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Item 8. Financial Statements and Supplementary Data

2023-03-17 compared with 2022-03-17 · 188 added, 433 removed, 568 unchanged (52% of the section changed)

2 unchanged sentences

Consolidated Financial Statements:

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020

Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2022 and 2021

Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Shareholders' Equity for the years  ended December 31, 2022 and 2021

Notes to Consolidated Financial Statements

5 unchanged sentences

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’

and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income, 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.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

21 unchanged sentences

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE DATA)

$ 115,168  

$ 104,106  

Cost of Goods Sold

99,304  

94,441  

15,864  

Operating Expenses:

1 unchanged sentence

General and Administrative Expenses

10,002  

Restructuring Expenses

Impairment of Goodwill

Loss on Abandonment of Intangible Asset

Gain on Sale of Property and Equipment

( 141 )  

Total Operating Expenses

13,592  

10,281  

Income (Loss) from Operations

Other Income (Expense)

Income from Operations

Other (Expense) Income

Interest Expense

( 430 )  

PPP Loan Forgiviness Gain

Total Other Income (Expense)

Income (Loss) Before Income Taxes

Total Other (Expense) Income

Income Before Income Taxes

Income Tax Expense

Net Income (Loss)

$ 7,154  

Income (Loss) Per Common Share:

$ 2.68  

Weighted Average Number of Common Shares

Outstanding - Basic

2,664,586  

2,657,738  

$ 2.54  

Weighted Average Number of Common Shares

Outstanding - Dilutive

2,821,523  

2,657,738  

Other comprehensive income (loss)

Income Per Common Share:

Weighted Average Number of Common Shares Outstanding - Basic

Weighted Average Number of Common Shares Outstanding - Dilutive

Other comprehensive income

Foreign currency translation

Comprehensive income (loss), net of tax

$ 7,247  

Comprehensive income, net of tax

See accompanying notes to consolidated financial statements

6 unchanged sentences

Accounts Receivable, less allowances of $ 334 and $ 328

14,548  

15,625  

Employee Retention Credit Receivable

Inventories, Net

19,434  

13,917  

Contract Assets

Prepaid Assets and Other Current Assets

Prepaid Assets

Total Current Assets

51,774  

41,037  

Property and Equipment, Net

1 unchanged sentence

Other Intangible Assets, Net

$ 67,091  

$ 57,634  

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Current Portion of Long-Term Debt

$ 1,204  

Current Portion of Finance Lease Obligations

1 unchanged sentence

Accounts Payable

12,710  

11,239  

Accrued Payroll and Commissions

1 unchanged sentence

Total Current Liabilities

22,306  

19,536  

Long-Term Liabilities

Long-term Line of Credit

Long-Term Debt, Net of Current Maturities

Long-Term Finance Lease Obligations, Net of Current Portion

2 unchanged sentences

Total Long-Term Liabilities

18,674  

19,380  

Total Liabilities

40,980  

38,916  

Shareholders' Equity

6 unchanged sentences

Additional Paid-In Capital

15,962  

15,816  

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive (Loss) Income

Retained Earnings

Total Shareholders' Equity

26,111  

18,718  

Total Liabilities and Shareholders' Equity

$ 67,091  

$ 57,634  

See accompanying notes to consolidated financial statements

4 unchanged sentences

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

$ 7,154  

Adjustments to Reconcile Net Loss to Net Cash

Provided by Operating Activities:

Adjustments to Reconcile Net Income to Net Cash

Provided by (Used In) Operating Activities:

Compensation on Stock-Based Awards

1 unchanged sentence

Loss on Abandonment of Intangible Asset

Loss on Goodwill Impairment

Change in Accounts Receivable Allowance

( 15 )  

Change in Inventory Reserves

( 860 )  

Gain on Disposal of Property and Equipment

( 141 )  

PPP Loan Forgiveness Gain

( 6,171 )  

Employee Retention Credit Receivable  

( 5,209 )  

Foreign Currency Transaction Gain

Changes in Current Operating Items

Accounts Receivable

( 4,613 )  

Employee Retention Credit Receivable

Contract Assets

( 2,799 )  

Prepaid Expenses and other Curent Assets

( 171 )  

Accounts Payable

1 unchanged sentence

Other Accrued Liabilities

Net Cash (Used In) Provided by Operating Activities

( 4,540 )  

Net Cash Provided by (Used In) Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Purchase of Intangible Asset

( 64 )  

Purchases of Property and Equipment

( 1,292 )  

Net Cash (Used In) Provided By Investing Activities

( 730 )  

