) of Section 6.01 of the Credit Agreement, including the statements in connection with which this Compliance Certificate is delivered.
5. The financial covenant analyses and information set forth on Schedule A attached hereto are true and accurate on and as of the date of this Certificate.
Delivery of an executed counterpart of a signature page of this Certificate by fax transmission or other electronic mail transmission (e.g. “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart of this Certificate.
| Nortech Systems Incorporated, a Minnesota corporation | ||
| By: | ||
| Name: | ||
| Title: | Chief Financial Officer | |
Schedule A to Compliance Certificate
Financial Statement Date: [________, ____] (“Statement Date”)
| I. Section 7.11(a) – Consolidated Leverage Ratio.1 | |||
| A. | Consolidated Funded Indebtedness with respect to the Borrower and its Subsidiaries, on a Consolidated basis, for the Measurement Period ending on the Statement Date: | ||
| 1. | The outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments: | $___________ | |
| 2. | All purchase money Indebtedness: | $___________ | |
| 3. | The maximum amount available to be drawn under issued and outstanding letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments: | $___________ | |
| 4. | All obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business): | $___________ | |
| 5. | All Attributable Indebtedness: | $___________ | |
| 6. | All obligations to purchase, redeem, retire, defease or otherwise make any payment prior to the Maturity Date in respect of any Equity Interests or any warrant, right or option to acquire such Equity Interest, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends: | $___________ | |
| 7. | Without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in Line A1 through Line A6 above of Persons other than the Borrower or any Subsidiary: | $___________ | |
| 8. | All Indebtedness of the types referred to in Line A1 through Line A7 above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrower or a Subsidiary is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Borrower or such Subsidiary: | $___________ | |
| 9. | Consolidated Funded Indebtedness (Sum of Lines A1 through A8): | $___________ |
1Only provide calculations to the extent required pursuant to Section 7.11(a) of the Credit Agreement. Not required to be completed in connection with a Compliance Certificate delivered with financial statements referred to in clause (b)(i) of Section 6.01.
| B. | Consolidated EBITDA with respect to the Borrower and its Subsidiaries, on a Consolidated basis, for the Measurement Period ending on the Statement Date: |
| 1. | Consolidated Net Income: | $___________ | |
| 2. | To the extent deducted in calculating Line B1, without duplication, Consolidated Interest Charges: | $___________ | |
| 3. | To the extent deducted in calculating Line B1, without duplication, the provision for federal, state, local and foreign income taxes payable: | $___________ | |
| 4. | To the extent deducted in calculating Line B1, without duplication, depreciation and amortization expense: | $___________ | |
| 5. | To the extent deducted in calculating Line B1, without duplication, non-cash losses from the translation of Mexico operations from Mexican pesos and Dollars: | ||
| 6. | To the extent deducted in calculating Line B1, without duplication, non-recurring or one-time cash charges, losses, or expenses (including restructuring, integration, severance, relocation, facility closure) in an aggregate amount not to exceed (A) for any Measurement Period from January 1, 2025 through September 30, 2025 and solely including such charges, losses, or expenses incurred and/or paid from April 1, 2024 through March 31, 2025, $750,000, and (B) for any Measurement Period beginning October 1, 2025, the lesser of (1) $750,000 or (2) 10% of Consolidated EBITDA: | $___________ | |
| 7. | Sum of Lines B1 through B6: | $___________ | |
| 8. | To the extent reflected as a gain or otherwise included in the calculation of Consolidated Net Income for such period, without duplication, non-cash items increasing Consolidated Net Income for such period (excluding any such non-cash gains to the extent (i) there were cash gains with respect to such gains in past accounting periods, or (ii) there is a reasonable expectation that there will be cash gains with respect to such gains in future accounting periods): | $___________ | |
| 9. | Consolidated EBITDA (Sum of Line B7 minus Line B8): | $___________ |
| C. | Consolidated Leverage Ratio (the ratio of Line A9 to Line B9): | ||
| (Not to exceed the ratio set forth in Section 7.11(a) of the Credit Agreement) | _______ to 1.00 |
| II. Section 7.11(b) – Consolidated Fixed Charge Coverage Ratio2. | |||
| D. | Consolidated EBITDA (Line B9): | $___________ | |
| E. | Rentals paid or required to be paid under leases of real or personal, or mixed, property for the Measurement Period ending on the Statement Date: | $___________ | |
| F. | Sum of Line D plus Line E | $___________ | |
| G. | The aggregate amount of all non-financed cash Capital Expenditures for the Measurement Period ending on the Statement Date: | $___________ | |
| H. | The aggregate amount of federal, state, local and foreign income taxes paid in cash, in each case, of or by the Borrower and its Subsidiaries for the Measurement Period ending on the Statement Date: |
$___________ | |
| I. | Restricted Payments paid in cash for the Measurement Period ending on the Statement Date: | $___________ | |
| J. | Sum of Line G plus Line H plus Line I: | $___________ | |
| K. | Sum of Line F minus Line J: | $___________ | |
| L. | Consolidated Interest Charges to the extent paid in cash for the Measurement Period ending on the Statement Date: | $___________ | |
| M. | For the Measurement Period ending on the Statement Date, the aggregate principal amount of all redemptions or similar acquisitions for value of outstanding debt for borrowed money or regularly scheduled principal payments (determined without giving effect to any reduction of such scheduled principal payments resulting from the application of any voluntary or optional prepayments made during such period), but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under Section 7.02: | $___________ | |
| N. | Rentals paid or required to be paid under leases of real or personal, or mixed, property for the Measurement Period ending on the Statement Date: | $___________ | |
| O. | Sum of Line L through Line N: | $___________ | |
| P. | Consolidated Fixed Charge Coverage Ratio (the ratio of Line K to Line O): | _______ to 1.00 | |
| (Not to be less than the ratio set forth in Section 7.11(b) of the Credit Agreement) | |||
2 Only provide calculations to the extent required pursuant to Section 7.11(b) of the Credit Agreement. Not required to be completed in connection with a Compliance Certificate delivered with financial statements referred to in clause (b)(i) of Section 6.01.
