Form 10-Q - Quarterly report [Sections 13 or 15(d)]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

Executive Offices: 7550 Meridian Circle N., Suite # 150, Maple Grove, MN 55369

Telephone number: (952) 345-2244

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $.01 per share		NSYS		NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐		Accelerated Filer ☐
Non-accelerated Filer ☒		Smaller Reporting Company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of $.01 par value common stock outstanding as of August 1, 2024 was 2,762,177.

TABLE OF CONTENTS

	PAGE

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)	3
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Cash Flows	5-6
Condensed Consolidated Statements of Shareholders’ Equity	7
Condensed Notes to Consolidated Financial Statements	8-15
Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations	16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	20
Item 4 - Controls and Procedures	20

PART II – OTHER INFORMATION

Item 1 - Legal Proceedings	21
Item 1A. - Risk Factors	21
Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds	21
Item 3 - Defaults on Senior Securities	21
Item 4 - Mine Safety Disclosures	21
Item 5 - Other Information	21
Item 6 - Exhibits	21
SIGNATURES	22

PART I

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	2024			2023			2024			2023
	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2024			2023			2024			2023

Net sales	$	33,891		$	35,021		$	68,106		$	69,909
Cost of goods sold		29,274			29,547			58,041			58,951
Gross profit		4,617			5,474			10,065			10,958
Operating expenses:
Selling		909			953			1,714			1,843
General and administrative		2,982			3,105			6,152			6,370
Research and development		291			317			609			593
Restructuring charges		91			-			91			-
Total operating expenses		4,273			4,375			8,566			8,806
Income from operations		344			1,099			1,499			2,152
Other expense:
Interest expense		(165	)		(125	)		(332	)		(235	)
Income before income taxes		179			974			1,167			1,917
Income tax expense		22			340			245			602
Net income	$	157		$	634		$	922		$	1,315

Net income per common share:
Basic (in dollars per share)	$	0.06		$	0.23		$	0.34		$	0.49
Weighted average number of common shares outstanding - basic (in shares)		2,760,052			2,718,066			2,751,330			2,705,121
Diluted (in dollars per share)	$	0.05		$	0.22		$	0.32		$	0.46
Weighted average number of common shares outstanding - diluted (in shares)		2,935,671			2,870,848			2,922,113			2,887,313

Other comprehensive income (loss)
Foreign currency translation		(175	)		(281	)		(358	)		(241	)
Comprehensive income (loss), net of tax	$	(18	)	$	353		$	564		$	1,074

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2024 AND DECMEBER 31, 2023

(IN THOUSANDS, EXCEPT SHARE DATA)

	JUNE 30, 2024			DECEMBER 31, 2023⁽¹⁾
ASSETS
Current assets:
Cash	$	1,542		$	960
Restricted cash		-			715
Accounts receivable, less allowances of $270 and $358, respectively		17,577			19,279
Inventories, net		22,793			21,660
Contract assets		14,957			14,481
Prepaid assets and other assets		2,291			1,698
Total current assets		59,160			58,793
Property and equipment, net		6,001			6,513
Operating lease assets, net		8,274			6,917
Deferred tax assets		2,641			2,641
Other intangible assets, net		183			263
Total assets	$	76,259		$	75,127

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of finance lease obligations	$	214		$	356
Current portion of operating lease obligations		1,169			1,033
Accounts payable		12,728			15,924
Accrued payroll and commissions		2,612			4,138
Customer deposits		5,453			4,068
Other accrued liabilities		1,120			1,063
Total current liabilities		23,296			26,582
Long-term liabilities:
Long-term line of credit, net of issuance costs		8,314			5,815
Long-term finance lease obligations, net of current portion		146			209
Long-term operating lease obligations, net of current portion		7,949			6,763
Other long-term liabilities		409			414
Total long-term liabilities		16,818			13,201
Total liabilities		40,114			39,783
Shareholders’ equity:
Preferred stock, $1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding		250			250
Common stock - $0.01 par value; 9,000,000 shares authorized; 2,762,177 and 2,740,178 shares issued and outstanding, respectively		28			27
Additional paid-in capital		17,165			16,929
Accumulated other comprehensive loss		(890	)		(532	)
Retained earnings		19,592			18,670
Total shareholders’ equity		36,145			35,344
Total liabilities and shareholders’ equity	$	76,259		$	75,127

(1)

The balance sheet as of December 31, 2023 has been derived from the consolidated audited financial statements at that date.

