Nortech Systems Annual Report 2019

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549 FORM 10-K ☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2019OR ☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from __________ to __________ NORTECH SYSTEMS INCORPORATED(Exact name of registrant as specified in its charter)Commission file number 0-13257State of Incorporation: MinnesotaIRS Employer Identification No. 41-1681094Executive Offices: 7550 Meridian Circle N #150, Maple Grove, MN 55369Telephone number: (952) 345-2244 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading SymbolName of each exchange on which registeredCommon Stock, par value $.01 per shareNSYSNASDAQ Capital Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ 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 thepreceding 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 90days. 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 Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. ☐ 1 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 growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the ExchangeAct. 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 revisedfinancial 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 ☒ The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of $4.02 per share, was $4,950,646 on June 30, 2019. Shares of common stock outstanding at March 16, 2020: 2,658,559. (The remainder of this page was intentionally left blank.) 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the 2019 Annual Shareholders’ Meeting have been incorporated by reference into Part III of this Form 10-K. The ProxyStatement is expected to be filed with the Securities and Exchange Commission (the SEC) within 120 days after December 31, 2019, the end of our fiscal year. (The remainder of this page was intentionally left blank) 3 NORTECH SYSTEMS INCORPORATEDANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS PART I PAGE Item 1.Business5-8 Item 1A.Risk Factors 8-13 Item 1B.Unresolved Staff Comments 13 Item 2.Properties 14 Item 3. Legal Proceedings 14 Item 4. Mine Safety Disclosures 14 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15-16 Item 6. Selected Financial Data 16 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations16-23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23 Item 8.Financial Statements and Supplementary Data 24-50 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure51 Item 9A.Controls and Procedures 51 Item 9B.Other Information 51 PART III Item 10.Directors, Executive Officers and Corporate Governance52 Item 11.Executive Compensation 52 Item 12.Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters 52-53 Item 13.Certain Relationships and Related Transactions, and Director Independence 53 Item 14. Principal Accountant Fees and Services53 PART IV Item 15.Exhibits and Financial Statement Schedules54-56 Signatures57 Index to Exhibits58-60 4 NORTECH SYSTEMS INCORPORATEDFORM 10-KFor the Year Ended December 31, 2019 PART I Item 1. Business GeneralNortech Systems, Inc., (“the Company”, “we”, “our”) organized in December 1990, is an Electronic Manufacturing Services (“EMS”) company headquartered in MapleGrove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou,China. We offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing, testing,prototyping, manufacturing, supply chain management and post-market services. Our manufacturing and engineering services include complete medical devices, printedcircuit board assemblies, wire and cable assemblies, and complex higher-level electromechanical assemblies. The majority of our revenue is derived from products builtto the customer's design specifications. Our breadth of manufacturing, technical expertise and experience make us attractive to our broad customer base. Our customers are original equipment manufacturers(“OEMs”) in the Aerospace and Defense, Medical and Industrial markets. The diversity in the markets we serve is an advantage in dealing with the effects offluctuations from the economy and competition. In the design phase, we provide technical support, subject matter expertise in design for manufacturing and testingcapabilities that allow our customer programs to get to production faster while meeting both their quality and cost requirements. Our customers rely on our experienceand capabilities in manufacturing and supply chain to manage and reduce cost over the life cycle of their products. This requires a strong relationship with ourcustomers based on a trusting partnership as we perform as an extension of their operations. All of our facilities are certified to one or more of the industry standards, including International Standards Organization (“ISO”) 9001, ISO 13485, and AerospaceSystems (“AS”) 9100, with most having additional certifications based on the needs of the customers they serve. In addition to industry standard certifications weactively manage quality metrics throughout product life-cycle at all levels of the organization to provide real-time, pro-active support to our customers and their projects.Process validation is performed through the strict phases of installation qualification, operation qualification and performance qualification. Business SegmentAll of our operations fall under the Contract Manufacturing segment within the EMS industry. We strategically direct production between our various manufacturingfacilities based on a number of considerations to best meet our customers’ needs. We share resources for sales, marketing, engineering, supply chain, informationservices, human resources, payroll, and all corporate accounting functions. Our financial information is consolidated and evaluated regularly by the chief operatingdecision maker in assessing performance and allocating resources. Business StrategyThe EMS industry has evolved into a dynamic, high-tech, regulated global electronics contract services industry. We continue to expand our capabilities and footprintto better meet these changing market requirements. Along with offering technical expertise in our quality processes, engineering design applications and testing, we arealso increasing our focus on supplier-managed inventory services and the cost drivers throughout the global supply chain. We continue to transform our businessmodel from one that is less transactional and price/commodity driven to a solution based model focused on value added services. We continue to pursue strategicopportunities that may include acquisitions, mergers, and/or joint ventures with complementary companies to expand our service offering, advance our competitiveedge, grow our customer base and increase revenues. Our strategic objectives and our history have been based on both organic and acquired growth. 