NORTECH SYSTEMS INC 10-K

Item 8. Financial Statements and Supplementary Data   PAGE     Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 23 ) 30     Consolidated Financial Statements:       Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020 32     Consolidated Balance Sheets as of December 31, 2021 and 2020 33     Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 34     Consolidated Statements of Shareholders' Equity for the years ended December 31, 2021 and 2020 35     Notes to Consolidated Financial Statements 36-59     (The remainder of this page was intentionally left blank.)   29     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the shareholders and the board of directors of Nortech Systems, Inc. and Subsidiaries:   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheets of Nortech systems, Inc. and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.   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.   30     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/ Baker Tilly US, LLP   We have served as the Company's auditor since 2017.   Minneapolis, Minnesota   March 17, 2022   31       NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE DATA)         2021     2020                     Net Sales   $ 115,168     $ 104,106                     Cost of Goods Sold     99,304       94,441                     Gross Profit     15,864       9,665                     Operating Expenses:                 Selling Expenses     2,361       2,474   General and Administrative Expenses     10,002       9,253   Restructuring Expenses     327       -   R&D Expenses     483       -   Impairment of Goodwill     -       2,375   Loss on Abandonment of Intangible Asset     560       -   Gain on Sale of Property and Equipment     ( 141 )     ( 3,821 ) Total Operating Expenses     13,592       10,281                     Income (Loss) from Operations     2,272       ( 616 )                   Other Income (Expense)                 Interest Expense     ( 430 )     ( 620 ) PPP Loan Forgiviness Gain     6,171       -   Total Other Income (Expense)     5,741       ( 620 )                   Income (Loss) Before Income Taxes     8,013       ( 1,236 )                   Income Tax Expense     859       310                     Net Income (Loss)   $ 7,154     $ ( 1,546 )                   Income (Loss) Per Common Share:                 Basic   $ 2.68     $ ( 0.58 ) Weighted Average Number of Common Shares                 Outstanding - Basic     2,664,586       2,657,738                     Diluted   $ 2.54     $ ( 0.58 ) Weighted Average Number of Common Shares                 Outstanding - Dilutive     2,821,523       2,657,738                     Other comprehensive income (loss)                 Foreign currency translation     93       220   Comprehensive income (loss), net of tax   $ 7,247     $ ( 1,326 )   See accompanying notes to consolidated financial statements   32       NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE DATA)   ASSETS   2021     2020   Current Assets                 Cash   $ 643     $ 352   Restricted Cash     1,582       3,212   Accounts Receivable, less allowances of $ 328 and $ 343     14,548       15,625   Employee Retention Credit Receivable     5,209       -   Inventories, Net     19,434       13,917   Contract Assets     8,698       5,899   Prepaid Assets and Other Current Assets     1,660       2,032   Total Current Assets     51,774       41,037                     Property and Equipment, Net     5,833       6,426   Operating Lease Assets     8,983       8,998   Other Intangible Assets, Net     501       1,173   Total Assets   $ 67,091     $ 57,634                     LIABILITIES AND SHAREHOLDERS' EQUITY                 Current Liabilities                 Current Portion of Long-Term Debt   $ -     $ 1,204   Current Portion of Finance Lease Obligations     601       660   Current Portion of Operating Leases     1,043       688   Accounts Payable     12,710       11,239   Accrued Payroll and Commissions     4,045       2,870   Other Accrued Liabilities     3,907       2,875   Total Current Liabilities     22,306       19,536                     Long-Term Liabilities                 Long-term Line of Credit     8,959       3,328   Long-Term Debt, Net of Current Maturities     -       5,865   Long-Term Finance Lease Obligations, Net of Current Portion     916       1,152   Long-Tem Operating Lease Obligations, Net of current Portion     8,695       8,889   Other Long-Term Liabilities     104       146   Total Long-Term Liabilities     18,674       19,380   Total Liabilities     40,980       38,916                     Shareholders' Equity                 Preferred Stock, $1 par value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding     250       250   Common Stock - $0.01 par value; 9,000,000 Shares Authorized; 2,672,064 and 2,659,628 Shares Issued and Outstanding, respectively     27       27   Additional Paid-In Capital     15,962       15,816   Accumulated Other Comprehensive Income (Loss)     56       ( 37 ) Retained Earnings     9,816       2,662   Total Shareholders' Equity     26,111       18,718   Total Liabilities and Shareholders' Equity   $ 67,091     $ 57,634     See accompanying notes to consolidated financial statements   33       NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS)       2021     2020   CASH FLOWS FROM OPERATING ACTIVITIES                 Net Income (Loss)   $ 7,154     $ ( 1,546 ) Adjustments to Reconcile Net Loss to Net Cash                 Provided by Operating Activities:                 Depreciation     1,774       2,002   Amortization     176       191   Compensation on Stock-Based Awards     111       68   Compensation on Equity Appreciation Rights     143       108   Loss on Abandonment of Intangible Asset     560       -   Loss on Goodwill