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	2024			2023
	SIX MONTHS ENDED
	JUNE 30,
	2024			2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	922		$	1,315
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		966			1,027
Compensation on stock-based awards		206			192
Change in inventory reserves		113			(53	)
Change in accounts receivable allowances		(88	)		(31	)
Other, net		(59	)		(116	)
Changes in current operating assets and liabilities:
Accounts receivable		1,690			(1,580	)
Employee Retention Credit Receivable		-			2,650
Inventories		(1,288	)		1,350
Contract assets		(476	)		(1,620	)
Prepaid expenses and other current assets		(531	)		(1,042	)
Accounts payable		(2,546	)		586
Accrued payroll and commissions		(1,516	)		(1,788	)
Customer deposits		1,385			(195	)
Other accrued liabilities		(236	)		(414	)
Net cash (used in) provided by operating activities		(1,458	)		281

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment		9			-
Purchases of property and equipment		(1,020	)		(956	)
Net cash used in investing activities		(1,011	)		(956	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit		68,323			65,886
Payments to line of credit		(65,809	)		(65,726	)
Principal payments on financing leases		(202	)		(189	)
Proceeds from stock option exercises		31			173
Net cash provided by financing activities		2,343			144

Effect of exchange rate changes on cash		(7	)		(35	)

Net change in cash and cash equivalents		(133	)		(566	)
Cash and cash equivalents - beginning of period		1,675			2,481
Cash and cash equivalents - end of period	$	1,542		$	1,915

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets:
Cash	$	1,542		$	781
Restricted cash		-			1,134
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	1,542		$	1,915

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	SIX MONTHS ENDED
	JUNE 30,
	2024		2023

Supplemental disclosure of cash flow information:
Cash paid for interest	$	307	$	248
Cash paid for income taxes	$	279	$	1,036

Supplemental noncash investing and financing activities:
Property and equipment purchases in accounts payable	$	75	$	49
Operating lease assets acquired under operating leases	$	1,923	$	-

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS)

											Accumulated
									Additional		Other						Total
	Preferred Stock				Common Stock				Paid-In		Comprehensive			Retained			Shareholders’
	Shares		Amount		Shares		Amount		Capital		Loss			Earnings			Equity
Balance as of March 31, 2023		250	$	250		2,701	$	27	$	16,481	$	(330	)	$	12,477		$	28,905
Net income		-		-		-		-		-		-			634			634
Foreign currency translation adjustment		-		-		-		-		-		(281	)		-			(281	)
Stock option exercises		-		-		36		-		138		-			-			138
Compensation on stock-based awards		-		-		-		-		93		-			-			93
Balance as of June 30, 2023		250	$	250		2,737	$	27	$	16,712	$	(611	)	$	13,111		$	29,489

Balance as of March 31, 2024		250	$	250		2,755	$	27	$	17,009	$	(715	)	$	19,435		$	36,006
Net income		-		-		-		-		-		-			157			157
Foreign currency translation adjustment		-		-		-		-		-		(175	)		-			(175	)
Issuance for stock-based awards		-		-		7		-		126		-			-			126
Compensation on stock-based awards		-		-		-		1		30		-			-			31
Balance as of June 30, 2024		250	$	250		2,762	$	28	$	17,165	$	(890	)	$	19,592		$	36,145

Balance as of December 31, 2022		250	$	250		2,691	$	27	$	16,347	$	(370	)	$	11,826		$	28,080
Net income		-		-		-		-		-		-			1,315			1,315
Foreign currency translation adjustment		-		-		-		-		-		(241	)		-			(241	)
Compensation on stock-based awards		-		-		-		-		192		-			-			192
Issuance for stock-based awards		-		-		46		-		173		-			-			173
Cumulative adjustment related to adoption of ASC 326 (current expected credit loss)		-		-		-		-		-		-			(30	)		(30	)
Balance as of June 30, 2023		250	$	250		2,737	$	27	$	16,712	$	(611	)	$	13,111		$	29,489

Balance as of December 31, 2023		250	$	250		2,740	$	27	$	16,929	$	(532	)	$	18,670		$	35,344
Balance		250	$	250		2,740	$	27	$	16,929	$	(532	)	$	18,670		$	35,344
Net income		-		-		-		-		-		-			922			922
Foreign currency translation adjustment		-		-		-		-		-		(358	)		-			(358	)
Compensation on stock-based awards		-		-		-		-		206		-			-			206
Issuance for stock-based awards		-		-		22		1		30		-			-			31
Balance as of June 30, 2024		250	$	250		2,762	$	28	$	17,165	$	(890	)	$	19,592		$	36,145
Balance		250	$	250		2,762	$	28	$	17,165	$	(890	)	$	19,592		$	36,145

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2023, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All dollar amounts are stated in thousands of U.S. dollars.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Estimates also affect the reported amounts of net sales and expenses during each reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.

Recently Issued New Accounting Standards

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure. The ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures.

Out-of-Period Correction

During the first quarter of 2024, we identified an error that understated our accrued liabilities by approximately $178 as of December 31, 2023. We corrected the error on a prospective basis during the first quarter of 2024 through an out of period adjustment lowering our net income by $178 in both the three and six months ended June 30, 2024. We assessed the materiality of the error and concluded that the error was not material to the results of operations or financial condition or for the prior annual and interim periods, and the correction is not expected to be material to the full year results for fiscal year 2024.