5 Our quality systems and processes are based on ISO standards with all facilities certified to ISO 9001 and/or AS9100 standards. We also have ISO 13485 certificationwhich recognizes our quality management systems applicable to contract design, manufacture and repair of assemblies for the medical industry. Our Milaca operation isa U.S. Food and Drug Administration (“FDA”) registered facility. These certifications and registrations provide our customers assurance of our capabilities and provenprocesses. We are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives we have invested in Restriction ofHazardous Substances (lead free) processing, equipment, plant capacity studies, people, enterprise resource planning systems, lean manufacturing and supply chainmanagement techniques at our facilities. We are committed to continuous improvement and have invested in training our people to identify and act on improvementopportunities. We maintain a diversified customer base and expand into other capabilities and services when there is a fit with our core competencies and strategicvision. MarketingWe concentrate our marketing efforts in the Aerospace and Defense, Medical and Industrial markets. Our marketing strategy emphasizes our breadth, expertise andexperience in each of our markets. Our expertise helps our customers save time and money and also reduces their risks. The breadth of our manufacturing, supply chain,engineering services and complete turnkey solutions assist our customers in getting their products to market quickly while managing the total cost solution. Ourstrength is managing low to moderate volume components and assemblies with high mix customer demand. This requires us to have close customer relationships andoperational flexibility to manage the variation of product demands. Our customer emphasis continues to be on companies that require an electronic manufacturing partner with a high degree of manufacturing and quality sophistication,including statistical process control, statistical quality control, ISO standards, Military Specifications, AS9100 and FDA facility registration. We continue efforts topenetrate our existing customer base and expand market opportunities with participation in industry forums and selected trade shows. We target customers who valueproven manufacturing performance, design, project management and application engineering expertise and who value the flexibility to manage the supply chain of a highmix of products and services. We market our services through a mix of traditional marketing outreach, a specialized business development team and independentmanufacturers' representatives. For more information on our marketing and service offerings see our web site at nortechsys.com. The information on our company’swebsite is not part of this filing. Sources and Availability of MaterialsWe currently purchase the majority of our electronic components globally and directly from electronic component manufacturers and large electronic distributors. Onoccasion, some of our components may be placed on a stringent allocation basis; however, we are not currently experiencing any major material purchasing oravailability problems. Major CustomersOur largest customer has two divisions that together accounted for approximately 22.5% and 23.2% of net sales for the years ended December 31, 2019 and 2018,respectively. One division accounted for approximately 19.9% and 20.8% of net sales for the years ended December 31, 2019 and 2018, respectively. The second divisionaccounted for approximately 2.6% and 2.4% of net sales for the years ended December 31, 2019 and 2018, respectively. 6 Patents and LicensesOur success depends on our technical expertise, trade secrets, supply chain and manufacturing skills. However, during the normal course of business we have obtainedor developed proprietary product requiring licensing, patent, copyright or trademark protection. CompetitionThe contract manufacturing EMS industry's competitive makeup includes small closely held contract manufacturing companies, large global full-service contractmanufacturers, company-owned in-house manufacturing facilities and foreign contract manufacturers. We do not believe that the small closely held operations pose asignificant competitive threat in the markets and customers we serve, as they generally do not have the complete manufacturing and engineering services or capabilitiesrequired by our target customers. We do believe the larger global full service and foreign manufacturers are more focused on higher volume customer engagements andwe do not see them as our primary competition. We continue to see opportunities with OEM companies that have their own in-house electronic manufacturingcapabilities as they evaluate their internal costs and investments against outsourcing to contract manufacturers like us. We do see trends of the low volume, high mixcustomer demand going to a regional supply base. This is a good fit with our operations in US, Mexico and Asia. We continue to study and investigate other regionsand global alternatives to meet our