Net Cash Used In Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Net Change in Line of Credit

Proceeds from Long-Term Debt

Proceeds from Line of Credit

Payments to Line of Credit

Principal Payments on Long-Term Debt

( 1,128 )  

Principal Payments on Financing Leases

( 664 )  

Stock Option Excercises

Net Cash Provided By (Used In) Financing Activities

Net Cash (Used In) Provided By Financing Activities

Effect of Exchange Rate Changes on Cash

Net Change in Cash and Cash Equivalents

( 1,339 )  

Cash and Cash Equivalents - Beginning of Year

Cash and Cash Equivalents - End of Year

$ 2,225  

$ 3,564  

Reconciliation of cash and restricted cash reported within the consolidated balance sheets

1 unchanged sentence

Total Cash and restricted cash reported in the consolidated statements of cash flows

$ 2,225  

$ 3,564  

Supplemental Disclosure of Cash Flow Information:

1 unchanged sentence

Cash Paid (Refunded) for Income Taxes

( 114 )  

Supplemental Noncash Investing and Financing Activities:

12 unchanged sentences

BALANCE DECEMBER 31, 2020

$ 15,748  

$ ( 257 )  

$ 4,208  

$ 19,976  

( 1,546 )  

Foreign Currency Translation Adjustment

Stock Option Exercises

Compensation on Stock-based awards

BALANCE DECEMBER 31, 2021

15,816  

( 37 )  

18,718  

Foreign Currency Translation Adjustment

Stock Option Exercises  

Compensation on stock-based awards

BALANCE DECEMBER 31, 2022

$ 15,962  

$ 9,816  

$ 26,111  

See accompanying notes to consolidated financial statements

5 unchanged sentences

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”).

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

6 unchanged sentences

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.

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.

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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.

1 unchanged sentence

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.

As of December 31, 2022 we had outstanding letters of credit for $ 300 .

Restricted cash as of December 31, 2022 and December 31, 2021 was $ 1,454 and $ 1,582 , respectively.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2 unchanged sentences

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.

The allowance for doubtful accounts was $ 334 and $ 328 at December 31, 2022 and 2021, 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’

2 unchanged sentences

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.

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 Company qualified and applied for the ERC in 2021 for the first and second quarters of that year.

The Company has elected to account for the credit as a government grant.

GAAP does 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.

The CARES Act allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020.

1 unchanged sentence

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.

We did not remit the amount due on December 31, 2021 or during 2022 due to our awaiting receipt of the anticipated credits under the ERC that exceeds the deferral amount as allowed under the above IRS Notices.

The deferred amounts are recorded within accrued payroll and commissions on the condensed consolidated balance sheets.

4 unchanged sentences

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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Inventories are as follows:

Raw materials

$ 18,492  

$ 14,865  

Work in process

Finished goods

( 1,298 )  

$ 19,434  

$ 13,917  

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Property and Equipment

4 unchanged sentences

All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows:

Buildings 

Leasehold improvements

4 unchanged sentences

Manufacturing Equipment

18,892  

22,685  

Office and Other Equipment

Accumulated Depreciation and Amortization

( 24,224 )  

Total Property and Equipment, Net

$ 5,833  

$ 6,426  

Long-Lived Asset Impairment

3 unchanged sentences

Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose.

No impairments of long-lived assets were recorded during the years ended December 31, 2022 and 2021.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Preferred Stock

3 unchanged sentences

No preferred stock dividends were declared or paid during the years ended December 31, 2022 and 2021.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Revenue Recognition

4 unchanged sentences

The majority of our contracts have a single performance obligation.

Goods created for customers with no alternative use and enforceable right to a payment of cost plus a reasonable margin, revenue is recognized over time instead of at a point in time.

Revenue is recorded net of returns, allowances and customer discounts.

13 unchanged sentences

We recognize interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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.

4 unchanged sentences

These returns could be subject to material adjustments or differing interpretations of the tax laws.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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.

We use a Black-Scholes option-pricing model to determine the grant date fair value of our service-based incentive awards and recognize the expense on a straight-line basis over the vesting period.

We determine the grant date fair value of our market-based incentive awards using a lattice simulation model and recognize the expense on a straight-line basis over the vesting period.

The grant date fair value of restricted stock units is determined based on the closing market price of the Company's common stock on the date of grant, with compensation expense recognized ratably over the applicable vesting period.

See Note 8 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.

Net Income Per Common Share

Basic net income 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, 2022, stock options of 205,907 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.

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.

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.