Inventories

Inventories are as follows:

SCHEDULE OF INVENTORIES

	June 30,			December 31,
	2024			2023
Raw materials	$	22,463		$	20,863
Work in process		645			1,033
Finished goods		965			934
Reserves		(1,280	)		(1,170	)
Inventories, net	$	22,793		$	21,660

Other Intangible Assets

Other intangible assets as of June 30, 2024 and December 31, 2023 are as follows:

SCHEDULE OF OTHER INTANGIBLE ASSETS

	Customer Relationships		Patents		Total
Balances as of January 1, 2023	$	216	$	206	$	422
Amortization		144		15		159
Balances as of December 31, 2023	$	72	$	191	$	263
Balances	$	72	$	191	$	263
Amortization		72		8		80
Balances as of June 30, 2024	$	-	$	183	$	183
Balances	$	-	$	183	$	183

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is 5.5 years. Of the patents value as of June 30, 2024, $98 are being amortized and $85 are in process and a patent has not yet been issued.

Amortization expense of finite life intangible assets for both the three months ended June 30, 2024 and 2023 was $40. Amortization expense of finite life intangible assets for both the six months ended June 30, 2024 and 2023 was $80.

As of June 30, 2024, estimated future annual amortization expense (except projects in process) related to these assets is as follows:

Year	Amount
2024	$	9
2025		18
2026		18
2027		18
2028		18
Thereafter		17
Total	$	98

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract assets. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. The Company’s $1,542 cash balance as of June 30, 2024 included approximately $1,141 and $32 that was held at banks located in China and Mexico, respectively. We grant credit to customers in the normal course of business and generally do not require collateral on our accounts receivable.

We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of gross accounts receivable. One customer accounted for 26% and 25% of net sales for the three and six months ended June 30, 2024, respectively. Two customers accounted for 39% of net sales for both the three and six months ended June 30, 2023.

As of June 30, 2024, three customers represented approximately 39% of our gross accounts receivable. As of December 31, 2023, two customers represented approximately 35% of our gross accounts receivable.

Contract assets for three customers accounted for 43% of gross contract assets as of June 30, 2024. Contract assets for two customers accounted for 34% of gross contract assets as of December 31, 2023.

Export sales from the U.S. represented approximately 3% and 2% of net sales for the three and six months ended June 30, 2024, respectively. Export sales represented approximately 3% of net sales for both three and six month ended June 30, 2023.

NOTE 3. REVENUE

Revenue Recognition

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 74% of net sales for both the three and six months ended June 30, 2024 and approximately 73% and 74% of net sales for the three and six months ended June 30, 2023, respectively.

The following tables summarize our net sales by market for the three months ended June 30, 2024 and 2023, respectively:

SCHEDULE OF NET SALES BY MARKET


	Three Months Ended June 30, 2024
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	12,725	$	4,435	$	711	$	17,871
Aerospace and defense		6,097		494		44		6,635
Industrial		6,163		2,667		555		9,385
Total net sales	$	24,985	$	7,596	$	1,310	$	33,891


	Three Months Ended June 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	14,570	$	5,318	$	719	$	20,607
Aerospace and defense		4,499		674		182		5,355
Industrial		6,593		2,125		341		9,059
Total net sales	$	25,662	$	8,117	$	1,242	$	35,021

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

The following tables summarize our net sales by market for the six months ended June 30, 2024 and 2023, respectively:


	Six Months Ended June 30, 2024
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	25,789	$	9,679	$	1,508	$	36,976
Aerospace and defense		11,301		736		116		12,153
Industrial		13,110		5,014		853		18,977
Total net sales	$	50,200	$	15,429	$	2,477	$	68,106


	Six Months Ended June 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	30,295	$	10,379	$	1,305	$	41,979
Aerospace and defense		7,914		1,224		261		9,399
Industrial		13,183		4,533		815		18,531
Total net sales	$	51,392	$	16,136	$	2,381	$	69,909

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

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the six months ended June 30, 2024 were as follows:

SCHEDULE OF CONTRACT ASSETS

Balances as of January 1, 2024	$	14,481
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		27,904
Allowance for current expected credit losses		(14	)
Amounts invoiced during the period		(27,414	)
Balance outstanding as of June 30, 2024	$	14,957

We expect substantially all of the remaining performance obligations for the contract assets recorded as of June 30, 2024 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.

NOTE 4. FINANCING ARRANGEMENTS

We had 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 was to expire on June 15, 2026.

On 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.

The 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. The Company met the covenants for the period ended June 30, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. 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. We were in compliance with all the financial covenants related to this agreement as of and for the period ended June 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in excess of the amounts allowed under the Revolver. We have received a waiver of this event of default from the bank.

Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. 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 8.0% and 8.3% as of June 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $8,360 and $5,846 outstanding as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024 we had unused availability on the line of credit of $6,440.

The line of credit is shown net of debt issuance costs of $46 and $31 on the condensed consolidated balance sheet as of June 30, 2024 and December 31, 2023, respectively.

NOTE 5. LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. As of June 30, 2024, we do not have material lease commitments that have not commenced. We extended our operating leases for part of our manufacturing facility in China and our corporate office in Maple Grove, MN during the first six months of 2024 which extended the lease through August of 2033 with monthly lease payments of $14 to $18.