competitive challenges and customer requirements. Research and DevelopmentWe perform research and development for customers on an as requested, project and program basis for development of conceptual engineering and design activities aswell as products moving into production. While we did not expend significant dollars in 2019 or 2018 on Company-sponsored product research and development, wecontinue to explore opportunities for developing proprietary manufacturing methods or products. Environmental Law ComplianceWe believe that our manufacturing facilities are currently operating in compliance with local, state, and federal environmental laws. We plan to continue acquiringenvironmental-oriented equipment and incurring the expenditures we deem necessary for compliance with applicable laws. Expenditures relating to compliance foroperating facilities incurred in the past have not significantly affected our capital expenditures, earnings or competitive position. Government RegulationAs a medical device manufacturer, we have additional compliance requirements. We are required to register with the FDA and are subject to periodic inspection by theFDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations,including testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorouslymonitored through periodic inspections and product field monitoring by the FDA. To support the quality requirements of our Aerospace and Defense market customers,our Blue Earth facility is International Traffic in Arms Regulations (“ITAR”) registered. EmployeesWe have 687 full-time and 97 part-time/temporary employees as of December 31, 2019. Manufacturing personnel, including direct, indirect support and sales functions,comprise 747 employees, while general administrative employees total 37. 7 Foreign Operations and Export Sales from Our Domestic OperationsWe have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China with approximately $961,000 and $596,000 in long-term assets and $3,425,000 and$189,000 of Right of Use Assets at December 31, 2019, respectively. Export sales from our domestic operations represented 3.1% and 4.8% of net sales the years endedDecember 31, 2019 and 2018, respectively. Available InformationOur Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available free of charge, assoon as reasonably practicable, after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission ("SEC"). Thesereports are available on our website at http://www.nortechsys.com and on the SEC's website at http://www.sec.gov. Information included on our website is not deemedto be incorporated into this Annual Report on Form 10-K. Item 1A. Risk FactorsIn evaluating our Company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report onForm 10-K. Each of these risk factors could adversely affect our business, operating results and/or financial condition, as well as adversely affect the value of aninvestment in our common stock. In addition to the following disclosures, please refer to the other information contained in this report, including our consolidatedfinancial statements and the related notes. The economic conditions around the world could adversely affect demand for our products and services and the financial health of our customers.Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, construction,consumer spending, financing availability, employment rates, interest rates, inflation, consumer confidence, defense spending levels, and the profits, capital spending,and liquidity of industrial companies. An economic downturn or financial market turmoil may depress demand for our equipment in all major geographies and markets. If our original equipment manufacturersare unable to purchase our products because of unavailable credit or unfavorable credit terms, depressed end-user demand, or are simply unwilling to purchase ourproducts, our net sales and earnings will be adversely affected. Also, we are subject to the risk that our customers will have financial difficulties, which could harm theirability to satisfy their obligation to pay accounts receivable. Further, an economic downturn may affect our ability to satisfy the financial covenants in the terms of ourfinancing arrangements. We operate in the highly competitive EMS industry and we depend on continuing outsourcing by OEMs.We compete against many EMS companies. The larger global competitors have more resources and greater economies of scale and have more geographically diversifiedinternational operations. We also compete with OEM operations that are continually evaluating manufacturing products internally against the advantages ofoutsourcing or delaying their decision to outsource. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with excesscapacity, lower cost structures and availability of lower cost labor. Competitive factors in our targeted markets are believed to be quality, the ability to meet delivery schedules, customer service, value-added engineering, technologysolutions, geographic location and price. We also expect that our competitors will continue to improve the performance of their current products or services, to reducetheir current products or service sales prices and improve services that maybe offered. Any of these could cause a decline in sales, loss of market share, or lower profitmargin. 