Impairment     -       2,375   Change in Accounts Receivable Allowance     ( 15 )     8   Change in Inventory Reserves     ( 860 )     672   Gain on Disposal of Property and Equipment     ( 141 )     ( 3,821 ) PPP Loan Forgiveness Gain     ( 6,171 )     -   Employee Retention Credit Receivable     ( 5,209 )     -   Changes in Current Operating Items                 Accounts Receivable     1,134       3,019   Inventories     ( 4,613 )     ( 216 ) Contract Assets     ( 2,799 )     1,760   Prepaid Expenses and other Curent Assets     ( 171 )     651   Income Taxes     634       ( 675 ) Accounts Payable     1,471       ( 2,950 ) Accrued Payroll and Commissions     1,176       ( 623 ) Other Accrued Liabilities     1,106       340   Net Cash (Used In) Provided by Operating Activities     ( 4,540 )     1,363                     CASH FLOWS FROM INVESTING ACTIVITIES                 Proceeds from Sale of Property and Equipment     626       6,019   Purchase of Intangible Asset     ( 64 )     ( 34 ) Purchases of Property and Equipment     ( 1,292 )     ( 485 ) Net Cash (Used In) Provided By Investing Activities     ( 730 )     5,500                     CASH FLOWS FROM FINANCING ACTIVITIES                 Net Change in Line of Credit     5,688       ( 6,760 ) Proceeds from Long-Term Debt     -       6,077   Principal Payments on Long-Term Debt     ( 1,128 )     ( 2,684 ) Principal Payments on Financing Leases     ( 664 )     ( 592 ) Stock Option Excercises     35       -   Net Cash Provided By (Used In) Financing Activities     3,931       ( 3,959 )                   Effect of Exchange Rate Changes on Cash     -       -                     Net Change in Cash and Cash Equivalents     ( 1,339 )     2,904   Cash and Cash Equivalents - Beginning of Year     3,564       660   Cash and Cash Equivalents - End of Year   $ 2,225     $ 3,564                     Reconciliation of cash and restricted cash reported within the consolidated balance sheets                 Cash   $ 643     $ 352   Restricted Cash     1,582       3,212   Total Cash and restricted cash reported in the consolidated statements of cash flows   $ 2,225     $ 3,564                     Supplemental Disclosure of Cash Flow Information:                 Cash Paid for Interest   $ 316     $ 577   Cash Paid (Refunded) for Income Taxes     ( 114 )     855                     Supplemental Noncash Investing and Financing Activities:                 Property and Equipment Purchases in Accounts Payable   $ 35     $ 175   Property Acquired under Operating Lease     1,188       4,999   Equipment Acquired under Finance Lease     368       395   PPP Loan Forgiveness     6,171       -     See accompanying notes to consolidated financial statements   34       NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS)                               Accumulated                                       Additional     Other             Total       Preferred     Common     Paid-In     Comprehensive     Retained     Shareholders'       Stock     Stock     Capital     Income (Loss)     Earnings     Equity   BALANCE DECEMBER 31, 2019   $ 250     $ 27     $ 15,748     $ ( 257 )   $ 4,208     $ 19,976   Net Loss     -       -       -       -       ( 1,546 )     ( 1,546 ) Foreign Currency Translation Adjustment     -       -       -       220       -       220   Compensation on Stock-based awards     -       -       68       -       -       68                                                     BALANCE DECEMBER 31, 2020     250       27       15,816       ( 37 )     2,662       18,718   Net Income     -       -       -       -       7,154       7,154   Foreign currency translation adjustment     -       -       -       93       -       93   Stock Option Exercises     -       -       35       -       -       35   Compensation on stock-based awards     -       -       111       -       -       146                                                     BALANCE DECEMBER 31, 2021   $ 250     $ 27     $ 15,962     $ 56     $ 9,816     $ 26,111     See accompanying notes to consolidated financial statements     35 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (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 (“GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).   Nature of Business Our manufacturing services include complete medical devices, printed circuit board assemblies, wire and cable assemblies, and complex higher-level electromechanical assemblies for a wide range of medical, industrial and defense and aerospace industries. We provide a full "turn-key" contract manufacturing service to our customers. All products are built to the customer's design specifications. We also provide engineering services and repair services.   Our manufacturing facilities are located in Bemidji, Blue Earth, Milaca, and Mankato, Minnesota as well as, Monterrey, Mexico and Suzhou, China. Products are sold to customers both domestically and internationally.   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 and its 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 revenue 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, goodwill impairment and long-lived asset impairment testing. 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. As of December 31, 2021 we had outstanding letters of credit for $ 400 in total to Essjay Bemidji Holdings, LLC and Essjay Mankato Holdings, LLC. Restricted cash as of December 31, 2021 and December 31, 2020 was $ 1,582 and $ 3,212 , respectively. The December 31, 2021 and 2020 restricted cash balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.   36 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       Accounts Receivable and Allowance for Doubtful Accounts We grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts was $ 328 and $ 343 at December  31, 2021 and 2020, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.   