The components of lease expense were as follows:


	Three Months Ended June 30,
Lease Cost	2024		2023
Operating lease cost	$	581	$	592
Finance lease interest cost		6		11
Finance lease amortization expense		129		182
Total lease cost	$	716	$	785


	Six Months Ended June 30,
Lease Cost	2024		2023
Operating lease cost	$	1,177	$	1,159
Finance lease interest cost		12		23
Finance lease amortization expense		129		364
Total lease cost	$	1,318	$	1,546

Supplemental condensed consolidated balance sheet information related to leases was as follows:

	Balance Sheet Location	June 30, 2024		December 31, 2023
Assets
Finance lease assets	Property and equipment, net	$	373	$	636
Operating lease assets	Operating lease assets, net		8,274		6,917
Total leased assets		$	8,647	$	7,553

Liabilities
Current
Current finance lease liabilities	Current portion of finance lease obligations	$	214	$	356
Current operating lease liabilities	Current portion of operating lease obligations		1,169		1,033
Noncurrent
Long-term finance lease liabilities	Long-term finance lease liabilities, net of current portion		146		209
Long-term operating lease liabilities	Long-term operating lease obligations, net of current portion		7,949		6,763
Total lease liabilities		$	9,478	$	8,361

Supplemental condensed consolidated statement of cash flows information for the six months ended June 30, 2024 related to leases was as follows:

	June 30,		June 30,
	2024		2023
Operating Leases
Cash paid for amounts included in the measurement of lease liabilities	$	933	$	934
Property acquired under operating lease	$	1,923	$	-

Future payments of lease liabilities as of June 30, 2024 were as follows:

	Operating Leases			Finance Leases			Total
2024	$	928		$	163		$	1,091
2025		1,792			106			1,898
2026		1,758			105			1,863
2027		1,470			-			1,470
2028		1,469			-			1,469
Thereafter		5,510			-			5,510
Total lease payments	$	12,927		$	374		$	13,301
Less: imputed interest		(3,809	)		(14	)		(3,519	)
Present value of lease liabilities	$	9,118		$	360		$	9,478

The lease term and discount rate as of June 30, 2024 were as follows:

Weighted-average remaining lease term (years)
Operating leases	8.1
Finance leases	1.7
Weighted-average discount rate
Operating leases	8.0	%
Finance leases	5.3	%

NOTE 6. STOCK BASED AWARDS

Stock-based compensation expense was reported as follows in the condensed consolidated statements of income within general and administrative expenses of $126 and $93 for the three months ended June 30, 2024 and 2023, respectively and $206 and $192 for the six months ended June 30, 2024 and 2023, respectively.

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. An additional 50,000, 175,000 100,000 and 100,000 shares were authorized in March 2020, May 2022, May 2023 and May 2024, respectively.

We granted 22,000 service-based stock options during the three and six months ended June 30, 2024. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2024 was $8.22. We granted 29,000 service-based stock options during the three and six months ended June 30, 2023. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows:

	2024			2023
Stock option fair value assumptions:
Risk-free interest rate		4.40	%		3.45	%
Expected life (years)		6.0			6.5
Dividend yield		0	%		0	%
Expected volatility		58	%		60	%
Weighted average grant date fair value of stock options granted	$	6.47		$	5.67

Total compensation expense related to stock options was $65 and $121 for the three and six months ended June 30, 2024, respectively. Total compensation expense related to stock options was $55 and $123 for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, there was $844 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 3.8 years.

Following is the status of option activity for the six months ended and as of June 30, 2024:

SCHEDULE OF OPTION ACTIVITY

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding – December 31, 2023		458,700		$	6.63		6.53	$	1,432
Granted		22,000			11.06
Exercised		(5,500	)		5.42
Forfeited		(9,600	)		10.26
Outstanding – June 30, 2024		465,600		$	6.78		6.20	$	3,150
Exercisable on June 30, 2024		279,300		$	4.67		4.60	$	2,479

Restricted Stock Units

During the three and six month periods ended June 30, 2024 and 2023, we granted 15,141 and 18,000 restricted stock units (“RSUs”), respectively, at an average grant price per share of $11.06 and $9.37, respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $61 and $85 for the three and six months ended June 30, 2024 and 2023, respectively. Total compensation expense related to the RSUs was $38 and $69 for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, total unrecognized compensation expense related to the RSUs was $220, which will vest over a weighted average period of 0.9 years.

Following is the status of restricted stock activity for the six months ended and as of June 30, 2024:

SCHEDULE OF RESTRICTED STOCK ACTIVITY

	Shares			Weighted- Average Remaining Vesting Term (in years)		Aggregate Intrinsic Value
Outstanding – December 31, 2023		27,000			1.0	$	254
Granted		15,141
Vested		(16,500	)
Forfeited		(1,500	)
Outstanding – June 30, 2024		24,141			0.9	$	330

NOTE 7. NET INCOME PER SHARE DATA

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding using the treasury stock method during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options and non-vested stock relating to restricted stock units.