8 The availability of excess manufacturing capacity of our competitors also creates competitive pressure on price and winning new business. We must continue to providea quality product, be responsive and flexible to customers’ requirements, and deliver to customers’ expectations. Our lack of execution could have an adverse effect onour results of operations and financial condition. We offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing, testing, prototyping,manufacturing, supply chain management and post-market services. Our engineering revenue depends on our ability to deliver quality value-added engineering services required by our customers in the future. The markets for our engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our businesswill depend upon our ability to hire and retain qualified engineering personnel and maintain and enhance our technological leadership. Although we believe that wecurrently have the ability to provide the value-added engineering services that is required by our customers, there is no certainty that we will develop the capabilitiesrequired by our customers in the future. The emergence of new technology, industry standards or customer requirements may render the engineering services wecurrently provide obsolete or uncompetitive. The acquisition and implementation of new engineering knowledge and technical skills may require significant expense thatcould adversely affect our operating results, as could our failure to anticipate and adapt to our customers’ changing technological requirements. We may not meet regulatory quality standards applicable to our manufacturing and quality processes which could have an adverse effect on our business.We are registered with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s QSR requirements, which require manufacturers ofmedical devices to adhere to certain regulations, including testing, quality control and documentation procedures. We are also ITAR registered which is required for ourmanufacturing of defense related products. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored throughperiodic inspections and product field monitoring. If any inspection reveals noncompliance with these regulations, it could adversely affect our operations. A large percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us.Our largest customer has two divisions that account for 22.5% and 23.2% of net sales for the years ended December 31, 2019 and 2018, respectively. The loss of asubstantial portion of net sales to our largest customers could have a material adverse effect on us. We are dependent on suppliers for electronic components and may experience shortages, extended lead times, cost premiums and shipment delays that wouldadversely affect our customers and us.We purchase raw materials, commodities and components for use in our production. Increased costs of these materials could have an adverse effect on our productioncosts if we are unable to pass along price increases or reduce the other cost of goods produced through cost improvement initiatives. Fuel and energy cost increasescould also adversely affect our freight and operating costs. Due to customer specifications and requirements, we are dependent on suppliers to provide criticalelectronic components and materials for our operations that could result in shortages of some of the electronic components needed for their production. Componentshortages may result in expedited freight, overtime premiums and increased component costs. In addition to the financial impact on operations from lost revenue andincreased cost, there could potentially be harm to our customer relationships. 9 Our customers cancel orders, change order quantity, timing and specifications that if not managed would have an adverse effect on inventory carrying costs.We face, through the normal course of business, customer cancellations and rescheduled orders and are not always successful in recovering the costs of suchcancellations or rescheduling. In addition, excess and obsolete inventory losses as a result of customer order changes, cancellations, product changes and contracttermination could have an adverse effect on our operations. We estimate and reserve for any known or potential impact from these possibilities. Our exposure to financially troubled customers or suppliers may adversely affect our financial results.We provide manufacturing services to companies and industries that have in the past, and may in the future, experience financial difficulty. If our customers experiencefinancial difficulty, we could have difficulty recovering amounts owed to us from these customers, or demand for our products from these customers could decline.Additionally, if our suppliers experience financial difficulty, we could have difficulty sourcing supply necessary to fulfill production requirements and meet scheduledshipments. If one or more of our customers were to become insolvent or otherwise were unable to pay for the services provided by us on a timely basis, or at all, ouroperating results and financial condition could be adversely affected. Such adverse effects could include one or more of the following: an increase in our provision fordoubtful accounts, a charge for inventory write-offs, a reduction in revenue, and an increase in our working capital requirements due to higher inventory levels andincreases in days our accounts receivables are outstanding. Some shareholders may be able to take actions that do not reflect the will or best interests of other shareholders.Our officers and directors control a majority share of our outstanding common stock and could individually or together exert a significant degree of influence over ouraffairs. The manufacture and sale of our products carries potential risk for product liability claims.We represent and warrant the goods and services we deliver are free from defects in material and workmanship for one year from ship date. We make no otherguarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including without limitation, warranties to merchantability, fit for a particularpurpose, non-infringement of patent or the like unless agreed upon in writing. If a product liability claim, results in our being liable and the amount is in excess of ourinsurance coverage or there is no insurance coverage for the claim then it could have an adverse effect on our business and financial position. Complying with securities laws, tax laws, accounting policies and regulations, and subsequent changes, may be costly for us and