Employee Retention Credit (ERC) and Payroll Tax Deferral We qualified for Employee Retention Credits on qualified wages paid in the first and second quarters of 2021 and filed for both credits in the third quarter of 2021. We recognize government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. In 2021, there was $ 5,209 related to Employee Retention Credits recognized as a reduction of the associated costs within cost of goods sold of $ 4,670 , selling of $ 125 , and general and administrative expenses of $ 414 on the consolidated statements of operations and within Employee Retention Credits Receivable on the consolidated balance sheets. See Note 12.   The CARES Act allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As of December 31, 2021, there was $ 1,158 of social security tax payments deferred, of which 50% was required to be remitted by December 2021 and the remaining 50% by December 2022. IRS Notice 2020 - 22 and Notice 2021 - 24 provides that employers are not subject to the penalty for failing to timely deposit employment taxes under Code Section 6656 if (i) the amount of employment taxes that are not deposited (i.e., the deemed credit amount) is less than or equal to the employer’s anticipated credits (ERC) and (ii) the employer did not previously file for advance payment of these credits. We did not remit the amount due on December 31, 2021 due to our awaiting receipt of the anticipated credits under the ERC, as allowed under the above IRS Notices. The deferred amounts are recorded within accrued payroll and commissions on the condensed consolidated balance sheets.   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:       2021     2020   Raw materials   $ 18,492     $ 14,865   Work in process     1,678       969   Finished goods     562       242   Reserves     ( 1,298 )     ( 2,159 ) Total   $ 19,434     $ 13,917     37 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     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:   Buildings  39 Years Leasehold improvements 3-15 Years Manufacturing equipment 3-7 Years Office and other equipment 3-7 Years   Property and equipment at December 31, 2021 and 2020:       2021     2020   Land   $ 148     $ 176   Building and Leasehold Improvements     4,083       5,999   Manufacturing Equipment     18,892       22,685   Office and Other Equipment     6,934       7,148   Accumulated Depreciation and Amortization     ( 24,224 )     ( 29,582 ) Total Property and Equipment, Net   $ 5,833     $ 6,426     Long-Lived Asset Impairment We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets or asset group. 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. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose.   Preferred Stock Preferred stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of 12 % when and if declared. In liquidation, holders of preferred stock have preference to the extent of $ 1.00 per share plus dividends accrued but unpaid. No preferred stock dividends were declared or paid during the years ended December 31, 2021 and 2020.   38 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Revenue Recognition Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Consolidated Statements of Operations and Comprehensive Loss. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.   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. The total amount charged to expense was $ 57 and $ 42 for the years ended December 31, 2021 and 2020, respectively.   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.   39 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Incentive Compensation We use a Black-Scholes option-pricing model to determine the grant date fair value of our incentive awards and recognize the expense on a straight-line basis over the vesting period. See Note 8 for additional information.   Net Income (Loss) Per Common Share Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net income (loss) per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding, unless their effect is antidilutive. For the year ended December 31, 2021, stock options of 156,937 were included in the computation of diluted income per common share as their impact were dilutive. There were no dilutive shares in the years ended 2020 due to the net loss.   Fair Value of Financial Instruments The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash, accounts receivable, accounts payable, and accrued 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. We utilized a Level 3 valuation in our testing of goodwill as of October 1, 2020. See Note 4, Goodwill and Intangible Assets, for more detail.   40 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Enterprise-Wide Disclosures Our results of operations for the years ended December 31, 2021 and 2020 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.   Export sales from our domestic operations represent approximately 3.1 % and 2.8 % of consolidated net sales for the years ended December 31, 2021 and 2020, respectively.   Net sales by our major EMS industry markets for the years ended December 31, 2021 and 2020 are as follows:       2021     2020   Medical   $ 63,047     $ 55,098   Aerospace and Defense     16,639       20,624   Industrial     35,482       28,384   Total Net Sales   $ 115,168     $ 104,106     Noncurrent assets, excluding deferred taxes, by country are as follows:       United States     Mexico     China     Total   December 31, 2021                                 Property and equipment, net   $ 4,664     $ 454     $ 715     $ 5,833   Operating Lease Assets   $ 5,287       2,800       896     $ 8,983   Other assets   $ 501       -       -     $ 501                                     December 31, 2020                                 Property and equipment, net   $ 5,057     $ 681     $ 688     $ 6,426   Operating Lease Assets   $ 5,574       3,117       307     $ 8,998   Other assets   $ 1,173       -       -     $ 1,173     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 other income (expense). The functional currency for our China subsidiary is the Renminbi (“RMB”). Assets and liabilities of the China operation 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. The total foreign currency translation adjustment increased shareholders’ equity by $ 93 and $ 220 for the years ended December 31, 2021 and 2020, respectively.   