The calculation of diluted income per shared excluded 31,611 and 45,453 in weighted average shares for the three and six months ended June 30, 2024, respectively, and 60,728 and 47,182 in weighted average shares for the three and six months ended June 30, 2023, respectively, as their effect was anti-dilutive. Basic and diluted weighted average shares outstanding were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Basic weighted average shares outstanding		2,760,052		2,718,066		2,751,330		2,705,121
Dilutive effect of outstanding stock options and non-vested restricted stock units		175,619		152,782		170,783		182,192
Diluted weighted average shares outstanding		2,935,671		2,870,848		2,922,113		2,887,313

NOTE 8. INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events.

Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%, respectively. Our effective tax rate for the three and six months ended June 30, 2023 was 35% and 31%. The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three and six month periods ended June 30, 2023 and inclusion of estimated research and development tax credits in the three and six months ended June 30, 2024, partially offset by increased taxes on foreign entities.

NOTE 9. RESTRUCTURING CHARGES

During the first six months of 2024, we accrued restructuring charges of $91 related to the closure and consolidation of our Blue Earth, Minnesota production facility, which is planned to be completed in the fourth quarter of 2024. There were no restructuring charges or amounts accrued in the six months ended June 30, 2023.

NOTE 10. PAYROLL TAX DEFERRAL

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. During the year ended December 31, 2023, the Company remitted $1,158 to the Internal Revenue Service (“IRS”) related to the deferral of payroll taxes, of which $785 was recorded as a refund receivable as of December 31, 2023, with a corresponding liability due. These amounts were settled during the first quarter of 2024.

NOTE 11. RELATED PARTY TRANSACTIONS

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We have accounts receivable related to Abilitech of $85. Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable, and we have recorded a full allowance against the gross amount. The Company believes that transactions with Abilitech were 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 (less than 10%) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company has an agreement 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. The Company and Marpe Technologies will each receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company has met its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies. The total value of the Company’s 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. There can be no assurances that Marpe Technologies’ medical device operations will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recover the value of services provided to Marpe if not paid when the services are provided. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the three and six months ended June 30, 2024 and 2023, we recognized net sales to Marpe Technologies of $0 and $67, respectively. As of June 30, 2024 and December 31, 2023, we have recorded an unbilled receivable of $21 and $39, respectively, related to expected reimbursement from the BIRD Foundation and have outstanding accounts receivable of $0 and $20, 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.

ITEM 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

Overview

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. As of June 30, 2024, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove (corporate office). We also have facilities in Monterrey, Mexico and Suzhou, China. In May, 2024, we announced the closure of our Blue Earth facility by the end of 2024 and moving its operations to our Bemidji facility.

All dollar amounts are stated in thousands of U.S. dollars.

Results of Operations

Net Sales. Net sales for the three months ended June 30, 2024 and 2023 were $33,891 and $35,021, respectively, a decrease of $1,130 or 3.2%. Net sales for the six months ended June 30, 2024 and 2023 were $68,106 and $69,909, respectively, a decrease of $1,803 or 2.6%. The following is a summary of net sales by our major industry markets:

	Three Months Ended June 30,
	2024		2023		Increase (Decrease)
Medical	$	17,871	$	20,607	$	(2,736	)	(13.3	)%
Industrial		9,385		9,059		326		3.6	%
Aerospace and defense		6,635		5,355		1,280		23.9	%
Total net sales	$	33,891	$	35,021	$	(1,130	)	(3.2	)%

	Six Months Ended June 30,
	2024		2023		Increase (Decrease)
Medical	$	36,976	$	41,979	$	(5,003	)	(11.9	)%
Industrial		18,977		18,531		446		2.4	%
Aerospace and defense		12,153		9,399		2,754		29.3	%
Total net sales	$	68,106	$	69,909	$	(1,803	)	(2.6	)%

	●	Medical: Net sales to our medical customers decreased $2,736, or 13.3%, in the three months ended June 30, 2024 as compared with the same period in 2023, and $5,002, or 11.9%, in the six months ended June 30, 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 in anticipation of moving several programs for one customer to our Monterrey, Mexico facility.

	●	Industrial: Net sales to our industrial customers increased $326, or 3.6%, in the three months ended June 30, 2024 as compared with the same period in 2023, and $446, or 2.4%, in the six months ended June 30, 2024 as compared with the same period in 2023. The increase in net sales was primarily due to stronger demand with existing customers.

	●	Defense: Net sales to our aerospace and defense customers were up $1,280, or 23.9%, in the three months ended June 30, 2024 as compared with the same period in 2023, and $2,754, or 29.3% in the six months ended June 30, 2024 as compared with the same period in 2023. The increase in net sales relates to increasing demand in the aerospace and defense market, and improved supply chain availability of component materials.

Backlog. Our 90-day shipment backlog as of June 30, 2024 was $30,095, down 14.5% from March 31, 2024, and 12.2% from the prior-year comparable quarter end. 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.

Our total order backlog as of June 30, 2024 was $73,296, a 14.8% decrease from the prior quarter end and a 27.4% decrease from the prior-year comparable quarter end. 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. More recently we are also noting reduced visibility to revenues in the next several quarters as customers are rebalancing their inventories and, therefore, deferring the placement of some orders.