| III. Section 7.11(c) – Consolidated EBITDA.3 | |||
| Q. | Consolidated EBITDA (Line B9): (Not to be less than the amount set forth in Section 7.11(c) of the Credit Agreement) | $___________ | |
| IV. Section 7.11(d) – Liquidity.4 | |||
| R. | Cash on the balance sheet at such time which is not restricted and which is unencumbered by any Liens other than (x) the Liens in favor of Lender and (y) inchoate Liens which arise by statute or operation of law, in each case, on an involuntary basis: | $___________ | |
| S. | Availability: | $___________ | |
| T. | Liquidity (the sum of Line R and Line S): (Not to be less than the amount set forth in Section 7.11(d) of the Credit Agreement) |
$____________ | |
3Only provide calculations to the extent required pursuant to Section 7.11(c) of the Credit Agreement. Not required to be completed in connection with a Compliance Certificate delivered with financial statements referred to in clause (b)(i) of Section 6.01.
4Only provide calculations to the extent required pursuant to Section 7.11(d) of the Credit Agreement. Required to be completed in connection with Compliance Certificates delivered with financial statements referred to in clauses (b)(i) and (b)(ii) of Section 6.01.
Exhibit 10.13
NORTECH SYSTEMS INCORPORATED
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (“First Amendment”) dated effective as of this 27th day of March, 2025_ by and between Nortech Systems Incorporated, a Minnesota corporation (the “Company”), and Jay D. Miller (“Executive”). The Company and the Executive may be referred to herein as the “parties.”
Recitals
WHEREAS, the Company currently employs Executive as President and Chief Executive Officer under that certain Employment Agreement dated effective as of February 27, 2022 (“Agreement”);
WHEREAS, the Executive has indicated a desire to retire from his employment with the Company as of December 31, 2028; and
WHEREAS, the Company and the Executive desire to modify certain terms and conditions of employment of Executive as President and Chief Executive Officer as set forth in the Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, premises and mutual covenants contained herein and in the Agreement, and intending to be legally bound hereby, the Company and Executive hereby mutually agree as follows:
| 1. | Incentive Bonus. The second sentence of Section 5.2. of the Agreement shall be amended and restated in its entirety as follows: |
“During the Agreement Period, Executive’s stated payout percentage under the Incentive Bonus Plan will be a target of 60% of his then-current Base Salary, prorated for the portion of the fiscal year during which Executive is employed by the Company.”
| 2. | Clawback Provisions. Section 5 of the Agreement shall be amended to add a new Section 5.7. as follows: |
“5.7. Clawback Provisions. Notwithstanding any other provisions in this Agreement to the contrary, any incentive-based or other compensation paid to the Executive under this Agreement or any other agreement or arrangement with the Company which is subject to recovery under any law, government regulation, or stock exchange listing requirement will be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation, or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement). The Company will make any determination for clawback or recovery in its sole discretion and in accordance with any applicable law or regulation.
| 3. | Agreement Term. Section 3 of the Agreement shall be amended and restated in its entirety as follows: |
“3. Agreement Term. This Agreement shall commence on the Effective Date, and shall continue, unless sooner terminated in accordance with this Agreement, until February 27, 2024 (the “Initial Period”); provided, however, this Agreement shall be extended automatically for one additional two-year period until February 27, 2026 (the “Extended Period”), and thereafter automatically for the period of February 28, 2026 through December 31, 2028 (the “Additional Extended Period,” and together with the Initial Period and the Extended Period, the “Agreement Period”) unless either party provides notice of non-renewal to the other party at or before one-hundred twenty (120) days prior to expiration of the Initial Period or the Extended Period, as applicable. During the Agreement Period, Executive’s employment may be terminated by the Company or Executive, subject to the provisions of Section 6 of this Agreement. If Executive remains employed by the Company on December 31, 2028, the Agreement Period shall expire and Executive’s employment with the Company shall end as of 11:59 p.m. CT on such date. Notwithstanding the provisions of this Section, the provisions of Sections 8, 9, 10, 11 and 12 shall survive the termination of Executive’s employment (for any reason) and remain in full force and effect thereafter.
| 4. | End of Employment on December 31, 2028. Section 6 of the Agreement shall be amended to add a new Section 6.8. as follows: |
“6.8. End of Employment on December 31, 2028. Notwithstanding anything herein to the contrary, if Executive’s employment with the Company ends upon expiration of the Agreement Period on December 31, 2028 as set forth in Section 3, then payments to Executive will be governed solely by this Section 6.8 (and, for clarity, not Section 6.3 or Section 6.6), and in such case, Executive shall be entitled to the following compensation: (a) Base Salary earned but unpaid as of the date of the termination of Executive’s employment relationship; and any other payments and/or benefits which Executive is entitled to receive under any of the Benefit Plans; (b) annual bonus earned by Executive in calendar year 2028 under the Incentive Bonus Plan, paid at the same time as annual bonuses are paid to the Company’s other executive officers after the end of the year in which the bonus was earned, but no later than April 15 following the end of that year, and (c) upon execution by Executive of an acceptable general release of claims against the Company in a form acceptable to the Company within sixty (60) days, and after the expiration of any applicable rescission or revocation period, the Company will cause any unvested portion of Executive’s stock options or awards subject to vesting based on continuous service to vest immediately in full to the extent not already vested, and any such stock awards will be exercisable for the full remaining portion of their term. For clarity, no option or award granted to Executive that is subject to performance vesting metrics as set forth in any option or award agreement between Executive and the Company will vest as a result of Executive’s end of employment under this Section 6.8.