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. Net foreign currency transaction losses included in the determination of net earnings was $ 131 and $ 32 for the years ended December 31, 2021 and 2020, respectively.   41 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Reclassification Certain reclassifications have been made to the prior year’s consolidated financial statements to enhance comparability with the current year’s financial statements. As a result, certain line items have been restated in the statement of operations to properly reflect the classification of information technology related expenses. Comparative figures have been adjusted to conform to the current year’s presentation.   The items were reclassified as follows:       Year Ended       December 31, 2020       Previously Reported     After Reclassification   Cost of Goods Sold   $ 95,651     $ 94,441   General and Administrative Expenses     8,043       9,253     Recently Issued Accounting Standards In June 2016, the FASB issued ASU 2016 - 13, Measurement of Credit Losses on Financial Instruments. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The ASU also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements. The new guidance is effective for public business entities that meet the definition of a Smaller Reporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.   In March 2020, the FASB issued ASU 2020 - 04,  Reference Rate Reform. ASU 2020 - 04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020 - 04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. Our line of credit agreement with Bank of America was amended on December 31, 2021 to reference the Bloomberg Short-Term Bank Yield Index (BSBY) rather than LIBOR. We do not anticipate a material impact on our consolidated financial statements related to the change in index. We do not have additional material agreements that will be impacted by a change in reference rate.   42 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS   Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at two high-credit quality financial institutions. These accounts may at times exceed federally insured limits. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.   We have certain customers whose revenue 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 26.9 % and 23.4 % of net sales for the years ended December 31, 2021 and 2020, respectfully. Accounts receivable for one customer was 19.3 % and 19.6 % at December 31, 2021 and 2020, respectfully.     NOTE 3. REVENUE   Revenue recognition Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.   Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.   The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 78 % and 84 % of our revenue for the years ended December 31, 2021 and 2020, respectively. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.   43 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.   On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.   Contract Assets Contract assets, recorded as such in the Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the years ended December 31, 2021 and 2020 was as follows:   Outstanding at January 1, 2020   $ 7,659   Increase (decrease) attributed to:         Transferred to receivables from contract assets recognized     ( 6,795 ) Product transferred over time     5,035   Outstanding at December 31, 2020     5,899   Increase (decrease) attributed to:         Transferred to receivables from contract assets recognized     ( 5,259 ) Product transferred over time     8,058   Outstanding at December 31, 2021   $ 8,698     We expect substantially all of the remaining performance obligations for the contract assets recorded as of December 31, 2021, 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.   44 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     The following tables summarize our net sales by market for the years ended December 31, 2021 and 2020:       Year Ending December 31, 2021       Product/ Service Transferred Over Time     Product Transferred at Point in Time     Noncash Consideration     Total Net Sales by Market   Medical   $ 47,285     $ 13,250     $ 2,512     $ 63,047   Aerospace and Defense     14,879       861       899       16,639   Industrial     27,213       6,851       1,418       35,482   Total net sales   $ 89,377     $ 20,962     $ 4,829     $ 115,168         Year Ending December 31, 2020       Product/ Service Transferred Over Time     Product Transferred at Point in Time     Noncash Consideration     Total Net Sales by Market   Medical   $ 45,694     $ 6,398     $ 3,006     $ 55,098   Aerospace and Defense     18,948       454       1,222       20,624   Industrial     22,451       4,444       1,489       28,384   Total net sales   $ 87,093     $ 11,296     $ 5,717     $ 104,106       NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS   Goodwill   We evaluate the value of our goodwill annually as of October 1 st or more frequently such as when events or changes in circumstances indicate there may be an impairment. We test for impairment at the reporting unit level, which we had one reporting unit (Nortech) at December 31, 2020.   