adversely affect our financialstatements.New or changing laws, regulations, policy and standards relating to corporate governance and public disclosure, including SEC and Nasdaq regulations, tax legislationand the implementation of significant changes in the United States Generally Accepted Accounting Principles (“GAAP”), present challenges due to complexities,assumptions and judgements required to implement. We apply judgments based on our understanding, interpretation and analysis of the relevant facts, circumstances,historical experience and valuations, as appropriate. As a result, actual amounts could differ from those estimated at the time the financial statements are issued. Inaddition, implementation may change the financial accounting or reporting standards that govern the preparation of our financial statements or authoritative entitiescould reverse their previous interpretations or positions on how various financial accounting or reporting standards should be applied. These changes may be difficultto predict and implement and could materially or otherwise impact how we prepare and report our estimates, uncertainties, financial statements, operating results andfinancial condition. Our efforts to comply with evolving laws, regulations, accounting policies and standards have resulted in, and are likely to continue to result in,increased general and administrative expenses and management time and attention from revenue-generating activities to compliance activities and may have an adverseeffect on our financial statements, including cash flows. 10 We depend heavily on our people and may from time to time have difficulty attracting and retaining skilled employees.Our operations depend upon the continued contributions of our key management, marketing, technical, financial, accounting, product development engineers, salespeople and operational personnel. We also believe that our continued success will depend upon our ability to attract, retain and develop highly skilled managerial andtechnical resources within the highly competitive EMS industry. Not being able to attract or retain these employees could have a material adverse effect on revenuesand earnings. Anti-Corruption and Trade Laws - We may incur costs and suffer damages if our employees, agents, or suppliers violate anti-bribery, anti-corruption or trade lawsand regulations.Laws and regulations related to bribery, corruption and trade, and enforcement thereof, are increasing in frequency, complexity and severity on a global basis. Thecontinued geographic expansion of our business into China increases our exposure to, and cost of complying with, these laws and regulations. If our internal controlsand compliance program do not adequately prevent or deter our employees, agents, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions. Changes in currency translation rates could adversely impact our revenue and earnings.Changes in exchange rates will impact our reported sales and earnings. A majority of our manufacturing and cost structure is based in the United States. In addition,decreased value of local currency may adversely affect demand for our products and may adversely affect the profitability of our products in U.S. dollars in foreignmarkets where payments are made in the local currency. Operating in foreign countries exposes our operations to risks that could adversely affect our operating results.We operate manufacturing facilities in Mexico and China. Our operations in those countries are subject to risks that could adversely impact our financial results, such aseconomic or political volatility, foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers and otherrestrictions), protection of our and our customers’ intellectual property and proprietary technology in certain countries, potentially burdensome taxes, crime, employeeturnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations. Non-compliance with environmental laws may result in restrictions and could adversely affect operations.Our operations are regulated under a number of federal, state, and foreign environmental and safety laws and regulations that govern the discharge of hazardousmaterials into the air and water, as well as the handling, storage, and disposal of such materials. These laws and regulations include the Clean Air Act; the Clean WaterAct; the Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as well as similar federal, stateand foreign laws. Compliance with these environmental laws is a major consideration for us due to our manufacturing processes and materials. It is possible we may besubject to potential financial liability for costs associated with the investigation and remediation at our sites; this may have an adverse effect on operations. We havenot incurred significant costs related to compliance with environmental laws and regulations and we believe that our operations comply with all applicableenvironmental laws. Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. Weoperate in environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business, and environmentalgroups. Changes or restrictions on discharge limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capitalinvestment or relocation. It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition,and results of operations. 