| 5. | Exhibit A. Exhibit A to the Agreement is amended and restated in its entirety as set forth on Exhibit A hereto. |
Exhibit A
Perquisites
All perquisites are subject to customary withholding and other payroll taxes:
| ● | Annual Physical at the Mayo Clinic, up to a maximum of $5,000 | |
| ● | Annual club dues of up to $1,200 | |
| ● | Annual estate planning and tax preparation up to $2,000 | |
| ● | A maximum Auto Allowance of $1,000 per month less reimbursement for business mileage at the maximum rate then allowable by the U.S. Internal Revenue Service |
| 6. | Except as expressly set forth above, the Agreement will remain in full force and effect, and the parties ratify and confirm the terms thereof. |
IN WITNESS WHEREOF, the parties have executed this Amendment to the Employment Agreement to be effective as of the date first set forth above.
| NORTECH SYSTEMS INCORPORATED | ||
| By: | /s/ Andrew D. C. LaFrence | |
| Name: | Andrew D. C. LaFrence | |
| Title: | CFO and Senior Vice President of Finance | |
| EXECUTIVE | ||
| By: | /s/ Jay D. Miller | |
| Jay D. Miller, individually | ||
Exhibit 10.14
NORTECH SYSTEMS INCORPORATED
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (“First Amendment”) dated effective as of this 28th day of March, 2025 by and between Nortech Systems Incorporated, a Minnesota corporation (the “Company”), and Andrew D. C. LaFrence (“Executive”). The Company and the Executive may be referred to herein as the “parties.”
Recitals
WHEREAS, the Company currently employs Executive as Chief Financial Officer and Senior Vice President of Finance under that certain Employment Agreement dated effective as of December 1, 2023 (“Agreement”);
WHEREAS, the Executive has indicated a desire to retire from his employment with the Company in calendar year 2028; and
WHEREAS, the Company and the Executive desire to modify certain terms and conditions of employment of Executive as Chief Financial Officer and Senior Vice President of Finance set forth in the Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, premises and mutual covenants contained herein and in the Agreement, and intending to be legally bound hereby, the Company and Executive hereby mutually agree as follows:
| 1. | Agreement Term. Section 3 of the Agreement shall be amended and restated in its entirety as follows: |
“3. Agreement Term. This Agreement shall commence on the Effective Date so long as all contingencies of Executive’s offer of employment have been satisfied and shall continue, unless sooner terminated in accordance with this Agreement, until November 30, 2024 (the “Initial Period”); provided, however, this Agreement will automatically renew for successive one year renewal terms (each a “Renewal Period” and together with the Initial Period, the “Agreement Period”) (the first such Renewal Period shall run from November 30, 2024 through December 31, 2025, and then shall renew on January 1 each year for one year renewal terms thereafter) unless either party notifies the other party in writing at least ninety (90) days prior to expiration of the Initial Period or any Renewal Period. During the Agreement Period, Executive’s employment may be terminated by the Company or Executive, subject to the provisions of Section 6 of this Agreement. If Executive remains employed by the Company on December 31, 2028, or at the end of any Renewal Period thereafter, the Agreement Period shall expire and Executive’s employment with the Company shall end as of 11:59 p.m. CT on such date. Notwithstanding the provisions of this Section, the provisions of Sections 8, 9, 10, 11, 12 and 13 shall survive the termination of Executive’s employment (for any reason) and remain in full force and effect thereafter.”
| 1 |
| 2. | Termination by the Company Without Cause or by Executive for Good Reason. Section 6.3 is amended to add a new Section 6.3.3 as follows: |
“6.3.3 Notwithstanding anything stated in any other agreement between the Company and Executive that may be construed to the contrary, if Company terminates Executive’s employment without Cause, or Executive terminates his employment for Good Reason, then the Company will cause any unvested portion of Executive’s stock options or awards subject to vesting based on continuous service to vest immediately in full to the extent not already vested, and any such stock awards will be exercisable for the full remaining portion of their term. For clarity, no option or award granted to Executive that is subject to performance vesting metrics as set forth in any option or award agreement between Executive and the Company will vest solely as a result of Executive’s end of employment under this Section 6.3.3.”
| 3. | Non-Renewal by the Company. Section 6.7 entitled “Non-Renewal by the Company During the Initial Period” is amended and restated in its entirety as follows: |
“6.7 Non-Renewal by the Company. If the Company provides notice of non-renewal in accordance with Section 3, then Executive shall be entitled to (i) Base Salary in effect for the remainder of the Renewal Period, (ii) compensation in addition to any Base Salary earned but unpaid through the end of the applicable Renewal Period and any other earned and vested payments and/or benefits that Executive is entitled to receive under any of the Benefit Plans. Upon execution by Executive of an acceptable general release of claims against the Company in a form acceptable to the Company within sixty (60) days after the end of the Renewal Period, and after the expiration of any applicable rescission or revocation period, Executive shall be entitled to: (i) Base Salary in effect immediately prior to the end of the Renewal Period, for a period of nine (9) months, in the manner and at such times as the Base Salary otherwise would have been payable to Executive; (ii) a prorated bonus earned by Executive under the Incentive Bonus Plan, calculated and due only through the Executive’s last day worked with the Company, payable at the same time as annual bonuses are paid to the Company’s other executive officers after the end of the year in which the bonus was earned, but no later than April 15 following the end of that year; and (iii) the Company shall reimburse the Executive for the monthly COBRA premium paid by the Executive for the Executive and the Executive’s dependents as of the date immediately prior to the end of the Renewal Period of termination of employment for the lesser of: (A) nine (9) months; or (B) until Executive obtains comparable replacement coverage. Notwithstanding the foregoing, certain payments under this paragraph may be delayed pursuant to Section 7.2. If the Executive provides notice of non-renewal in accordance with Section 3, then such non-renewal shall be treated as a Voluntary Resignation without Good Reason under Section 6.6.