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

	June 30, 2024				March 31, 2024				June 30, 2023
	90 Day		Total		90 Day		Total		90 Day		Total
Medical	$	15,906	$	34,450	$	16,995	$	40,201	$	18,283	$	51,925
Industrial		6,398		11,423		8,200		15,184		9,702		21,037
Aerospace and defense		7,791		27,423		10,018		30,616		6,283		28,056
Total backlog	$	30,095	$	73,296	$	35,213	$	86,001	$	34,268	$	101,018

The 90-day and total backlog as of June 30, 2024 includes orders already recognized in net sales and included in the contract asset value of $14,957.

Operating Costs and Expenses.

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

	Three Months Ended June 30,
	2024			2023			Increase/(Decrease)
Net sales	$	33,891		$	35,021		$	(1,130	)	(3.2	)%
Cost of goods sold		29,274			29,547			(273	)	(0.9	)%
Gross profit		4,617			5,474			(857	)	(15.7	)%
Gross margin percentage ⁽¹⁾		13.6	%		15.6	%		(200	) bpc⁽²⁾
Selling		909			953			(44	)	(4.7	)%
% of Net sales		2.7	%		2.7	%
General and administrative		2,982			3,105			(123	)	(4.0	)%
% of Net sales		8.8	%		8.9	%
Restructuring charges		91			-			91		-	%
% of Net sales		0.2	%		-	%
Research and development		291			317			(26	)	(8.2	)%
% of Net sales		0.9	%		0.9	%
Operating income		344			1,099			(755	)	(68.7	)%
% of Net sales		1.0	%		3.1	%

	⁽¹⁾	Gross margin percentage is defined as gross profit as a percentage of net sales.
	⁽²⁾	Basis points change in gross margin percentage.

	Six Months Ended June 30,
	2024			2023			Increase/(Decrease)
Net sales	$	68,106		$	69,909		$	(1,803	)	(2.6	)%
Cost of goods sold		58,041			58,951			(910	)	(1.5	)%
Gross profit		10,065			10,958			(893	)	(8.1	)%
Gross margin percentage ⁽¹⁾		14.8	%		15.7	%		(90	) bpc⁽²⁾
Selling		1,714			1,843			(129	)	(7.0	)%
% of Net sales		2.5	%		2.6	%
General and administrative		6,152			6,370			(218	)	(3.4	)%
% of Net sales		9.0	%		9.1	%
Restructuring charges		91			-			91		-	%
% of Net sales		0.2	%		-	%
Research and development		609			593			16		2.7	%
% of Net sales		0.9	%		0.8	%
Operating income		1,499			2,152			(653	)	(30.3	)%
% of Net sales		2.3	%		3.1	%

	⁽¹⁾	Gross margin percentage is defined as gross profit as a percentage of net sales.
	⁽²⁾	Basis points change in gross margin percentage.

Gross profit and gross margins. Gross profit as a percent of net sales was 13.6% and 15.6% for the three months ended June 30, 2024 and 2023, respectively. Gross profit as a percent of net sales was 14.8% and 15.7% for the six months ended June 30, 2024 and 2023, respectively. The decrease in gross profit as a percentage of net sales in the 2024 periods as compared with the same prior-year periods was the result of lower net sales, as discussed above, and reduced facility utilization.

Selling expenses. Selling expenses as measured as a percent of net sales, were relatively flat in the three and six months ended June 30, 2024 and 2023.

General and administrative expenses. General and administrative expenses decreased in the 2024 periods as compared with the 2023 periods as the result of lower incentive compensation accruals in the current-year periods, and ,as a percent of net sales, remained relatively flat.

Restructuring charges. Restructuring charges were $91 in the three and six months ended June 30, 2024 for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility. We expect to incur approximately $800 of cash restructuring costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to be incurred and paid by December 2024.

Operating income. Operating income for the three months ended June 30, 2024 and 2023 were $344 or 1.0% of net sales, and $1,099 or 3.1% of net sales, respectively. Operating income for the six months ended June 30, 2024 and 2023 were $1,499 or 2.3% of net sales and $2,152 or 3.1% of net sales, respectively. Decreases in both periods were driven by the decrease in net sales and resulting gross margin.

Other expense

Interest expense. Interest expense was $165 and $125 for the three months ended June 30, 2024 and 2023, respectively. Interest expense was $332 and $235 for the six months ended June 30, 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.

Income taxes. Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%. Our effective tax rate for the three and six months ended June 30, 2023 was 35% and 31%. The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three and six month periods ended June 30, 2023 and inclusion of estimated research and development tax credits in the three and six months ended June 30, 2024, partially offset by increased taxes on foreign entities.