We tested goodwill for impairment as of October 1, 2020 and concluded that goodwill was impaired due to a significant reduction of results from operations during the fourth quarter of 2020 that was more than expected suggesting a greater impact of the COVID- 19 pandemic. We recorded a $ 2,375 impairment loss, which fully impaired our remaining goodwill.   In determining the nonrecurring fair value measurements of goodwill, we utilized a discounted cash flow approach. Our discounted cash flow model includes assumptions related to our product revenue, gross margins, operating margins and other assumptions along with a weighted average cost of capital that is a combination of the risk free rate coupled with our company specific risk premium.   45 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Other Intangible Assets Finite life intangible assets at December 31, 2021 and 2020 are as follows:       Customer Relationships     Intellectual Property     Trade Names     Patents     Total   Balance at January 1, 2020   $ 651     $ 5     $ 631     $ 56     $ 1,343   Additions     -       -       -       21       21   Amortization     144       5       42       -       191   Balance at December 31, 2020   $ 507     $ -     $ 589     $ 77     $ 1,173   Additions     -       -       -       64       64   Amortization     147       -       29       -       176   Abandonment Loss     -       -       560       -       560   Balance at December 31, 2021   $ 360     $ -     $ -     $ 141     $ 501     In 2021, we determined the fair value of the Devicix tradename was more likely than not at $ 0 based on management’s best estimate and recognized a $ 560 loss on abandonment of intangible assets.   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 3.0 years. Patents are not being amortized as they are in process and a patent has not yet been received.   Amortization expense of finite life intangible assets was $ 176  and $ 191 for the years ended December 31, 2021 and 2020, respectively.   Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows:   Year   Amount   2022   $ 145   2023     145   2024     71   Total   $ 361     We completed our qualitative assessment of our long-lived assets as of December 31, 2021 and conclude it is more likely than not that our finite-lived intangible and other long-lived assets were not impaired. In the fourth quarter of 2020, we evaluated that there was a trigger event, largely driven by the ongoing impact of COVID- 19, that indicated that the carrying amount of our long-lived assets may not be recoverable. We performed the recoverability test of our undiscounted cash flow forecast over the life of our primary asset and determined there was no impairment.   46 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       NOTE 5. FINANCING ARRANGEMENTS   We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $ 16,000 that expires on June 15, 2022. On December 31, 2021, we renewed the credit agreement through June  15, 2026.   Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Prior to the amendment, the line of credit was subject to variations in LIBOR. Our line of credit bears interest at a weighted-average interest rate of 3.5 % and 4.0 % as of December  31, 2021 and 2020, respectively. We had borrowings on our line of credit of $ 9,016 and $ 3,328 outstanding as of December  31, 2021 and December  31, 2020, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $ 58 on the consolidated balance sheet for the year ended December 31, 2021.   The line of credit with Bank of America contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.    The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2021 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days. The Company met the covenants for the period ended December 31, 2021.   At December 31, 2021 and 2020, we had unused availability under our line of credit of $ 3,539 and $ 8,131 , respectively, supported by our borrowing base. The line is secured by substantially all of our assets. In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improves our unused availability.   On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A., which provides for an unsecured loan of $ 6,077 pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus, Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which funds were received on April 22, 2020. The loan was accounted for as debt until November 3, 2021 when the $ 6,077 loan and $ 93 accrued interest was fully forgiven by the SBA. As a result, we recorded a PPP loan forgiveness gain of $ 6,170 which is included in other income (expense) on the consolidated statements of operations and other comprehensive income (loss) for the year ended December 31, 2021.   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 1.6 million USD) that will expire on June 22, 2022. This line of credit bears an interest rate of 4.5 % and we had no amounts outstanding as of December 31, 2021 and 2020.   47 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     There was no long-term debt at December 31, 2021. Long-term debt balances at December 31, 2020 consisted of the following (in thousands):       December 31,       2020   Term note payable - Bank of America         Real estate term note bearing interest at one-month LIBOR + 2.25% ( 4.3% as of December 31, 2020) with monthly payments of approximately $41,000 plus interest secured by substantially all assets.   $ 1,071                       Promissory Note     6,077                   7,148   Debt issuance Costs     ( 79 ) Total long-term debt     7,069   Current maturities of long-term debt     ( 1,204 ) Long-term debt - net of current maturities   $ 5,865     48 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       NOTE 6. LEASES   We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At December 31, 2021, we do not have material lease commitments that have not commenced. We did extend and add operating leases for our manufacturing facilities in 2021.   