NORTECH SYSTEMS INC

Previous wording

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.

Current wording

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, 2025, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility in July 2025. We also have facilities in Monterrey, Mexico and Suzhou, China.

Previous wording

*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:

Current wording

*Net Sales.*Net sales for the year ended December 31, 2025 and 2024 were $118,365 and $128,133, respectively, a year over year decrease of $9,768 or 7.6%. The following is a summary of net sales by our major industry markets:

Previous wording

*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.

Current wording

*Backlog.*Our 90-day shipment backlog as of December 31, 2025 was $27,288, up 3.2% from December 31, 2024. 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.

Previous wording

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.

Current wording

The 90-day and total backlog as of December 31, 2025 includes orders already recognized in net sales and included in the contract asset value of $15,184.

Previous wording

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.

Current wording

General and administrative expenses. General and administrative expenses decreased $919 or 7.8% in the year ended December 31, 2025 as compared with 2024 as the result of lower incentive compensation accruals in the current year.

Previous wording

*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.

Current wording

*Interest expense.*Interest expense was $964 and $744 for the years ended December 31, 2025 and 2024, respectively. This increase was driven by higher borrowings under our line of credit arrangement and an increased interest rate. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

Previous wording

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.

Current wording

Income taxes. Our effective tax rates for the years ended December 31, 2025 and 2024 were (2,391)% and (37.9)%, respectively. The unusually large negative rate in 2025 is primarily driven by the very small amount of pretax book income for the year, which causes normal permanent differences and valuation allowance adjustments to produce a disproportionately large impact on the calculated effective tax rate. The primary drivers of the change in the effective tax rates relate to changes in pretax book income between the years.

Previous wording

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.

Current wording

Net Loss. Our net loss in 2025 was $252 or $0.09 per diluted and basic common share. Our net loss in 2024 was $1,295 or $0.47 per diluted and basic common share.

Previous wording

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.

Current wording

Cash provided by operating activities for the year ended December 31, 2025 was $2,743, compared with cash used in operating activities of $2,250 for the year ended December 31, 2024. In 2025, operating cash flow was driven by significant non-cash add-backs as well as favorable working-capital movements, as increases in accounts receivable and contract assets were more than offset by a decrease in prepaid expenses and an increase in accounts payable due to timing of payments. In 2024, cash used in operating activities reflected the timing of accounts payable payments and the payment of accrued bonus expenses.

Previous wording

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.

Current wording

Net cash used in investing activities was $157 and $1,263 for the years ended December 31, 2025 and 2024, respectively. Cash used in investing activities in both years primarily relates to the purchase of property and equipment, partially offset in the year ended December 31, 2025 by proceeds from the sale of the Blue Earth property and equipment.

Previous wording

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.

Current wording

Net cash used in financing activities in 2025 of $1,867 consisted primarily of net payments on the line of credit. The 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.

Previous wording

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.

Current wording

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, when we have an enforceable right to payment for performance completed to date.. 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, 2025, the Company has recorded a contract asset of $15,184 for unbilled customer net sales included in net sales. Net sales are recorded net of returns, allowances and customer discounts.

Previous wording

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.

Current wording

Inventory is 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, 2025, we had an inventory reserve of $1,853.

Previous wording

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.

Current wording

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. During 2025 and 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.

Previous wording

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.

Current wording

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 $110 as of December 31, 2025.