Cash Flow Operating Results

The following is a summary of cash flow results:

	Six Months Ended June 30,
	2024			2023
Cash provided by (used in):
Operating activities	$	(1,458	)	$	281
Investing activities		(1,011	)		(956	)
Financing activities		2,343			144
Effect of exchange rates on changes in cash and cash equivalents		(7	)		(35	)
Net change in cash and cash equivalents	$	(133	)	$	(566	)

Operating Activities. Cash used in operating activities was $1,458 in the first six months of 2024, compared with cash provided of $281 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

	●	Cash provided by accounts receivable and contract assets was $1,214 in the six months ended June 30, 2024 as compared with cash usage of $3,200 in the same prior-year period. The improved cash flow in the current year was due an expected increase in cash collections due to higher sales and the timing of customer payments in the fourth quarter of 2023 as compared with the fourth quarter of 2022.
	●	Cash used in inventory was $1,288 in the six months ended June 30, 2024 as compared with cash provided of $1,350 in the prior-year period. The increase in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of product shipments and increased inventory levels to support the transition of manufacturing from our Blue Earth facility to our Bemidji plant.

	●	Cash used by changes in accounts payable was $2,546 in the current-year period as compared with cash provided of $586 in the same prior-year period, primarily related to the timing of cash payments.
	●	Cash provided by customer deposits was $1,385 in the six months ended June 30, 2024 as compared with cash used of $195 in the same prior-year period which is driven by timing of customer deposits received before the quarter end.

Investing Activities. Cash used in investing activities was $408 in the first six months of 2024, compared with cash used of $956 in the same prior-year period, both primarily for capital expenditures.

Financing Activities. Cash provided by financing activities was $2,343 in the first six months of 2024, compared with cash provided of $144 in the same prior-year period. The increase in cash provided by financing activities resulted from the cash used for working capital in the six months ended June 30, 2024.

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 for the next twelve months, capital expenditures and debt repayments.

Credit Facility. We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit arrangement of $16,000 that was to expire on June 15, 2026.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

Forward-Looking Statements

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

	♦	Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;
	♦	Supply chain disruption and unreliability;
	♦	Lack of supply of sufficient human resources to produce our products;
	♦	Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;
	♦	Changes in the reliability and efficiency of our operating facilities or those of third parties;
	♦	Increases in certain raw material costs such as copper and oil;
	♦	Commodity and energy cost instability;
	♦	Risks related to FDA noncompliance;
	♦	The loss of a major customer;
	♦	General economic, financial and business conditions that could affect our financial condition and results of operations;
	♦	Increased or unanticipated costs related to compliance with securities and environmental regulation;
	♦	Disruption of global or local information management systems due to natural disaster or cyber-security incident;
	♦	Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers’ operations or our suppliers’ operations.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also 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 obligation to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

ITEM 1A. RISK FACTORS

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In June 2024, the Company authorized the repurchase of $100,000 of its Common Stock. As of June 30, 2024, no Common Stock has been repurchased under this program.

ITEM 3. DEFAULTS ON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits

31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32*		Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 2024, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Nortech Systems Incorporated and Subsidiaries

Date: August 8, 2024	by	/s/ Jay D. Miller

		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

Date: August 8, 2024	by	/s/ Andrew D. C. LaFrence

		Andrew D. C. LaFrence
		Chief Financial Officer and Senior Vice President of Finance
		Nortech Systems Incorporated

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Jay D. Miller, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Nortech Systems Incorporated and Subsidiaries;

	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2024	By:	/s/ Jay D. Miller

		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Andrew D. C. LaFrence, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Nortech Systems Incorporated. and Subsidiaries;

	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2024	By:	/s/ Andrew D. C. LaFrence

		Andrew D. C. LaFrence
		Chief Financial Officer and Senior Vice President of Finance
		Nortech Systems Incorporated

Exhibit 32

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Jay D. Miller, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2024 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 8, 2024

By:	/s/ Jay D. Miller

	Jay D. Miller
	Chief Executive Officer and President
	Nortech Systems Incorporated

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Andrew D .C. LaFrence, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2024 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 8, 2024

By:	/s/ Andrew D. C. LaFrence

	Andrew D. C. LaFrence
	Chief Financial Officer and Senior Vice President of Finance
	Nortech Systems Incorporated

Cover - $ / shares	6 Months Ended
Cover - $ / shares	Jun. 30, 2024	Aug. 01, 2024
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Jun. 30, 2024
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2024
Current Fiscal Year End Date	--12-31
Entity File Number	0-13257
Entity Registrant Name	NORTECH SYSTEMS INCORPORATED
Entity Central Index Key	0000722313
Entity Tax Identification Number	41-1681094
Entity Incorporation, State or Country Code	MN
Entity Address, Address Line One	7550 Meridian Circle N.
Entity Address, Address Line Two	Suite # 150
Entity Address, City or Town	Maple Grove
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55369
City Area Code	(952)
Local Phone Number	345-2244
Title of 12(b) Security	Common Stock, par value $.01 per share
Trading Symbol	NSYS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		2,762,177
Entity Listing, Par Value Per Share	$ 0.01