The carrying amounts for cash, accounts receivable, ERC receivable, accounts payable, and other assets and liabilities approximate fair value because of the short maturity of these instruments.

Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt and line of credit approximates its fair value.

6 unchanged sentences

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Unobservable inputs for the asset or liability, reflecting the reporting entity’s own assumptions about the assumptions that market participants would use in pricing

2 unchanged sentences

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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

See Note 4, Other Intangible Assets, for more detail.

Enterprise-Wide Disclosures

3 unchanged sentences

Net sales by our major EMS industry markets for the years ended December 31, 2022 and 2021 are as follows:

$ 63,047  

$ 55,098  

Aerospace and Defense

16,639  

20,624  

35,482  

28,384  

Total Net Sales

$ 115,168  

$ 104,106  

Noncurrent assets, excluding deferred taxes, by country are as follows:

2 unchanged sentences

Property and Equipment, Net

$ 4,664  

$ 5,833  

Operating Lease Assets

$ 5,287  

$ 8,983  

December 31, 2021

Property and Equipment, Net

$ 5,057  

$ 6,426  

Operating Lease Assets

$ 5,574  

$ 8,998  

$ 1,173  

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Foreign Currency Transactions

5 unchanged sentences

The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within shareholders’

The total foreign currency translation adjustment increased shareholders’

equity by $ 93 and $ 220 for the years ended December 31, 2021 and 2020, respectively.

The total foreign currency translation adjustment decreased shareholders’

equity by $ 426 and increased shareholder’s equity by $ 93 for the years ended December 31, 2022 and 2021, 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 $ 42 and $ 131 for the years ended December 31, 2022 and 2021, respectively.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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:

December 31, 2020

Previously Reported

After Reclassification

Cost of Goods Sold

$ 95,651  

$ 94,441  

General and Administrative Expenses

Recently Issued Accounting Standards

3 unchanged sentences

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.

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 evaluated the impact of this standard on our consolidated financial statements and related disclosures and conclude it will not be material.

Revision and Immaterial Correction of an Error in Previously Issued Financial Statements

The Company identified an error related to the classification of the activity on our line of credit facility with Bank of America at December 31, 2021 as reported on Form 10-K. 

In our December 31, 2021 consolidated financial statements, we incorrectly classified borrowings and payments on our line of credit facility on a net basis within the financing section of the consolidated cash flow statement;

this activity should be shown on a gross basis. 

This change in presentation to the consolidated cash flow statement does not impact total operating, investing, or financing cash flows. 

There was no change to the consolidated statement of income or consolidated balance sheet. 

In accordance with ASC 250, Accounting Changes and Error Corrections, we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were immaterial to the Company’s 2022 audited financial statements.

Since these revisions were not material to any prior period financial statements, no amendments to previously filed financial statements are required.

Consequently, the Company has corrected 

these immaterial errors by revising the December 31, 2021 consolidated financial statements presented herein.

The tables below present the effect of the financial statement adjustments related to the revision discussed above of the Company’s previously reported financial statements as of and for the periods ended December 31, 2021.

The effect of the immaterial correction of an error on our previously filed audited consolidated financial statements as of December 31, 2021 and for the year then ended is as follows:

Consolidated Statements of Cash Flows

December 31, 2021

CASH FLOWS FROM FINANCING ACTIVITIES

Net Proceeds from Line of Credit

Proceeds from Line of Credit

Payments to Line of Credit

Principal Payments on Long-Term Debt

Principal Payments on Financing Leases

Stock Option Excercises

Net Cash Provided By Financing Activities

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

4 unchanged sentences

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.

One customer accounted for 26.9 % of net sales for both of the years ended December 31, 2022 and 2021.

Accounts receivable for one customer was 21.1 % and 19.3 % at December 31, 2022 and 2021, respectfully.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Revenue recognition

13 unchanged sentences

Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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.

4 unchanged sentences

The inclusion of noncash consideration has no impact on overall profitability.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Contract Assets

1 unchanged sentence

Significant changes in the contract assets balance during the years ended December 31, 2022 and 2021 was as follows:

Outstanding at January 1, 2020

$ 7,659  

Increase (decrease) attributed to:

Transferred to receivables from contract assets recognized

Product transferred over time

Outstanding at December 31, 2020

Balance outstanding at December 31, 2021

Increase (decrease) attributed to:

Transferred to receivables from contract assets recognized

Product transferred over time

Outstanding at December 31, 2021

$ 8,698  

Amounts transferred over time to contract assets

Amounts invoiced during the period

Balance outstanding at December 31, 2022

We expect substantially all of the remaining performance obligations for the contract assets recorded as of December 31, 2022, 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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following tables summarize our net sales by market for the years ended December 31, 2022 and 2021:

5 unchanged sentences

Total Net Sales

$ 47,285  

$ 13,250  

$ 2,512  

$ 63,047  

Aerospace and Defense

14,879  

16,639  

27,213  

35,482  

Total net sales

$ 89,377  

$ 20,962  

$ 4,829  

$ 115,168  

Year Ending December 31, 2021

4 unchanged sentences

Total Net Sales

$ 45,694  

$ 6,398  

$ 3,006  

$ 55,098  

Aerospace and Defense

18,948  

20,624  

22,451  

28,384  

Total net sales

$ 87,093  

$ 11,296  

$ 5,717  

$ 104,106  

GOODWILL AND OTHER INTANGIBLE ASSETS

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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2 unchanged sentences

Relationships

Intellectual Property  

Balance at January 1, 2021

$ 1,343  

Additions  

Balance at December 31, 2020

$ 1,173  

Abandonment Loss

Balance at December 31, 2021

Balance at December 31, 2022

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.

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The weighted average remaining amortization period of our intangible assets is 1.9 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.

Of the patents value at December 31, 2022, $ 95 are being amortized and $ 111 are in process and a patent has not yet been received.

Amortization expense of finite life intangible assets was $ 150 and $ 176 for the years ended December 31, 2022 and 2021, respectively.

Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows:

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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

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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 

We have a credit agreement with Bank of America which was entered into on June 15, 2017, and subsequently extended, which provides for a line of credit arrangement of $ 16,000 that expires on 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.

Our line of credit bears interest at a weighted-average interest rate of 5.2 % and 3.5 % as of December 31, 2022 and 2021, respectively.

We had borrowings on our line of credit of $ 6,897 and $ 9,016 outstanding as of December 31, 2022 and December 31, 2021, 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. 

In addition, the credit agreement does not expire within one year, the Company is not in violation of the covenants and the Company expects Bank of America to be capable of honoring the financing arrangement.

The line of credit is shown net of debt issuance costs of $ 44 thousand on the consolidated balance sheet for the year ended December 31, 2022.

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, 2022 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.

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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.

During 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 which expired on January 15, 2023.

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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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):

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

Debt issuance Costs

Total long-term debt

Current maturities of long-term debt

Long-term debt - net of current maturities

$ 5,865  

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 1.5 million USD) that will expire on August 18, 2023.

We had no amounts outstanding as of December 31, 2022 and 2021.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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Operating lease cost

$ 2,291  

$ 1,643  

Finance lease interest cost

1 unchanged sentence

Total lease cost

$ 2,872  

$ 2,382  

Supplemental balance sheet information related to leases was as follows:

4 unchanged sentences

Operating lease assets

$ 8,983  

$ 8,998  

Finance lease assets

1 unchanged sentence

Total leased assets

$ 11,035  

$ 11,328  

Current operating lease liabilities

Current Portion of Operating Lease Obligations

$ 1,043  

Current finance lease liabilities

5 unchanged sentences

Total lease liabilities

$ 11,255  

$ 11,389  

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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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.

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Total lease payments

$ 14,610  

$ 1,648  

$ 16,258  

( 132 )  

Present value of lease liabilities

$ 9,739  

$ 1,516  

$ 11,255  

The lease term and discount rate at December 31, 2022 were as follows:

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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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 

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.

2 unchanged sentences

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:

The income tax expense for the years ended December 31, 2022 and 2021 consists of the following:

Current taxes - Federal

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The statutory rate reconciliation for the years ended December 

31, 2021 and 2020 is as follows:

The statutory rate reconciliation for the years ended December 31, 2022 and 2021 is as follows:

Statutory Rate

$ 1,606  

State Income Tax

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Change in State Deferred Rate

( 39 )  

Valuation Allowance

PPP Loan Forgiveness

( 1,276 )  

US Permanent differences

Federal Tax Credits

( 37 )  

Global Intangible Low-Taxed Income Effect

Return to provision - credits, perm diffs

( 481 )  

Goodwill Impairment

( 25 )  

Withholding Tax

Income and loss from operations before income taxes was derived from the following sources:

$ 6,072  

$ 8,013  

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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Lease Accounting ASC 842 Lease Liability

Section 481(a) adjustment

Capitalized Research Expenses

Net operating loss carryforwards

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COGS Offset Adjustment

( 1,807 )  

Valuation allowance

( 1,976 )  

Deferred tax assets

Accumulated Other Comprehensive Income

( 297 )  

Lease Accounting ASC 842 Lease Asset

( 1,518 )  

Prepaid Expenses

Property and equipment

( 71 )  

Deferred tax liabilities

( 1,886 )  

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.

