What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2025-03-31 compared with 2024-03-20 · 315 added, 200 removed, 34 unchanged (94% of the section changed)

Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of March 12, 2024, there were 590 shareholders of record.

of March 12, 2025, there were 590 shareholders of record.

Our stock is listed on the NASDAQ Capital Market under the symbol “NSYS”.

We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in the foreseeable future.

We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in

the foreseeable future.

We did not declare or pay a cash dividend in 2024 or 2023.

Future dividend policy and payments, if any, will depend upon earnings and our financial condition, our need for funds, limitations on payments of dividends present in our current or future debt agreements, and other factors.

Stock price comparisons (NASDAQ):

During the Three Months Ended

Future dividend policy and payments, if any, will

depend upon earnings, our financial condition, our need for funds, limitations on payments of dividends present in our current or future

debt agreements and other factors.

price comparisons (NASDAQ):

During the Three Months

March 31, 2024

6 unchanged sentences

December 31, 2023

Equity Compensation Plan Information

Certain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.

of Equity Securities by the Issuer and Affiliated Purchasers

May 2024, our Board of Directors approved a share repurchase program authorizing up to $100,000 in share repurchases.

This share repurchase

program commenced in August 2024 and expired in October 2024 upon completion of the program.

We purchased 8,185 shares of the Company’s

common stock at an average price of $12.09 per share.

Compensation Plan Information

information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.

Selected Financial Data [Reserved]

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services.

Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries.

We serve three major markets within the EMS industry:

Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.

are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace

and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support

including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services.

are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board

assemblies, complex higher-level assemblies and other box builds for a wide range of industries.

As of December 31, 2024, we have facilities in Minnesota:

Bemidji, Blue Earth, Mankato, Milaca and Maple Grove.

We also have facilities in Monterrey, Mexico and Suzhou, China.

Our net ‘sales are derived from complex designed products built to the customers’ specifications.

The products we manufacture are engineered and designed products that require sophisticated manufacturing support.

Bemidji, Mankato, Milaca

and Maple Grove.

We closed our facility in Blue Earth, Minnesota in December 2024 and are currently seeking to sell this facility.

also have facilities in Monterrey, Mexico and Suzhou, China.

net sales are derived from complex designed products built to the customers’ specifications.

The products we manufacture are engineered

and designed products that require sophisticated manufacturing support.

Quality, on-time delivery, and reliability are of upmost importance.

Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy.

We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.

Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint.

Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.

Operating Results

The following table presents our statements of income data in dollars and as a percentage of total net sales for the years indicated (dollars in millions):

Cost of Goods Sold

Selling Expenses

General and Administrative Expenses

Research and Development Expenses

Income from Operations

Interest Expense

Income Before Income Taxes

Income Tax (Benefit) Expense

Our net sales in 2023 were $139.3 million, compared with $134.1 million in 2022, an increase of $5.2 million or 3.9%, that was driven by increases in all of our markets.

The industrial market increased by $1.4 million or 3.6% in 2023 as compared with 2022.

The medical market increased year-over-year by $2.8 million or 3.7% with medical devices accounting for the increase.

Net sales from the aerospace and defense markets increased by $1.0 million or 5.1% in 2023 as compared with 2022.

The increase in net sales is due to continued strong demand across our medical, industrial and defense markets, and the impact of pricing actions taken in the second half of 2022 to address increased manufacturing costs.

Net sales by our major EMS industry markets for the years ended December 31, 2023 and 2022 were as follows (in millions):

Aerospace and Defense

Total Net Sales

Net sales by timing of transfer of goods and services are as follows (in millions):

Year Ended December 31, 2023

Product/ Service

Transferred Over

Consideration 1

Aerospace and Defense

Total net sales

Year Ended December 31, 2022

Product/ Service

Transferred Over

Consideration 1

Aerospace and Defense

Total Net Sales

1 Noncash consideration represents material provided by the customer used in the build of the product.

Our 90-day order backlog as of December 31, 2023 was $35.1 million as compared with $35.9 million at the end of 2022.

Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

Our total order backlog as of December 31, 2023 was $91.7 million, a 11.9% decrease from $104.1 million as of December 31, 2022.

Our total and 90-day order backlog by market has decreased when compared with the prior year.

As the supply chain continues to normalize, customer order lead times are reducing and are starting to return to their pre-pandemic ordering practices.

Our 90-day backlog varies each reporting period end due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases.

90-day shipment backlog by our major industry markets are as follows (in millions):

90 Day Backlog as of

Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early

engagement design, and development strategy.

We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements

to increase asset utilization, reduce lead times and provide competitive pricing.

strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness

by expanding our global footprint.

Our industrial and defense markets are focused on improving our asset utilization and profitability

while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid

dollar amounts are stated in thousands of U.S.

Net sales for the year ended December 31, 2024 and 2023 were $128,133 and $139,332, respectively, a year over year decrease

of $11,199 or 8.0%.

The following is a summary of net sales by our major industry markets:

Medical Device

Medical Imaging

Aerospace and Defense

Total Backlog

Total order backlog by our major industry markets are as follows (in millions):

Total Backlog as of

Net sales to our Medical Device customers decreased $4,122, or 10.6%, in the year ended December 31, 2024 as compared with

the same period in 2023.

The decrease was primarily due to inventory re-balancing with existing customers and timing of customer

product launches.

Net sales to our Medical Imaging customers decreased $2,416, or 6.1%, in the year ended December 31, 2024 as compared with the

same period in 2023.

The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches

and lower average sales prices as we moved several programs to our Monterrey, Mexico facility.

Net sales to our Industrial customers decreased $4,596, or 11.5%, in the year ended December 31, 2024 as compared with the same period

The decrease in net sales was primarily due to Industrial customers’ efforts to reduce their inventory investments,

delayed program launches with several customers as well as sales headwinds in several markets for which we provide products for these

Net sales to our Aerospace and Defense customers decreased $65, or 0.3%, in the year ended December 31, 2024, as

compared with the same period in 2023.

Growth in this market was negatively impacted by the closure of Blue Earth facility in

December 2024 and the movement of these customers programs to our Bemidji facility as well as the timing of customer approvals to approve

As a result, fourth quarter net sales in this market decreased from $6,055 in 2023 to $2,609 in 2024.

Our 90-day shipment backlog as of December 31, 2024 was $26,451, down 24.8% from December 31, 2023.

Our 90-day backlog consists of

firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.

total order backlog as of December 31, 2024 was $65,852, a 28.2% decrease from December 31, 2023.

As the supply chain lead times have

normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog.

to experience reduced visibility to net sales in the next several quarters as customers are rebalancing their inventories and, therefore,

deferring the placement of some orders, as well as shortening their order to fulfilment lead teams.

and total shipment backlog by our major industry markets are as follows:

Medical Device

Medical Imaging

Aerospace and Defense

Total Backlog

The 90-day and total backlog as of December 31, 2023 contain the contract asset value of $14.5 million, which has been recognized as net sales.

Our gross profit was $23.1 million and $20.5 million, and as a percentage of net sales 16.6% and 15.3%, for the years ended December 31, 2023 and 2022, respectively.

The gross profit improvement relates primarily to price increases in response to material and labor cost inflation.

Selling expenses were marginally lower at $3.6 million, or 2.6% of net sales, for the year ended December 31, 2023 compared with $3.7 million, or 2.8% of net sales, for the year ended December 31, 2022.

90-day and total backlog as of December 31, 2024 includes orders already recognized in net sales and included in the contract asset value

Costs and Expenses.

sales, cost of goods sold, gross profit, and operating costs were as follows:

Increase/(Decrease)

Cost of goods sold

margin percentage (1)

% of Net sales

General and administrative

General and administrative expenses were $12.3 million, or 8.9% of net sales, for the year ended December 31, 2023 and $11.4 million, or 8.5% of net sales, for the year ended 2022.

General and administrative expenses for the year ended December 31, 2023 were up $0.9 million mainly due to higher wages of $0.7 due to merit increases and one-time higher professional fees related to a system implementation of $0.2 million.