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023	Jun. 30, 2024	Jun. 30, 2023
Income Statement [Abstract]
Net sales	$ 33,891	$ 35,021	$ 68,106	$ 69,909
Cost of goods sold	29,274	29,547	58,041	58,951
Gross profit	4,617	5,474	10,065	10,958
Operating expenses:
Selling	909	953	1,714	1,843
General and administrative	2,982	3,105	6,152	6,370
Research and development	291	317	609	593
Restructuring charges	91		91
Total operating expenses	4,273	4,375	8,566	8,806
Income from operations	344	1,099	1,499	2,152
Other expense:
Interest expense	(165)	(125)	(332)	(235)
Income before income taxes	179	974	1,167	1,917
Income tax expense	22	340	245	602
Net income	$ 157	$ 634	$ 922	$ 1,315
Net income per common share:
Basic (in dollars per share)	$ 0.06	$ 0.23	$ 0.34	$ 0.49
Weighted average number of common shares outstanding - basic (in shares)	2,760,052	2,718,066	2,751,330	2,705,121
Diluted (in dollars per share)	$ 0.05	$ 0.22	$ 0.32	$ 0.46
Weighted average number of common shares outstanding - diluted (in shares)	2,935,671	2,870,848	2,922,113	2,887,313
Other comprehensive income (loss)
Foreign currency translation	$ (175)	$ (281)	$ (358)	$ (241)
Comprehensive income (loss), net of tax	$ (18)	$ 353	$ 564	$ 1,074

Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands

Jun. 30, 2024

Dec. 31, 2023

^[1]

Current assets:

Cash

$ 1,542

$ 960

Restricted cash

715

Accounts receivable, less allowances of $270 and $358, respectively

17,577

19,279

Inventories, net

22,793

21,660

Contract assets

14,957

14,481

Prepaid assets and other assets

2,291

1,698

Total current assets

59,160

58,793

Property and equipment, net

6,001

6,513

Operating lease assets, net

8,274

6,917

Deferred tax assets

2,641

Other intangible assets, net

183

263

Total assets

76,259

75,127

Current liabilities:

Current portion of finance lease obligations

214

356

Current portion of operating lease obligations

1,169

1,033

Accounts payable

12,728

15,924

Accrued payroll and commissions

2,612

4,138

Customer deposits

5,453

4,068

Other accrued liabilities

1,120

1,063

Total current liabilities

23,296

26,582

Long-term liabilities:

Long-term line of credit, net of issuance costs

8,314

5,815

Long-term finance lease obligations, net of current portion

146

209

Long-term operating lease obligations, net of current portion

7,949

6,763

Other long-term liabilities

409

414

Total long-term liabilities

16,818

13,201

Total liabilities

40,114

39,783

Shareholders’ equity:

Preferred stock, $1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding

250

Common stock - $0.01 par value; 9,000,000 shares authorized; 2,762,177 and 2,740,178 shares issued and outstanding, respectively

Additional paid-in capital

17,165

16,929

Accumulated other comprehensive loss

(890)

(532)

Retained earnings

19,592

18,670

Total shareholders’ equity

36,145

35,344

Total liabilities and shareholders’ equity

$ 76,259

$ 75,127

[1]	The balance sheet as of December 31, 2023 has been derived from the consolidated audited financial statements at that date.

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2024	Dec. 31, 2023
Statement of Financial Position [Abstract]
Accounts receivable allowance	$ 270	$ 358
Preferred stock, par value	$ 1	$ 1
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	250,000	250,000
Preferred stock, shares outstanding	250,000	250,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	9,000,000	9,000,000
Common stock, shares issued	2,762,177	2,740,178
Common stock, shares outstanding	2,762,177	2,740,178

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 922	$ 1,315
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	966	1,027
Compensation on stock-based awards	206	192
Change in inventory reserves	113	(53)
Change in accounts receivable allowances	(88)	(31)
Other, net	(59)	(116)
Changes in current operating assets and liabilities:
Accounts receivable	1,690	(1,580)
Employee Retention Credit Receivable		2,650
Inventories	(1,288)	1,350
Contract assets	(476)	(1,620)
Prepaid expenses and other current assets	(531)	(1,042)
Accounts payable	(2,546)	586
Accrued payroll and commissions	(1,516)	(1,788)
Customer deposits	1,385	(195)
Other accrued liabilities	(236)	(414)
Net cash (used in) provided by operating activities	(1,458)	281
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment	9
Purchases of property and equipment	(1,020)	(956)
Net cash used in investing activities	(1,011)	(956)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit	68,323	65,886
Payments to line of credit	(65,809)	(65,726)
Principal payments on financing leases	(202)	(189)
Proceeds from stock option exercises	31	173
Net cash provided by financing activities	2,343	144
Effect of exchange rate changes on cash	(7)	(35)
Net change in cash and cash equivalents	(133)	(566)
Cash and cash equivalents - beginning of period	1,675	2,481
Cash and cash equivalents - end of period	1,542	1,915
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets:
Cash	1,542	781
Restricted cash		1,134
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	1,542	1,915
Supplemental disclosure of cash flow information:
Cash paid for interest	307	248
Cash paid for income taxes	279	1,036
Supplemental noncash investing and financing activities:
Property and equipment purchases in accounts payable	75	49
Operating lease assets acquired under operating leases	$ 1,923

Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($)
$ in Thousands

Preferred Stock [Member]