| 2 |
| 4. | End of Employment on December 31, 2028. Section 6 is amended to add a new Section 6.8 as follows: |
“6.8 End of Employment on December 31, 2028. Notwithstanding anything herein to the contrary, if Executive’s employment with the Company ends upon the expiration of a Renewal Period ending on December 31, 2028 as set forth in Section 3 or after Executive’s written notice of his intent to retire from the Company during the period beginning January 1, 2028 through December 30, 2028, or any Renewal Period thereafter, then payments to Executive will be governed solely by this Section 6.8 (and for clarity, not Sections 6.3, 6.6 or 6.7), and in such case, the Executive shall be entitled to the following compensation: (a) Base Salary earned but unpaid as of the date of termination of Executive’s employment relationship; and any other payments and/or benefits which Executive is entitled to receive under any of the Benefit Plans. Upon execution by Executive of an acceptable general release of claims against the Company in a form acceptable to the Company within sixty (60) days, and after the expiration of any applicable rescission or revocation period, Executive also shall be entitled to: (b) annual bonus earned by Executive in the calendar year under the Incentive Bonus Plan, paid at the same time as annual bonuses are paid to the Company’s other executive officers after the end of the year in which the bonus was earned, but no later than April 15 following the end of that year; and (c) the Company will cause any unvested portion of Executive’s stock options or awards subject to vesting based on continuous service to vest immediately in full to the extent not already vested, and any such stock awards will be exercisable for the full remaining portion of their term. For clarity, no option or award granted to Executive that is subject to performance vesting metrics as set forth in any option or award agreement between Executive and the Company will vest solely as a result of Executive’s end of employment under this Section 6.8.
| 5. | Perquisites. Exhibit A to the Agreement is amended and restated in its entirety as follows: |
Exhibit A
Perquisites
All perquisites are subject to customary withholding and other payroll taxes. Effective 1/1/2025:
| ● | Annual Physical at the Mayo Clinic, up to a maximum of $5,000 | |
| ● | Annual club dues up to $1,200 | |
| ● | Annual estate planning and tax preparation up to $2,000 | |
| ● | Auto Allowance of up to $650 per month, or reimbursement for business mileage at the maximum rate then allowable by the U.S. Internal Revenue Service at the election of Executive |
| 6. | Except as expressly set forth above, the Agreement will remain in full force and effect, and the parties ratify and confirm the terms thereof. |
[Signature Page Follows]
| 3 |
IN WITNESS WHEREOF, the parties have executed this Amendment to the Employment Agreement to be effective as of the date first set forth above.
| NORTECH SYSTEMS INCORPORATED | ||
| By: | /s/ Jay D. Miller | |
| Name: | Jay D. Miller | |
| Title: | President and Chief Executive Officer | |
| EXECUTIVE | ||
| By: | /s/ Andrew D. C. LaFrence | |
| Andrew D. C. LaFrence, individually | ||
[Signature Page to First Amendment to Employment Agreement]
Exhibit 10.15
NORTECH SYSTEMS INCORPORATED
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (“First Amendment”) dated effective as of this 28th day of, March, 2025 by and between Nortech Systems Incorporated, a Minnesota corporation (the “Company”), and John Lindeen (“Executive”). The Company and the Executive may be referred to herein as the “parties.”
Recitals
WHEREAS, the Company currently employs Executive as Senior Vice President of Global Operations under that certain Employment Agreement dated effective as of September 10, 2019 (“Agreement”);
WHEREAS, the Executive has indicated a desire to retire from his employment with the Company as of December 31, 2030; and
WHEREAS, the Company and the Executive desire to modify certain terms and conditions of employment of Executive as Senior Vice President of Global Operations set forth in the Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, premises and mutual covenants contained herein and in the Agreement, and intending to be legally bound hereby, the Company and Executive hereby mutually agree as follows:
| 1. | Agreement Term. Section 3 of the Agreement shall be amended and restated in its entirety as follows: |
“3. Agreement Term. This Agreement shall commence on the Effective Date and shall continue, unless sooner terminated in accordance with this Agreement, until September 20, 2020 (the “Initial Period”); provided, however, this Agreement will automatically renew for successive one year renewal terms (each a “Renewal Period”) and together with the Initial Period, the “Agreement Period”) (the Renewal Period beginning on September 20, 2024 shall run from September 20, 2024 through December 31, 2025, and then shall renew on January 1 each year for one year renewal terms thereafter) unless either party notifies the other party in writing at least ninety (90) days prior to the expiration of the Initial Period or any Renewal Period. During the Agreement Period, Executive’s employment may be terminated by the Company or the Executive, subject to the provisions of Section 6 of this Agreement. If Executive remains employed by the Company on December 31, 2030, or at the end of any Renewal Period thereafter, the Agreement Period shall expire and Executive’s employment with the Company shall end as of 11:59 p.m. CT on such date. Notwithstanding the provisions of this Section, the provisions of Sections 8, 9, 10, 11, 12 and 13 shall survive the termination of Executive’s employment (for any reason) and remain in full force and effect thereafter.”
| 1 |
| 2. | Clawback Provisions. Section 5 of the Agreement shall be amended to add a new Section 5.7. as follows: |
“5.7. Clawback Provisions. Notwithstanding any other provisions in this Agreement to the contrary, any incentive-based or other compensation paid to the Executive under this Agreement or any other agreement or arrangement with the Company which is subject to recovery under any law, government regulation, or stock exchange listing requirement will be subject to such deductions and clawback as may be required to be made pursuant to such the Company’s Clawback Policy, as may be updated from time to time, applicable law, government regulation, or stock exchange listing requirement. The Company will make any determination for clawback or recovery in its sole discretion and in accordance with the Clawback Policy, any applicable law or regulation.