We have financing leases for certain property and equipment used in the normal course of business.   The components of lease expense were as follows:       December 31,     December 31,   Lease Cost   2021     2020   Operating lease cost   $ 2,291     $ 1,643   Finance lease interest cost     79       102   Finance lease amortization expense     502       637   Total lease cost   $ 2,872     $ 2,382     Supplemental balance sheet information related to leases was as follows:     Balance Sheet Location   December 31, 2021     December 31, 2020   Assets                   Operating lease assets Operating lease assets   $ 8,983     $ 8,998   Finance lease assets Property, Plant and Equipment     2,052       2,330   Total leased assets   $ 11,035     $ 11,328                       Liabilities                   Current                     Current operating lease liabilities Current Portion of Operating Lease Obligations   $ 1,043     $ 688     Current finance lease liabilities Current Portion of Finance Lease Obligations     601       660   Noncurrent                   Long-term operating lease liabilities Long Term Operating Lease Liabilities, Net     8,695       8,889   Long term finance lease liabilities Long Term Finance Lease Obligations, Net     916       1,152   Total lease liabilities   $ 11,255     $ 11,389     49 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Supplemental cash flow information related to leases was as follows:       December 31,     December 31,       2021     2020   Operating leases                 Cash paid for amounts included in the measurement of lease liabilities   $ 1,649     $ 1,058   Right-of-use assets obtained in exchange for lease obligations   $ 1,188     $ 4,999     The right-of use-assets obtained in exchange in for lease obligations in the year ended December 31, 2021 was largely due to leasing of additional space in our Suzhou, China facility.   Maturities of lease liabilities were as follows:     Operating Leases     Finance Leases     Total   2022     1,754       664       2,418   2023     1,809       409       2,218   2024     1,509       357       1,866   2025     1,255       103       1,358   2026     1,217       115       1,332   Thereafter     7,066       -       7,066   Total lease payments   $ 14,610     $ 1,648     $ 16,258   Less: Interest     ( 4,871 )     ( 132 )     ( 5,003 ) Present value of lease liabilities   $ 9,739     $ 1,516     $ 11,255     The lease term and discount rate at December 31, 2021 were as follows:   Weighted-average remaining lease term (years)         Operating leases     9.4   Finance leases     3.06   Weighted-average discount rate         Operating leases     7.7 % Finance leases     5.17 %   50 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       NOTE 7. RESTRUCTURING CHARGES   In 2021, we recorded restructuring charges of $ 327 related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility. With the Merrifield closure, we shifted wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations. No amounts were accrued as of December 31, 2021. We reduced our workforce by approximately 42 employees as a result of this facility closure.     NOTE 8. INCOME TAXES   In December 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA included additional funding through tax credits as part of its economic package for 2021. We evaluated these items in its tax computation as of December 31, 2020 and determined that the items do not have a material impact on our financial statements as of December  31, 2020. Additionally, as part of the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we received a PPP loan on April 15, 2020. The full amount of the loan and accrued interest were forgiven on November 3, 2021. This extinguishment of debt income is recorded in other income (expense) on the consolidated statements of operations and other comprehensive income for the year ended December 31, 2021. The PPP loan forgiveness will be treated as tax-exempt income due to the provisions in the CAA.   The income tax expense for the years ended December  31, 2021 and 2020 consists of the following:       2021     2020   Current taxes - Federal   $ 401     $ 121   Current taxes - State     17       24   Current taxes - Foreign     441       165   Income tax expense   $ 859     $ 310     51 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     The statutory rate reconciliation for the years ended December  31, 2021 and 2020 is as follows:       2021     2020   Statutory Rate   $ 1,606     $ ( 259 ) State Income Tax     14       60   Effect of foreign operations     110       ( 18 ) Change in State Deferred Rate     ( 39 )     ( 115 ) Valuation Allowance     472       101   PPP Loan Forgiveness     ( 1,276 )     -   US Permanent differences     3       5   Federal Tax Credits     ( 37 )     ( 108 ) Global Intangible Low-Taxed Income Effect     391       125   Return to provision - credits, perm diffs     ( 481 )     4   Goodwill Impairment     -       499   IRS Payable     121       -   Other     ( 25 )     16       $ 859     $ 310     Income and loss from operations before income taxes was derived from the following sources:       2021     2020   Domestic   $ 6,072     $ ( 2,109 ) Foreign     1,941       873       $ 8,013     $ ( 1,236 )   52 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Deferred tax (liabilities) assets at December 31, 2021 and 2020, consist of the following:       2021     2020   Deferred Tax                 Allowance for uncollectable accounts   $ 80     $ 85   Inventories reserve     303       531   Accrued vacation     135       115   Accrued bonus     274       57   Stock-based compensation