Research and Development Expense

Research and development expenses were $1.2 million or 0.9% of net sales for the year ended December 31, 2023 and $1.5 million or 1.1% of net sales for the year ended 2022.

Income from Operations

Our income from operations for 2023 was $6.0 million, an increase of $2.1 million from the income of $3.9 million in 2022.

The increase in income from operations was driven by the increase in gross profit.

Interest Expense

Interest expense for the year ended December 31, 2023 and December 31, 2022 was $0.5 and $0.4 million, respectively.

We realized an income tax benefit of $1.4 million resulting in an effective tax rate of 26% for the year ended December 31, 2023.

This benefit was largely driven by the $2.6 million valuation allowance reversal as we concluded it was more likely than not that we will realize our net deferred tax assets.

Income tax expense was $1.5 million for the year ended December 31, 2022 with an effective tax rate of 42%.

Our 2022 tax rate was driven by the increase in deferred tax assets and corresponding valuation allowance from research and development expenses which were no longer tax deductible pursuant to the Tax Cuts and Jobs Act which requires the Company to capitalize and amortize research and experimental expenditures for tax return purposes starting in 2022.

The statutory rate reconciliation for the years ended December 31, 2023 and 2022 is as follows, (in thousands):

Statutory Rate

State Income Tax

Effect of Foreign Operations

% of Net sales

Research and development

Change in State Deferred Rate

Valuation Allowance

Maquiladora Tax

US Permanent Differences

Federal Tax Credits

Global Intangible Low-Taxed Income Effect

Return to Provision - Credits, Perm Diffs

Withholding Tax

Our net income in 2023 was $6.9 million or $2.38 per diluted common share and $2.53 per basic common share.

Our net income in 2022 was $2.0 million or $0.70 per diluted and $0.75 per basic common share.

Liquidity and Capital Resources

We believe that our existing financing arrangements, anticipated cash flows from operations, and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months.

Credit Facilities

We had a $16 million asset backed line of credit agreement with Bank of America which, as amended, was to expire on June 15, 2026.

Under this credit agreement, line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

This line of credit weighted-average interest rate was 8.3% and 5.2% as of December 31, 2023 and 2022, respectively.

We had borrowings on our line of credit of $5.8 million and $6.9 million as of December 31, 2023 and December 31, 2022, respectively.

As of December 31, 2023 and 2022, we had unused availability under our line of credit of $9.4 million and $8.4 million, respectively, supported by our borrowing base.

We were in compliance with all the financial covenants related to this agreement as of and for the year ended December 31, 2023.

On February 29, 2024, we replaced our asset back line of credit agreement with $15 million Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”).

The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR”, plus a defined margin.

If we prepay SOFR borrowings before their contractual maturity, we have agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

We are required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

The Revolver requires us to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement.

There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of our outstanding borrowings.

The Revolver contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.

% of Net sales

Restructuring charges

% of Net sales

Operating (loss) income

% of Net sales

margin percentage is defined as gross profit as a percentage of net sales.

points change in gross margin percentage.

profit and gross margins.

Gross profit as a percent of net sales was 13.1% and 16.6% for the years ended December 31, 2024 and 2023,

respectively.

The decrease in gross profit as a percentage of net sales in 2024 as compared with the same prior-year periods was the

result of lower net sales, as discussed above, and corresponding lower operating leverage from reduced production at a number of our

manufacturing facilities, as well as incremental costs associated included in costs of goods sold related to the closure of our Blue

Earth facility and moving production to our Bemidji facility.

Selling expenses decreased slightly in the year ended December 31, 2024 as compared with 2023 as the result of lower incentive

compensation expense in 2024.

and administrative expenses.

General and administrative expenses decreased $645, or 5.2% in the year ended December 31, 2024 as compared

with the 2023 as the result of lower incentive compensation expense in 2024.

Restructuring

Restructuring charges were $571 in the year ended December 31, 2024 for employee retention bonuses, disposal and moving

costs associated with the closure of our Blue Earth facility.

