NORTECH SYSTEMS INC

Previous wording

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.

Current wording

One customer accounted for at 32.2% of net sales for the year ended December 31, 2025, and 27.7% of net sales for the year ended December 31, 2024. The loss of a substantial portion of net sales to our largest customers could have a material adverse effect on us.

Previous wording

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.

Current wording

We purchase raw materials, commodities and components for use in our production process. Increased costs of these materials, including tariffs, 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, financial results and liquidity.

Previous wording

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.

Current wording

Our customers cancel orders, change order quantity, timing and product specifications that if not managed would have an adverse effect on the timing of net sales and inventory carrying costs.

Previous wording

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.

Current wording

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, changes to the components required to produce products, and contract termination could have an adverse effect on our operations, financial results and liquidity. 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. To reduce the impact of canceled or charged orders, our terms and conditions require customers to purchase excess inventory.

Previous wording

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.

Current wording

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. The loss of key management or an ineffective transition of leadership could adversely affect our operations and strategic direction.

Previous wording

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.

Current wording

Competitive factors in our targeted markets are believed to be manufacturing capabilities, 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.

Previous wording

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.

Current wording

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, financial position and liquidity. 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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, reducing the number of facilities, and changing the location of certain customer part production to different 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.

Previous wording

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.

Current wording

Restructurings could adversely affect us, including a slower than expected more costly transition of customers between facilities, 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.

Previous wording

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.

Current wording

We are dependent on our information technology systems for order, inventory procurement and management, production management, treasury, financial reporting, communications and other functions. If our information systems fail or experience major interruptions due to physical damage or loss of power or incur disruptions to our information systems, including security breaches, losses of data or outages, cyberattacks and other security issues, it could adversely affect our operations and/or financial results.

Previous wording

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.

Current wording

We rely on our information technology systems to effectively manage our operations, administration 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.

Previous wording

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.

Current wording

We also 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, to the extent feasible, 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.

Previous wording

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.

Current wording

We have made investments in 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.

Previous wording

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.

Current wording

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 cash flow generated from operations, and we incurred R&D expenses of 1,172 and $1,191 in the years ended December 31, 2025 and 2024, respectively. 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.

Previous wording

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.

Current wording

Our credit agreement contains financial and operating covenants with which we must comply.

Previous wording

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.

Current wording

Our Mexico facility operates as a maquiladora, and its financial records are kept in Mexican Pesos. As the functional 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, 2025 and 2024, we recorded translation gain of $120 and a translation loss of $137, respectively, in our consolidated statements of operations. The majority of these gains and losses were related to the translation of value added tax receivables denominated in Mexican Pesos into US dollars.

Previous wording

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.

Current wording

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 initially finance these purchases. 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 a short-term increase in inventory 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.

Previous wording

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.

Current wording

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 is infrequently held at a customer’s facility or warehouse, or elsewhere 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.

Previous wording

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.

Current wording

New or changing laws, regulations, governmental orders or mandates, 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.

Previous wording

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.

Current wording

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. While we achieved CMMC level 2 certification in 2025, if we cannot maintain compliance with these regulations, our agreements with defense contractors and the resulting net sales may be impacted negatively.