| 3. | Termination by the Company Without Cause or by Executive for Good Reason. Section 6.3. is amended to add a new Section 6.3.3. as follows: |
“6.3.3. Notwithstanding anything stated in any other agreement between the Company and Executive that may be construed to the contrary, if Company terminates Executive’s employment without Cause, or Executive terminates his employment for Good Reason, then the Company will cause any unvested portion of Executive’s stock options or awards subject to vesting based on continuous service to vest immediately in full to the extent not already vested, and any such stock options will be exercisable for the full remaining portion of their term. For clarity, no option or award granted to Executive that is subject to performance vesting metrics as set forth in any option or award agreement between Executive and the Company will vest solely as a result of Executive’s end of employment under this Section 6.3.3.”
| 4. | Non-Renewal by the Company. Section 6 is amended to add a new Section 6.7 as follows: |
“6.7 Non-Renewal by the Company. If the Company provides notice of non-renewal in accordance with Section 3, then Executive shall be entitled to (i) Base Salary in effect for the remainder of the Renewal Period, (ii) compensation in addition to any Base Salary earned but unpaid through the end of the applicable Renewal Period and any other earned and vested payments and/or benefits that Executive is entitled to receive under any of the Benefit Plans. Upon execution by Executive of an acceptable general release of claims against the Company in a form acceptable to the Company within sixty (60) days after the end of the Renewal Period, and after the expiration of any applicable rescission or revocation period, Executive shall be entitled to: (i) Base Salary in effect immediately prior to the end of the Renewal Period, for a period of nine (9) months, in the manner and at such times as the Base Salary otherwise would have been payable to Executive; (ii) a prorated bonus earned by Executive under the Incentive Bonus Plan, calculated and due only through the Executive’s last day worked with the Company, payable at the same time as annual bonuses are paid to the Company’s other executive officers after the end of the year in which the bonus was earned, but no later than April 15 following the end of that year; and (iii) the Company shall reimburse the Executive for the monthly COBRA premium paid by the Executive for the Executive and the Executive’s dependents as of the date immediately prior to the end of the Renewal Period of termination of employment for the lesser of: (A) nine (9) months; or (B) until Executive obtains comparable replacement coverage. Notwithstanding the foregoing, certain payments under this paragraph may be delayed pursuant to Section 7.2. If the Executive provides notice of non-renewal in accordance with Section 3, then such non-renewal shall be treated as a Voluntary Resignation without Good Reason under Section 6.6.
| 2 |
| 5. | End of Employment on December 31, 2030. Section 6 of the Agreement shall be amended to add a new Section 6.8. as follows: |
“6.8. End of Employment on December 31, 2030. Notwithstanding anything herein to the contrary, if Executive’s employment with the Company ends upon expiration of a Renewal Period ending on December 31, 2030 as set forth in Section 3, or any Renewal Period thereafter, then payments to Executive will be governed solely by this Section 6.8 (and for clarity, not Sections 6.3, 6.6 or 6.7), and in such case, Executive shall be entitled to the following compensation: (a) Base Salary earned but unpaid as of the date of termination of Executive’s employment relationship; and any other payments and/or benefits which Executive is entitled to receive under any of the Benefit Plans. Upon execution by Executive of an acceptable general release of claims against the Company in a form acceptable to the Company within sixty (60) days, and after the expiration of any applicable rescission or revocation period, Executive also shall be entitled to: (b) annual bonus earned by Executive in the calendar year under the Incentive Bonus Plan, paid at the same time as annual bonuses are paid to the Company’s other executive officers after the end of the year in which the bonus was earned, but no later than April 15 following the end of that year; and (c) the Company will cause any unvested portion of Executive’s stock options or awards subject to vesting based on continuous service to vest immediately in full to the extent not already vested, and any such stock awards will be exercisable for the full remaining portion of their term. For clarity, no option or award granted to Executive that is subject to performance vesting metrics as set forth in any option or award agreement between Executive and the Company will vest solely as a result of Executive’s end of employment under this Section 6.8.”
| 6. | Perquisites. Exhibit A to the Agreement is amended and restated in its entirety as follows: |
Exhibit A
Perquisites
All perquisites are subject to customary withholding and other payroll taxes. Effective 1/1/25:
| ● | Annual Physical at the Mayo Clinic, up to a maximum of $5,000 | |
| ● | Annual club dues up to $1,200 | |
| ● | Annual estate planning and tax preparation up to $2,000 | |
| ● | Auto Allowance of $650 per month, or reimbursement for business mileage at the maximum rate then allowable by the U.S. Internal Revenue Service at the election of the Executive |
| 7. | Except as expressly set forth above, the Agreement will remain in full force and effect, and the parties ratify and confirm the terms thereof. |
[Signature Page Follows]
| 3 |
IN WITNESS WHEREOF, the parties have executed this Amendment to the Employment Agreement to be effective as of the date first set forth above.
| NORTECH SYSTEMS INCORPORATED | ||
| By: | /s/ Jay D. Miller | |
| Name: | Jay D. Miller | |
| Title: | President and Chief Executive Officer | |
| EXECUTIVE | ||
| By: | /s/ John Lindeen | |
| John Lindeen, individually | ||
[Signature Page to First Amendment to Employment Agreement]
Exhibit 19.1
Nortech Systems Incorporated Policy on Insider Trading
This Insider Trading Policy (the “Policy”) describes the standards of Nortech Systems Incorporated and its subsidiaries (the “Company”) on trading, and causing the trading of, the Company’s securities or securities of certain other publicly traded companies while in possession of confidential information. This Policy is divided into two parts: the first part prohibits trading in certain circumstances and applies to the Company, all directors, officers and employees and their respective immediate family members of the Company and the second part imposes special additional trading restrictions and applies to all (i) directors of the Company, (ii) executive officers of the Company including without limitation the Company’s senior leadership team (together with the directors, “Company Insiders”), (iii) the employees listed on Appendix A, (iv) the Company (collectively, “Covered Persons”) and (v) certain other employees that the Company may designate from time to time as “Covered Persons” because of their position, responsibilities or their actual or potential access to material information.