and equity appreciation rights     135       78   Other Accruals     547       -   Lease Accounting ASC 842 Lease Liability     1,555       1,405   Section 481(a) adjustment     -       798   Net operating loss carryforwards     101       82   Tax credit carryforwards     162       165   Unrealized Foreign Currency Gain     22       42   Intangibles     569       -   COGS Rev Rec Adjustment     1,776       -   COGS Offset Adjustment     ( 1,807 )     -   Other     10       5   Total     3,862       3,363   Valuation allowance     ( 1,976 )     ( 1,504 ) Deferred tax assets     1,886       1,859                     Accumulated Other Comprehensive Income     ( 297 )     ( 61 ) Lease Accounting ASC 842 Lease Asset     ( 1,518 )     ( 1,386 ) Property and equipment     ( 71 )     ( 412 ) Deferred tax liabilities     ( 1,886 )     ( 1,859 ) Net deferred tax assets   $ -     $ -     We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and state net operating loss carry forwards.  A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our financial statements become deductible for income tax purposes, or when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.   Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives.   53 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     We have concluded that a valuation allowance is needed for all our United States based deferred tax assets due to the cumulative net losses we have sustained in the past three years.  In analyzing the need for a valuation allowance, we considered our history of operating results for income tax purposes over the past three years in each of the tax jurisdictions where we operate, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook and timing regarding when we might return to profitability.  After considering all available evidence both positive and negative, we concluded that the valuation allowance is needed for all our U.S. based deferred tax assets, no valuation allowance was placed on the foreign assets.   At December 31, 2021, for U.S. state tax purposes, we have Minnesota R&D credit carryforwards of $ 181 and various state net operating loss carryforwards of $ 296 for Iowa, $ 679 for Minnesota, $ 45 for Wisconsin. The state credits and NOLs expire at various years starting in 2024.   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 tax 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 table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December  31, 2021 and 2020 (in thousands):   Balance at December 31, 2020   $ 50   Tax Positions - Additions     -   Tax Positions - Reductions     -   Balance at December 31, 2021   $ 50     Our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December  31, 2021 and 2020 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 tax returns.   We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  As of December  31, 2021, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax year 2017. Our tax year 2018 income tax return is currently under IRS audit.     NOTE 9. 401 (K) RETIREMENT PLAN   We have a 401 (k) profit sharing plan (the 401 (k) Plan) for our employees. The 401 (k) Plan is 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 18. Employees are allowed to contribute up to 60 % of their wages to the 401 (k) Plan. Historically we have matched 25 % of the employees’ contributions up to 6 % of covered compensation. We made contributions, net of forfeitures, of approximately $ 276 and $ 267 during the years ended December  31, 2021 and 2020, respectively.   54 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       NOTE 10. INCENTIVE PLANS   Stock Options In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were additional shares authorized by the shareholders in March 2020 totaling 50,000 . Since the last shareholders’ meeting, the Board of Directors has approved and is seeking shareholder approval of an additional 175,000 to be authorized under the plan. There were 49,000 and 42,300 options granted during the years ended December 31, 2021 and 2020, respectively.   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 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.   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 a number of 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.   A summary of option activity as of and for the years ended December 31, 2021 and 2020 as follows:       Shares     Weighted- Average Exercise Price Per Share     Weighted- Average Remaining Contractual Term (in years)     Aggregate Intrinsic Value   Outstanding – January 1, 2020     372,200     $ 3.85                   Granted     42,300       4.34                   Exercised     ( 14,133 )     (3.78 )                 Cancelled     ( 37,727 )     (3.37 )                 Outstanding – December 31, 2020     362,640     $ 3.96       7.78     $ 1,164   Granted     49,000       8.50                   Exercised     ( 13,400 )     3.43                   Cancelled     ( 10,740 )     3.42                   Outstanding – December 31, 2021     387,500     $ 4.57       7.17     $ 2,250   Exercisable on December 31, 2021     186,700     $ 3.79       6.31     $ 1,225     55 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     There were 13,400 options exercised during the year ended December 31, 2021 and 14,133 options exercised during the year ended December 31, 2020. Total compensation expense related to stock options for the years ended December 31, 2021 and 2020 was $ 111 and $ 68 , respectively. As of December 31, 2021, there was $ 400 of unrecognized compensation which will vest over the next 3.5 years.   Equity Appreciation Rights Plan In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the 2010 Plan). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015 and approved by the shareholders on May 6, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to each reporting period based on the expected appreciation of the Units as defined in the Plan.   During the years ended December 31, 2021 and 2020, no Units were granted.   Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $ 143 and $ 108 for the years ended December 31, 2021 and 2020, respectively.     NOTE 11. 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 involuntarily 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.   56 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     Global Pandemic In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID- 19” ) as a pandemic. While the COVID- 19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities.   The full extent to which COVID- 19 will continue to directly or indirectly impact our business, financial condition and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID- 19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. The ultimate impact of COVID- 19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, as well as third -party actions taken to contain its spread and mitigate its public health effects. As a result, we are unable to estimate the extent to which COVID- 19 will negatively impact our financial results or liquidity.   We will continue to assess the potential impact of the COVID- 19 pandemic on our business, financial condition, and results of operations. We actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.     NOTE 12. EMPLOYEE RETENTION CREDIT   On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.   The ERC is calculated as a percentage of qualified wages (as defined in the CARES Act, as amended) paid by an eligible employer. The Company qualified for the ERC as it experienced a significant decline in gross receipts (for 2020, defined as a 50% decline in gross receipts when compared to the same calendar quarter in 2019, and for 2021, defined as a 20% decline in gross receipts when compared to the same quarter in 2019 ). As a small employer, all of the Company’s otherwise qualified wages were eligible for the ERC. For 2020, the ERC equaled 50 percent of an employee’s qualified wages up to $10,000 per employee per calendar quarter with a maximum annual credit for each employee of $5,000. For 2021, the ERC equaled 70 percent of an employee’s qualified wages up to $10,000 per employee per calendar quarter with a maximum annual credit of $21,000 for each employee. The Company determined that it was eligible for the ERC as revenues in the first quarter of 2021 declined more than 20% compared to the same quarter of 2019.   57 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)     As it relates to the 2020 and 2021 amounts, the Company has elected to account for the credit as a government grant. U.S. GAAP do not include grant accounting guidance for for-profit entities, therefore, the Company has elected to follow the grant accounting model in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, the Company cannot recognize any income from the grant until there is reasonable assurance (similar to the “probable” threshold in U.S. GAAP) that any conditions attached to the grant will be met and that the grant will be received. Once it is reasonably assured that the grant conditions will be met and that the grant will be received, grant income is recorded on a systematic basis over the periods in which the Company recognizes the payroll expenses for which the grant is intended to compensate. Income from the grant can be presented as either other income or as a reduction in the expenses for which the grant was intended to compensate.   During the year ended December 31, 2021 and 2020, the Company recorded ERC benefits of $ 5,209 as a reduction of the associated costs within cost of goods sold of $ 4,670 , selling of $ 125 , and general and administrative expenses of $ 414 on the consolidated statements of operations and within Employee Retention Credits Receivable on the consolidated balance sheet.   58 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)       NOTE 13. RELATED PARTY TRANSACTIONS   During the years ended December 31, 2021 and 2020, we did business with Printed Circuits, Inc. which was 90% owned by the Kunin family until late 2020. The Kunin family owns a majority of our stock. We had payments totaling $ 91 and $ 28 in the years ended December 31, 2021 and 2020, respectively, to Printed Circuits, Inc. The Company believes that these transactions are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.   David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021. During 2020, Mr. Kunin earned $ 16 as a consultant to Abilitech. Abilitech paid the Company $ 1,079 and $ 1,095 in the years ended December 31, 2021 and 2020, respectively, for delivery of medical products. The Company believes that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.   David Kunin, our Chairman, is a small minority owner (less than 10 %) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $ 1,000 conditional grant from the BIRD Foundation. The Company and Marpe Technologies will each receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company will meet its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies. The total value of the contribution will not exceed $500. The Company will receive a 10 -year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recoup the value of services provided to Marpe for which is not fully paid. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. As of December 31, 2021, we have received a $ 100 deposit, incurred expenses of $ 169 and recognized revenue of $ 148 from Marpe. The Company believes that transactions with Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.     59       Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None.