(loss) income.

Operating (loss) income for the years ended December 31, 2024 and 2023 were $(195), or (0.2)% of net sales, and

as compared with $5,953, or 4.3% of net sales, respectively.

The decreases were driven by lower in net sales and resulting gross

margin, incremental costs associated with the closure of the Blue Earth facility included in costs of sales as well as restructuring

expense, offset by lower incentive compensation of $1,643 in 2024 as we did not meet our bonus objectives.

Interest expense was $744 and $487 for the years ended December 31, 2024 and 2023, respectively.

This increase was driven

by higher borrowings under our line of credit arrangement.

Refer to “Liquidity and Capital Resources” for further discussion

of financing arrangements.

Our effective tax rates for the years ended December 31, 2024 and 2023 were (37.9)% and 25.8%, respectively.

drivers of the change in the effective tax rates relate to changes in pretax book income between the years and the 2023 recording of

a $2.6 million tax benefit from the reduction of our valuation allowance for deferred tax assets.

(Loss) Income.

Our net loss in 2024 was $1,295 or $0.47 per diluted and basic common share.

Our net income in 2023 was $6,874 or

$2.38 per diluted and $2.53 per basic common share.

and Capital Resources

believe that our existing financing arrangements, anticipated cash flows from operations, and cash on hand will be sufficient to satisfy

our working capital needs, capital expenditures and debt repayments for the next year from the date of this filing with the Securities

and Exchange Commission.

February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with

Bank of America (the “Revolver”).

The Revolver allows for borrowings at a defined base rate, or at the one, three or six

month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin.

If the Company prepays SOFR borrowings

before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges

coverage ratio, both of which are defined in the Revolver agreement.

These ratios are calculated based on trailing twelve-month

There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding

The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting

requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual

capital expenditures.

The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027.

Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000 Renminbi (RMB) (approximately 1.4 million USD) that expires on August 18, 2024.

No amounts were outstanding under this financing arrangement as of December 31, 2023 or 2022.

were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in

the first and second quarters of 2024.

We have received a waiver of this event of default from the bank.

On March 27, 2025, we

amended (the “Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge

ratio as of December 31, 2024, and March 31, 2025.

Further, the Amendment defers the Company’s compliance with these ratios

until the third quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 3.5 times or less in the third

quarter of 2025, and 2.5 times or less for each subsequent quarter;

and (b) a minimum fixed charge coverage ratio to 1.25

times for the third quarter of 2025 and each quarter thereafter.

The Company must also maintain EBITDA (earnings before

interest, taxes depreciation and amortization) as of the end of the second quarter and third quarter of at least $1,600.

addition, the Amendment requires the Company to maintain unrestricted cash and Revolver availability of at least $2.5 million at

each month end in the second quarter of 2025, $2.75 million at month end July 2025 and $3.0 million at the end of August and

September 2025.

The Amendment also requires the Company to provide incremental monthly reporting and increased the

Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver.

We have included the Amendment No.

Credit Agreement, Waiver, and Consent as an exhibit to this filing and any description of that document contained in this risk factor

is only a summary and is qualified by its entirety by the Amendment No.

1 to Credit Agreement, Waiver, and Consent.

the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index

Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset

borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears

interest at a weighted-average interest rate of 7.7% and 8.3% as of December 31, 2024 and 2023, respectively.

We had borrowings on our

line of credit of $8,695 and $5,846 outstanding as of December 31, 2024 and 2023, respectively.

As of December 31, 2024 we had unused

availability on the line of credit of $6,305.

Company has an interim funding agreement as of December 31, 2024 with a bank related to $345 of deposits made on equipment purchases

that will be funded through a finance lease when the equipment is received and operational.

As of December 31, we have $345 outstanding

on the interim funding agreement for equipment.

line of credit is shown net of debt issuance costs of $61 and $31 on the consolidated balance sheets as of December 31, 2024

and December 31, 2023, respectively.

China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000

Renminbi (RMB) (approximately 1.4 million USD) that expires on September 9, 2025.