One of the principal purposes of the federal securities laws is to prohibit so-called “insider trading.” Simply stated, insider trading occurs when a person uses material nonpublic information obtained through involvement with the Company to make decisions to purchase, sell, give away or otherwise trade the Company’s securities or the securities of certain other companies or to provide that information to others outside the Company. The prohibitions against insider trading apply to trades, tips and recommendations by virtually any person, including all persons associated with the Company, if the information involved is “material” and “nonpublic.” These terms are defined in this Policy under Part I, Section 3 below. The prohibitions would apply to any director, officer or employee who buys or sells securities on the basis of material nonpublic information that he or she obtained about the Company, its customers, suppliers, partners, competitors or other companies with which the Company has contractual relationships or may be negotiating transactions.
PART I
| 1. | Applicability |
This Policy applies to all trading or other transactions in (i) the Company’s securities, including common stock, options and any other securities that the Company may issue, such as preferred stock, notes, bonds and convertible securities, as well as to derivative securities relating to any of the Company’s securities, whether or not issued by the Company and (ii) the securities of certain other companies, including common stock, options and other securities issued by those companies as well as derivative securities relating to any of those companies’ securities.
This Policy applies to all employees of the Company, all officers of the Company, all members of the Company’s board of directors and their respective family members, and to the Company with respect to all purchases and sales of its securities.
| 2. | General Policy: No Trading or Causing Trading While in Possession of Material Nonpublic Information |
No director, officer or employee or any of their immediate family members may purchase or sell, or offer to purchase or sell, any Company security, whether or not issued by the Company, while in possession of material nonpublic information about the Company. (The terms “material” and “nonpublic” are defined in Part I, Section 3(a) and (b) below.) No director, officer or employee or any of their immediate family members who knows of any material nonpublic information about the Company may communicate that information to ‘tip’ any other person, including family members and friends, or otherwise disclose such information without the Company’s authorization.
(a) No director, officer or employee or any of their immediate family members may purchase or sell any security of any other company while in possession of material nonpublic information that was obtained in the course of his or her involvement with the Company. No director, officer or employee or any of their immediate family members who knows of any such material nonpublic information may communicate that information to, or tip, any other person, including family members and friends, or otherwise disclose such information without the Company’s authorization.
(b) For compliance purposes, you should never trade, tip or recommend securities (or otherwise cause the purchase or sale of securities) while in possession of information that you have reason to believe is material and nonpublic unless you first consult with, and obtain the advance approval of, the Compliance Officer (which is defined in Part I, Section 3(c) below).
(c) Covered Persons must “pre-clear” all trading in securities of the Company in accordance with the procedures set forth in Part II, Section 3 below.
(d) From time to time, the Company may engage in transactions in its own securities. It is the Company’s policy that any transactions in securities by the Company will comply with applicable laws with respect to insider trading.
| 3. | Definitions |
(a) Material. Insider trading restrictions come into play only if the information you possess is “material.” Materiality, however, involves a relatively low threshold. Information is generally regarded as “material” if it has market significance, that is, if its public dissemination is likely to affect the market price of securities, or if it otherwise is information that a reasonable investor would want to know before making an investment decision.
Information dealing with the following subjects is reasonably likely to be found material in particular situations:
| (i) | significant changes in the Company’s prospects; | |
| (ii) | significant write-downs in assets or increases in reserves; | |
| (iii) | developments regarding significant litigation or government agency investigations; | |
| (iv) | liquidity problems; | |
| (v) | changes in earnings estimates or unusual gains or losses in major operations; | |
| (vi) | major changes in the Company’s management or the board of directors; | |
| (vii) | changes in dividends; | |
| (viii) | extraordinary borrowings; | |
| (ix) | major changes in accounting methods or policies; | |
| (x) | award or loss of a significant contract; | |
| (xi) | cybersecurity risks and incidents, including vulnerabilities and breaches; | |
| (xii) | changes in debt ratings; proposals, plans or agreements, even if preliminary in nature, involving mergers, acquisitions, divestitures, recapitalizations, strategic alliances, licensing arrangements, or purchases or sales of substantial assets; and | |
| (xiii) | private or public offerings of Company securities. |
Material information is not limited to historical facts but may also include projections and forecasts. With respect to a future event, such as a merger, acquisition or introduction of a new product, the point at which negotiations or product development are determined to be material is determined by balancing the probability that the event will occur against the magnitude of the effect the event would have on a company’s operations or stock price should it occur. Thus, information concerning an event that would have a large effect on stock price, such as a merger, may be material even if the possibility that the event will occur is relatively small.
When in doubt about whether particular nonpublic information is material, you should presume it is material. If you are unsure whether information is material, you should either consult the Company’s Chief Financial Officer before making any decision to disclose such information (other than to persons who need to know it) or to trade in or recommend securities to which that information relates or assume that the information is material.
(b) Nonpublic. Insider trading prohibitions come into play only when you possess information that is material and “nonpublic.” The fact that information has been disclosed to a few members of the public does not make it public for insider trading purposes. To be “public” the information must have been disseminated in a manner designed to reach investors generally, and the investors must be given the opportunity to absorb the information. Even after public disclosure of information about the Company, you must wait until the close of business on the second trading day after the information was publicly disclosed before you can treat the information as public.