A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our financial statements become deductible for tax purposes.

We assess the realizability of our deferred tax assets and the need for a valuation allowance based on 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.

After considering all available evidence, both positive and negative, we have concluded that a valuation allowance is needed for all our United States based deferred tax assets due to the history of operating losses sustained in the past three years.

At December 31, 2022, for U.S.

state purposes, we have Minnesota R&D credit carry forwards of $ 172 , which begin to expire in 2027.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(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):

For positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following tables set forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2022 and 2021 (in thousands):

Balance at December 31, 2021

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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.

The liability for accrued interest as of December 31, 2022 and 2021 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.

2 unchanged sentences

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.

federal jurisdiction and various state and foreign jurisdictions.

As of December 31, 2022, our 2018 IRS audit was finalized.

401(K) RETIREMENT PLAN

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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.

We made contributions, net of forfeitures, of approximately $ 301 and $ 276 during the years ended December 31, 2022 and 2021, respectively.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

3 unchanged sentences

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.

An additional 50,000 and 175,000 shares were authorized by the shareholders in March 2020 and May 2022, respectively.

There were 115,000 options and restricted stock units and 49,000 options granted during the years ended December 31, 2022 and 2021, respectively.

Stock Options

We estimate the fair value of share-based awards on the date of grant using an option-pricing model.

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For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data.

We granted 21,000 market condition options to our Chief Executive Officer during the twelve months ended December 31, 2022.

The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028.

We granted 73,000 service-based options during the twelve months ended December 31, 2022.

There were 49,000 stock options granted during the twelve months ended December 31, 2021.

Total compensation expense related to stock options was $ 237 for the twelve months ended December 31, 2022.

Total compensation expense related to stock options was $ 116 for the twelve months ended December 31, 2021.

As of December 31, 2022, there was $ 762 of unrecognized compensation which will vest and expense over the next 3.61 years.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

A summary of option activity as of and for the years ended December 31, 2022 and 2021 as follows:

8 unchanged sentences

Exercisable on December 31, 2022

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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.

Restricted Stock Units

During the twelve months ended December 31, 2022, we granted 21,000 restricted stock units (“RSUs”) under our 2017 Stock Incentive Plan to non-employee directors which vest over two years.

Total compensation expense related to the RSUs were $ 97 for the twelve months ended December 31, 2022.

There was no compensation expense related to RSUs for the twelve months ended December 30, 2021.

Total unrecognized compensation expense related to the RSUs was $ 155 , which will vest over the next 1.24 years.

The RSUs granted in the twelve months ended December 31, 2022 had an average grant price of $ 12.00 per share with a weighted average remaining contractual term of 9.24 years.

No RSUs vested during the twelve months ended December 31, 2022.

Equity Appreciation Rights Plan

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During the years ended December 31, 2022 and 2021, 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.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $ 0 and $ 143 for the year ended December 31, 2022 and 2021, respectively.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

COMMITMENTS AND CONTINGENCIES

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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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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.

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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2021 AND

(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.

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.

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.

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.

We received payment on the Employee Retention Credit for the first quarter of 2021 of $ 2,559 in the fourth quarter of 2022.

The remaining Employee Retention Credits Receivable of $ 2,650 is recorded on the Consolidated Balance Sheets.

During the year ended December 31, 2022, the Company received the ERC related to the first quarter of 2021 of $ 2,559 .

The remaining Employee Retention Credits Receivable of $ 2,650 is recorded on the consolidated balance sheets as of December 31, 2022.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

3 unchanged sentences

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.

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 $ 247 and $ 1,079 in the years ended December 31, 2022 and 2021, respectively, for delivery of medical products.

We have exposure to Abilitech which includes $ 141 of accounts receivable and $ 113 of inventory.

We do not believe that Abilitech will pay the Company on accounts receivable or for inventory and we have fully reserved for such exposure.

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.

David Kunin, our Chairman, is a 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.

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 parties were successful in receiving approval for a $ 1,000 conditional grant.

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.

1 unchanged sentence

The total value of the contribution will not exceed $ 500 .

Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company's services beyond its contribution.

The Company will receive a 10 -year exclusive right to manufacture the products of Marpe Technologies.

2 unchanged sentences

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.

During the twelve months ended December 31, 2022 and 2021, we recognized revenue of $ 440 and $ 148 , respectively.

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.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data