No amounts were outstanding under this financing arrangement

as of December 31, 2024 or 2023.

The interest rate as of December 31, 2024 was approximately 4%.

Cash flows for the years ended December 31, 2023 and 2022 are summarized as follows:

(in millions)

flows for the years ended December 31, 2024 and 2023 are summarized as follows:

Cash flows provided by (used in):

2 unchanged sentences

Financing activities

Effect of Exchange Rate Changes on Cash

Net Change in Cash

Cash provided by operating activities for the year ended December 31, 2023 was $1.8 million compared with cash provided by operations of $5.4 million for the year ended December 31, 2022.

In 2023, the cash provided by operating activities was driven by $6.9 million in net income offset by a $2.2 million non-cash tax benefit from the reduction in our valuation allowance, and increased uses of working capital largely from accounts receivable and contract assets due to the increase in net sales and longer payment terms with several customers.

In 2022, the cash provided by operating activities was driven by results from operations.

Net cash used in investing activities was $1.3 million for the year ended December 31, 2023 and net cash used in investing activities was $2.4 million for the year ended December 31, 2022.

Cash used in investing activities in both years primarily relates to the purchase of property and equipment.

Net cash used in financing activities in 2023 of $1.3 million consisted primarily of net payments on the line of credit of $1.0 million and capital lease payments of $0.4 million, partially offset by cash receipts of $0.1 million from stock option exercises.

The cash used by financing activities in 2022 of $2.7 million consisted primarily of net payments on the line of credit of $2.1 million and capital lease payments of $0.6 million.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with U.S.

Generally Accepted Accounting Principles (“U.S.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, the reported amounts of net sales and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, valuation allowance for inventories, allowance for doubtful accounts, realizability of deferred tax assets and long-lived asset impairment testing.

We base our estimates and assumptions on our historical experience and on various other information available to us at the time that these estimates and assumptions are made.

We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources.

Effect of exchange rate

changes on cash

Net change in cash and

cash equivalents

used in operating activities for the year ended December 31, 2024 was $2,250 compared with cash provided by operations of $1,769 for

the year ended December 31, 2023.

In 2024, the cash used in operating activities was driven by the timing of accounts payable payments

and the payment of accrued bonus expenses.

In 2023, the cash provided by operating activities was driven by net income.

cash used in investing activities was $1,263 for the year ended December 31, 2024 and net cash used in investing activities was $1,284

for the year ended December 31, 2023.

Cash used in investing activities in both years primarily relates to the purchase of property and

cash provided by financing activities in 2024 of $2,765 consisted primarily of net proceeds from the line of credit of $2,849 and proceeds

from notes payable of $345.

The cash used by financing activities in 2023 of $1,281 consisted primarily of net payments on the line of

credit of $1,050 and capital lease payments of $390.

Accounting Policies and Estimates

discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements,

which have been prepared in accordance with U.S.

The preparation

of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of

assets and liabilities as of the date of our consolidated financial statements, the reported amounts of net sales and expenses during

the reporting periods presented, as well as our disclosures of contingent assets and liabilities.

On an on-going basis, we evaluate our

estimates and assumptions, including, but not limited to, valuation allowance for inventories, allowance for credit losses, realizability

of deferred tax assets and long-lived asset impairment testing.

base our estimates and assumptions on our historical experience and on various other information available to us at the time that these

estimates and assumptions are made.

We believe that these estimates and assumptions are reasonable under the circumstances and form the

basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources.

Actual results and outcomes could differ from our estimates primarily due to incorrect sales forecasting.

We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions.

If, for any reason, those estimates, and assumptions vary substantially it would also impact our financial results.

Our accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements.

Revenue Recognition

Our net sales are comprised of product, engineering services and repair services.

All net sales are recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales.

A performance obligation is a promise in a contract to transfer a distinct product or service to a customer.

We utilize a pipeline generated

by our sales team and speak directly with all departments regarding estimates and assumptions.