Nonpublic information may include:
| (i) | information available to a select group of analysts or brokers or institutional investors; | |
| (ii) | undisclosed facts that are the subject of rumors, even if the rumors are widely circulated; and | |
| (iii) | information that has been entrusted to the Company on a confidential basis until a public announcement of the information has been made and enough time has elapsed for the market to respond to a public announcement of the information (normally two trading days). |
As with questions of materiality, if you are not sure whether information is considered public, you should either consult with the Compliance Officer or assume that the information is nonpublic and treat it as confidential.
(c) Compliance Officer. The Company has appointed the Chief Financial Officer as the Compliance Officer for this Policy. The duties of the Compliance Officer include, but are not limited to, the following:
| (i) | assisting with implementation and enforcement of this Policy; | |
| (ii) | circulating this Policy to all employees and ensuring that this Policy is amended as necessary to remain up-to-date with insider trading laws; | |
| (iii) | pre-clearing all trading in securities of the Company by Covered Persons in accordance with the procedures set forth in Part II, Section 3 below; and | |
| (iv) | providing approval of any Rule 10b5-1 plans under Part II, Section 1(c) below and any prohibited transactions under Part II, Section 4 below. | |
| (v) | providing a reporting system with an effective whistleblower protection mechanism. |
| 4. | Exceptions |
The trading restrictions of this Policy do not apply to the following:
Options/Restricted Stock Units. Exercising stock options granted under any equity incentive plan of the Company for cash or other consideration permitted by such Plan or settlement of any restricted stock units granted under such plan. However, the sale of any shares issued on the exercise of Company-granted stock options and any cashless exercise of Company-granted stock options are subject to trading restrictions under this Policy.
| 5. | Violations of Insider Trading Laws |
Penalties for trading on or communicating material nonpublic information can be severe, both for individuals involved in such unlawful conduct and their employers and supervisors, and may include jail terms, criminal fines, civil penalties and civil enforcement injunctions. Given the severity of the potential penalties, compliance with this Policy is absolutely mandatory.
(a) Legal Penalties. A person who violates insider trading laws by engaging in transactions in a company’s securities when he or she has material nonpublic information can be sentenced to a substantial jail term and required to pay a criminal penalty of several times the amount of profits gained or losses avoided.
In addition, a person who tips others may also be liable for transactions by the tippees to whom he or she has disclosed material nonpublic information. Tippers can be subject to the same penalties and sanctions as the tippees, and the SEC has imposed large penalties even when the tipper did not profit from the transaction.
The SEC can also seek substantial civil penalties from any person who, at the time of an insider trading violation, “directly or indirectly controlled the person who committed such violation,” which would apply to the Company and/or management and supervisory personnel. These control persons may be held liable for up to the greater of $1 million or three times the amount of the profits gained or losses avoided. Even for violations that result in a small or no profit, the SEC can seek penalties from a company and/or its management and supervisory personnel as control persons.
(b) Company-Imposed Penalties. Employees who violate this Policy may be subject to disciplinary action by the Company, including dismissal for cause. Any exceptions to the Policy, if permitted, may only be granted by the Compliance Officer and must be provided before any activity contrary to the above requirements takes place.
| 6. | Inquiries |
If you have any questions regarding any of the provisions of this Policy, please contact the Compliance Officer.
PART II
| 1. | Blackout Periods |
All Covered Persons are prohibited from trading in the Company’s securities during blackout periods as defined below.
(a) Quarterly Blackout Periods. Trading in the Company’s securities is prohibited during the period beginning at the close of the market on two weeks before the end of a quarter or fiscal year and ending at the close of business on the second trading day following the date the Company’s financial results are publicly disclosed and Form 10-Q or Form 10-K is filed. During these periods, Covered Persons generally possess or are presumed to possess material nonpublic information about the Company’s financial results.
(b) Other Blackout Periods. From time to time, other types of material nonpublic information regarding the Company (such as negotiation of mergers, acquisitions or dispositions, investigation and assessment of cybersecurity incidents or new product developments) may be pending and not be publicly disclosed. While such material nonpublic information is pending, the Company may impose special blackout periods during which Covered Persons are prohibited from trading in the Company’s securities. If the Company imposes a special blackout period, it will notify the Covered Persons affected.
(c) Exception. These trading restrictions do not apply to transactions under a pre-existing written plan, contract, instruction, or arrangement under Rule 10b5-1 under the Securities Exchange Act of 1934 (an “Approved 10b5-1 Plan”) that meet the following requirements:
| (i) | has been reviewed and approved by the Compliance Officer at least five (5) days before being entered into (or, if revised or amended, such proposed revisions or amendments have been reviewed and approved by the Compliance Officer at least five (5) days before being entered into); | |
| (ii) | it provides that no trades may occur thereunder until expiration of the applicable cooling-off period specified in Rule 10b5-1(c)(ii)(B), and no trades occur until after that time. The appropriate cooling-off period will vary based on the status of the Covered Person. For directors and officers, the cooling-off period ends on the later of (x) ninety (90) days after adoption or certain modifications of the 10b5-1 plan; or (y) two business days following disclosure of the Company’s financial results in a Form 10-Q or Form 10-K for the quarter in which the 10b5-1 plan was adopted. For all other Covered Persons, the cooling-off period ends thirty (30) days after adoption or modification of the 10b5-1 plan. This required cooling-off period will apply to the entry into a new 10b5-1 plan and any revision or modification of a 10b5-1 plan; | |
| (iii) | it is entered into in good faith by the Covered Person, and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1, at a time when the Covered Person is not in possession of material nonpublic information about the Company; and if the Covered Person is a director or officer, the 10b5-1 plan must include representations by the Covered Person certifying to that effect; | |
| (iv) | it gives a third party the discretionary authority to execute such purchases and sales, outside the control of the Covered Person, so long as such third party does not possess any material nonpublic information about the Company; or explicitly specifies the security or securities to be purchased or sold, the number of shares, the prices and/or dates of transactions, or other formula(s) describing such transactions; and | |
| (v) | it is the only outstanding Approved 10b5-1 Plan entered into by the Covered Person (subject to the exceptions set out in Rule 10b5-1(c)(ii)(D)). |
No Approved 10b5-1 Plan may be adopted during a blackout period.