If, for any reason, those estimates, and

assumptions vary substantially it would also impact our financial results.

accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated

Financial Statements of this Annual Report on Form 10-K.

We believe that the following discussion addresses our critical accounting policies

and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated

financial statements.

net sales are comprised of product, engineering services and repair services.

All net sales are recognized when the Company satisfies

its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as)

our customer obtains control of the product or service, with the majority of our net sales being recognized over time including goods

produced under contract manufacturing agreements and services net sales.

A performance obligation is a promise in a contract to transfer

a distinct product or service to a customer.

A contract’s transaction price is allocated to each distinct performance obligation.

Most of our contracts have a single performance obligation and require that we provide services and products that are unique to each customer’s designed products and have no alternative usage.

As of December 31, 2023, the Company has recorded a contract asset of $14.5 million for unbilled customer net sales included in net sales.

Most of our contracts have a single performance obligation and require that we provide services and products that are unique to each

customer’s designed products and have no alternative usage.

As of December 31, 2024, the Company has recorded a contract asset

of $13,792 for unbilled customer net sales included in net sales.

Net sales are recorded net of returns, allowances and customer discounts.

Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Income and Comprehensive Income.

Sales, value added, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from net sales) basis.

Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Long-Lived Assets Impairment

We evaluate long-lived assets, primarily property and equipment, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.

To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

As of December 31, 2023, the Company’s common stock was trading at a value less than the Company’s net equity value.

As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was required as of December 31, 2023.

Allowance for Credit Losses

When we record customer receivables and contract assets arising from net sales transactions, we record an allowance for credit losses for the current expected credit losses (“CECL”) inherent in the asset over its expected life.

The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected.

Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.

We adopted CECL as of January 1, 2023 with a $30 thousand adjustment to retained earnings.

As of December 31, 2023, we held an allowance for credit losses of $0.4 million.

We estimate expected credit losses based on relevant information about past events, including historical write-offs of bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms that affect the collectability of the reported amount.

When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics.

Changes in the relevant information may significantly affect the estimates of expected credit losses.

Assets are written off when we determine them to be uncollectible.

Write-offs are recognized as a deduction from the allowance for credit losses.

Inventory Reserves

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs.

Certain raw material inventories are purchased solely to meet a customer’s unique manufacturing requirements.

Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales

in the consolidated statements of operations and comprehensive (loss) income.

Sales, value added, and other taxes collected from customers

and remitted to governmental authorities are accounted for on a net (excluded from net sales) basis.

Shipping and handling costs charged

to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Assets Impairment

evaluate long-lived assets, primarily property and equipment, whenever current events or changes in circumstances indicate that the carrying

amount of an asset or asset group may not be recoverable.

Recoverability for assets to be held and used is based on our projection of

the undiscounted future operating cash flows of the underlying assets.

To the extent such projections indicate that future undiscounted

cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount

to equal estimated fair value.

As of December 31, 2024, the Company’s common stock was trading at

a value less than the Company’s net equity value.

As such, the Company evaluated future undiscounted cash flows and determined that

no long-lived asset impairment was required as of December 31, 2024.

are recorded at the lower of cost or net realizable value for inventory that may have a lower net realizable value than cost or quantities

in excess of future production needs.

Certain raw material inventories are purchased solely to meet a customer’s unique manufacturing

requirements.

We seek to require our customers to prepay for end of life or certain inventory in excess of current customer order quantities.

We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis.

This process includes an evaluation of our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers.

On at least an annual basis we review the underlying inventory reserve assumptions based on recent trends.

As of December 31, 2023, we had an inventory reserve of $1.2 million.

Significant judgment is required in evaluating our tax positions and in determining income tax expense, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

We evaluate the recoverability of deferred tax assets based on available evidence.

This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results.

We establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of the deferred tax assets will not be realized.

In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period.

Future adjustments (either increases or decreases) to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets.

As of December 31, 2022, we had recorded a valuation allowance of $2.6 million that resulted from the establishment of a full valuation allowance against U.S.

net deferred tax assets as of that date.

In 2023, we recorded a $2.6 million tax benefit as we reversed our valuation allowance against our net U.S.

process includes an evaluation of our inventory based on current usage and the latest forecasts of product demand and production requirements

from our customers.

We periodically review the underlying inventory reserve assumptions based on recent trends.

December 31, 2024, we had an inventory reserve of $1,446.

judgment is required in evaluating our tax positions and in determining income tax expense, deferred tax assets and liabilities, and

any valuation allowance recorded against our deferred tax assets.

We evaluate the recoverability of deferred tax assets based on available

This process involves significant management judgment about assumptions that are subject to change from period to period based

on changes in tax laws or variances between future projected operating performance and actual results.

We establish a valuation allowance

for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than

not (defined as a likelihood of more than 50%) that all or a portion of the deferred tax assets will not be realized.

In making this

determination, we evaluate all positive and negative evidence as of the end of each reporting period.

Future adjustments (either increases

or decreases) to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net

deferred tax assets.

During the fourth quarter of 2023 concluded that it was more likely than not it would realize it net deferred tax assets given its recent three-year cumulative losses were insignificant as well as the Company’s forecasted pre-tax income in 2024 and beyond.

The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income or tax liability in either the carryback or carry-forward periods under the tax law.

Due to significant estimates used to establish the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record additional adjustments to the valuation allowance in future reporting periods that could have a material effect on our results of operations.

We establish reserves for uncertain tax positions when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail.

If we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit.

We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement.

We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations.

In 2023, we recorded a $2,600 tax benefit as we reversed a previously established valuation allowance against our

deferred tax assets.

During 2024, we concluded that it was more likely than not we would realize our recorded net

deferred tax assets.

The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income

or tax liability in either the carryback or carry-forward periods under the tax law.

Due to significant estimates used to establish the

valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record

additional adjustments to the valuation allowance in future reporting periods that could have a material effect on our results of operations.

establish reserves for uncertain tax positions when, despite our belief that our tax return positions are fully supportable, we believe

that certain positions are likely to be challenged and that we may or may not prevail.

If we determine that a tax position is more likely

than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit.

We measure the

benefit by determining the amount that is greater than 50% likely of being realized upon settlement.

We presume that all tax positions

will be examined by a taxing authority with full knowledge of all relevant information.

The calculation of our tax liabilities involves

dealing with uncertainties in the application of complex tax regulations.

We regularly monitor our tax positions and tax liabilities.

We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations.

Significant judgment is required in accounting for tax reserves.

Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our results of operations.

Our reserve for uncertain tax positions aggregated $131 thousand as of December 31, 2023.

New Accounting Pronouncements

Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We may also make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases.

Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes.

Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate.

We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded

tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law

including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations.

Significant judgment is

required in accounting for tax reserves.

Although we believe that we have adequately provided for liabilities resulting from tax assessments

by taxing authorities, positions taken by these tax authorities could have a material impact on our results of operations.

for uncertain tax positions aggregated $97 as of December 31, 2024.

Accounting Pronouncements

regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in “Financial Statements

and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.

Forward-Looking

Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases.

statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,”

“forecast,” “intend,” “possible,” “potential,” “predict,” “project,”

or other similar words that convey the uncertainty of future events or outcomes.

Although we believe these forward-looking statements

are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to

be inaccurate.

Forward-looking statements involve a number of risks and uncertainties.

Discussion of these factors is incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.

All forward-looking statements included in this Form 10-K are expressly qualified in their entirety by the forgoing cautionary statements.

We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Discussion of these factors is incorporated in

Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s

Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein

could also have material adverse effects on forward-looking statements.

All forward-looking statements included in this Form 10-K are

expressly qualified in their entirety by the forgoing cautionary statements.

We undertake no obligations to update publicly any forward-looking

statement (or its associated cautionary language) whether as a result of new information or future events.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

SYSTEMS INCORPORATED AND SUBSIDIARIES

THE YEARS ENDED DECEMBER 31, 2024 AND 2023

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 5. Market for Registrant’s Common Equity