If you are considering entering into, modifying or terminating an Approved 10b5-1 Plan or have any questions regarding Approved Rule 10b5-1 Plans, please contact the Compliance Officer.
You should consult your own legal and tax advisors before entering into, or modifying or terminating, an Approved 10b5-1 Plan. A trading plan, contract, instruction or arrangement will not qualify as an Approved 10b5-1 Plan without the prior review and approval of the Compliance Officer as described above.
| 2. | Trading Window |
Covered Persons are permitted to trade in the Company’s securities when no blackout period is in effect. Generally, this means that Covered Persons can trade during the period beginning on the second trading day following the date the Company’s financial results are publicly disclosed and Form 10-Q or Form 10-K is filed and ending on the close of the market two weeks before the end of a quarter or fiscal year. However, even during this trading window, a Covered Person who is in possession of any material nonpublic information should not trade in the Company’s securities until the information has been made publicly available or is no longer material. In addition, the Company may close this trading window if a special blackout period under Part II, Section 1(b) above is imposed and will re-open the trading window once the special blackout period has ended.
| 3. | Pre-Clearance of Securities Transactions |
(a) Because Company Insiders are likely to obtain material nonpublic information on a regular basis, the Company requires all such persons to refrain from trading, even during a trading window under Part II, Section 2 above, without first pre-clearing all transactions in the Company’s securities.
(b) Subject to the exemption in subsection (d) below, no Company Insider may, directly or indirectly, purchase or sell (or otherwise make any transfer, gift, pledge or loan of) any Company security at any time without first obtaining prior approval from the Compliance Officer. These procedures also apply to transactions by such person’s spouse, other persons living in such person’s household and minor children and to transactions by entities over which such person exercises control.
(c) The Compliance Officer shall record the date each request is received and the date and time each request is approved or disapproved. Unless revoked, a grant of permission will normally remain valid until the close of trading two business days following the day on which it was granted. If the transaction does not occur during the two-day period, pre-clearance of the transaction must be re-requested.
(d) Pre-clearance is not required for purchases and sales of securities under an Approved 10b5-1 Plan once the applicable cooling-off period has expired. No trades may be made under an Approved 10b5-1 Plan until expiration of the applicable cooling-off period. With respect to any purchase or sale under an Approved 10b5-1 Plan, the third party effecting transactions on behalf of the Company Insider should be instructed to send duplicate confirmations of all such transactions to the Compliance Officer.
| 4. | Acknowledgment and Certification |
All Covered Persons are required to sign the attached acknowledgment and certification.
ACKNOWLEDGMENT AND CERTIFICATION
The undersigned does hereby acknowledge receipt of the Company’s Insider Trading Policy. The undersigned has read and understands (or has had explained) such Policy and agrees to be governed by such Policy at all times in connection with the purchase and sale of securities and the confidentiality of nonpublic information.
| (Signature) | |||
| (Please print name) | |||
| Date: |
Last Revised: March 19, 2025
APPENDIX A
THE COMPANY AND THE COMPANY’S FINANCE DEPARTMENT LEADERSHIP, INCLUDING ALL PERSONNEL AT THE MANAGER LEVEL OR MORE SENIOR LEVEL
Exhibit 21
Subsidiaries of Nortech Systems Incorporated
The following are wholly owned subsidiaries of the Company as of December 31, 2024.
| Subsidiary | Jurisdiction of Organization | |
| Manufacturing Assembly Solutions of Monterrey, Inc. | Mexico | |
| Nortech Systems, Hong Kong Company, Limited | Hong Kong | |
| Nortech Systems, Suzhou Company, Limited | China | |
| Nortech Systems Holdings, LLC | Minnesota, USA |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (No. 333-279554, 333-223959, 333-237293, and 333-271986) of Nortech Systems Incorporated on Form S-8 of our report dated March 31, 2025, relating to our audit of the consolidated financial statements, which appears in this annual report on Form 10-K of Nortech Systems Incorporated for the year ended December 31, 2024.
/s/ BAKER TILLY US, LLP
Minneapolis, Minnesota
March 31, 2025
Exhibit 31.1
Certification
I, Jay D. Miller, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Nortech Systems Incorporated and Subsidiary; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 31, 2025 | By: | /s/ Jay D. Miller |
| Jay D. Miller | ||
President and Chief Executive Officer |
||
| Nortech Systems Incorporated |
EXHIBIT 31.2
Certification
I, Andrew D. C. LaFrence, certify that:
| 1. | I have reviewed this report on Form 10-K of Nortech Systems Incorporated and Subsidiary; |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 31, 2025 | By: | /s/ Andrew D. C. LaFrence |
| Andrew D. C. LaFrence | ||
Senior Vice President and Chief Financial Officer |
||
| Nortech Systems Incorporated |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jay D. Miller, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Nortech Systems Incorporated on Form 10-K for the year ended December 31, 2024, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Nortech Systems Incorporated.
| March 31, 2025 | By: | /s/ Jay D. Miller |
| Jay D. Miller | ||
| Chief Executive Officer and President | ||
| Nortech Systems Incorporated |
I, Andrew D. C. LaFrence, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Nortech Systems Incorporated on Form 10-K for the year ended December 31, 2024 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Nortech Systems Incorporated.
| March 31, 2025 | By: | /s/ Andrew D. C. LaFrence |
| Andrew D. C. LaFrence | ||
Senior Vice President and Chief Financial Officer |
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| Nortech Systems Incorporated |