11 We may be subject to risks associated with our acquisitions, and the risks could adversely affect our operating results.Our strategy is to grow our business organically and through acquisitions, alliances and joint venture arrangements. We will continue to pursue and acquire additionalbusinesses in the EMS industry that fit our long-term objectives for growth and profitability. The success of our acquisitions will depend on our ability to integrate thenew operations with the existing operations. The Company cannot ensure that the expected benefits of any acquisition will be realized. Costs could be incurred onpursuits or proposed acquisitions that have not yet or may not close which could significantly impact the operating results, financial condition, or cash flows.Additionally, after the acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustmentto the purchase price. Other acquisition risks include delays in realizing benefits from the acquired companies or products; difficulties due to lack of or limited priorexperience in any new product or geographic markets we enter; unforeseen losses of customers of, or suppliers to, acquired businesses; difficulties in retaining keyemployees of the acquired businesses; or challenges arising from increased geographic diversity and complexity of our operations and our information technologysystems. The price we pay for a business may exceed the value we realize and we cannot assure you that we will achieve the expected synergies and benefits of anyacquisition. Acquisitions may result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm ourfinancial results. If we fail to comply with the covenants contained in our credit agreement, we may be unable to secure additional financing and repayment obligations on ouroutstanding indebtedness may be accelerated.Our credit agreement contains financial and operating covenants with which we must comply. As of December 31, 2019, we were in compliance with these covenants.However, our continued compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these riskfactors. If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be unable to borrow funds andany outstanding indebtedness could become immediately due and payable, which could materially harm our business. We are dependent on our information technology systems for order, inventory and production management, financial reporting, communications and other functions.If our information systems fail or experience major interruptions due to physical damage or loss of power on our business and our financial results could beadversely affected.We rely on our information technology systems to effectively manage our operational and financial functions. Our computer systems, Internet web sites,telecommunications, and data networks are vulnerable to damage or interruption from power loss, natural disasters and other sources of physical damage or disruptionto the equipment which maintains, stores and hosts our information technology systems. We have taken steps to protect and create redundancies for the equipmentthat facilitates the use of our management information systems, but these steps may not be adequate to ensure that our operations are not disrupted by events withinand outside of our control. If our information technology systems fail or experience major interruptions, or the information technology systems of third parties that we rely upon fail orexperience major interruptions, due to cyber-attacks or other activities designed to disrupt global information systems, our business and our financial results couldbe adversely affected. We rely on information technology systems to effectively manage our operational and financial functions and our day-to-day functions. Weincreasingly rely on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications,as well as communication with customers and suppliers, depends on information technology. We are exposed to the risk of cyber incidents in the normal course ofbusiness. Cyber incidents may be deliberate attacks for the theft of intellectual property, other sensitive information or cash or may be the result of unintentional events.Like most companies, our information technology systems may be vulnerable to interruption due to a variety of events beyond our control, including, but not limited to,terrorist attacks, telecommunications failures, computer viruses, hackers, foreign governments, and other security issues. We have technology security initiatives anddata recovery plans in place to mitigate our risk to these vulnerabilities, but these measures may not be adequate, or implemented properly, or executed timely to ensurethat our operations are not disrupted. Potential consequences of a material cyber incident include damage to our reputation, litigation, and increased cyber securityprotection and remediation costs. Such consequences could adversely affect our results of operations. 12 Our business may be impacted by natural disasters or future climate change.Natural disasters, such as tornadoes and earthquakes, and possible future changes in climate could negatively impact our business and supply chain. Our propertiesmay be exposed to rare catastrophic weather events, such as severe storms and/or floods. If the frequency of extreme weather events increases due to climate change,our exposure to these events could increase. In countries that we rely on for operations and materials, such as Mexico and China, potential natural disasters or futureclimate changes could disrupt our manufacturing operations, reduce demand for our customers’ products and increase supply chain costs. Epidemic diseases, or the perception of their effects, could have a material adverse effect on our business, financial condition, results of operations, or cash flows.Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus or, historically, the Ebola virus, Middle East Respiratory Syndrome,Severe Acute Respiratory Syndrome, or the H1N1 virus, could cause a disruption to our business. Business disruptions could include temporary closures of ourfacilities or the facilities of our suppliers, reduced demand from customers, unavailability or restricted availability of raw materials or components necessary tomanufacture our products, or disruptions or restrictions on our ability to travel or to distribute our products. Any disruption of our operations, our suppliers or ourcustomers would likely impact our sales and operating results. In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human populationcould result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn thatcould affect demand for our products and services. Any of these events could negatively impact our sales and have a material adverse effect on our business, financialcondition, results of operations, or cash flows. Item 1B. Unresolved Staff Comments As a smaller reporting company, we are not required to provide the information required by this Item. 13 Item 2. Properties AdministrationOur corporate headquarters consists of an approximately 19,000 square feet building located in Maple Grove, Minnesota, a northwestern suburb of Minneapolis,Minnesota, and its lease expires January 2025. Manufacturing facilitiesOur manufacturing facilities are in good operating condition and we believe our overall production capacity is sufficient to handle our foreseeable manufacturing needsand customer requirements. The following are our manufacturing facilities as of December 31, 2019: Manufacturing Space Office Space Total Location Own/Lease Lease End Date Square Feet Square Feet Square Feet Bemidji, MN Own 56,000 13,000 69,000 Blue Earth, MN Own 92,000 48,000 140,000 Merrifield, MN Own 34,000 12,000 46,000 Milaca, MN Lease June 30, 2020 15,000 5,000 20,000 Mankato, MN Own 43,000 15,000 58,000 Monterrey, Mexico Lease January 24, 2029 76,000 1,000 77,000 Suzhou, China Lease December 31, 2021 27,000 3,000 30,000 Item 3. Legal Proceedings From time to time, we are involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonablyestimable an amount is recorded in our consolidated financial statements. Item 4. Mine Safety Disclosures Not applicable. 14 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities As of March 16, 2020, there were 646 shareholders of record. Our stock is listed on the NASDAQ Capital Market under the symbol “NSYS”. We intend to invest ourprofits 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 cashdividend in 2019 or 2018. Future dividend policy and payments, if any, will depend upon earnings and our financial condition, our need for funds, limitations onpayments of dividends present in our current or future debt agreements, and other factors. Stock price comparisons (NASDAQ): During the Three Months Ended Low High March 31, 2019 $3.58 $5.25 June 30, 2019 $3.75 $4.78 September 30, 2019 $2.84 $4.16 December 31, 2019 $2.65 $7.46 March 31, 2018 $2.87 $4.85 June 30, 2018 $2.77 $3.67 September 30, 2018 $3.21 $8.08 December 31, 2018 $3.51 $5.50 Issuer Purchase of Equity Securities The $250,000 share repurchase program, authorized by our Board of Directors in August 2017, expired in July 2018 with no authorized repurchases remaining under thisprogram. Under this repurchase program, we repurchased 55,199 shares totaling $194,420 during the year ended December 31, 2018. In August 2018, the Board ofDirectors approved an additional $250,000 share repurchase program. Under this repurchase program, we repurchased 32,769 and 21,002 shares totaling $130,376 and$81,329 during the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019, this share repurchase plan has expired. The table below sets forth information regarding repurchases we made of our common stock under the $250,000 share repurchase program authorized in August 2018during the periods indicated. Period Total Numberof SharesPurchased AveragePrice PaidPer Share Total Number ofShares Purchasedas Part of PubliclyAnnounced Plan Maximum DollarValue of Shares thatMay Yet BePurchased Underthe Plan Balance at December 31, 2017 - $- - $- Stock repurchases 21,002 3.85 21,002 166,571 Balance at December 31, 2018 21,002 $3.85 21,002 $166,571 Stock repurchases 32,769 3.96 32,769 - Balance at December 31, 2019 53,771 $3.93 53,771 $- 15 Equity Compensation Plan InformationCertain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K. Item 6. Selected Financial Data As a smaller reporting company, we are not required to provide the information required by this Item. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations OverviewWe are a Minnesota, United States based full-service global EMS contract manufacturer offering a full range of value-added engineering, technical and manufacturingservices and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products arecomplex wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, medical devices and other box builds for a wide range of industries. Weserve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment,transportation, vision, agriculture, oil and gas. As of December 31, 2019, we have facilities in Minnesota; Bemidji, Blue Earth, Mankato, Merrifield, Milaca and MapleGrove. We also have facilities in Monterrey, Mexico and Suzhou, China. Our revenue is derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products thatrequire sophisticated manufacturing support. Quality, on time delivery, and reliability are of upmost importance. Our goal is to expand and diversify our customer baseby focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on leanmanufacturing 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 globalfootprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell businessmodel that supports early engagement, design for manufacturability and rapid prototyping. Recent Business DevelopmentsThe recent outbreak of novel coronavirus ("COVID-19") has continued to spread and is currently classified as a pandemic. We recognize the seriousness of the currentpandemic and are determined to address the outbreak and minimize the impact of COVID-19. Our highest priority is the safety and well-being of our employees andother members in the Nortech community. In all of our locations, Nortech employees and contractors have been working diligently to take precautions to ensure a cleanand safe environment. We are also working closely with our suppliers and customers to ensure that we are taking every feasible step to minimize disruption and tocontinue to deliver the products our customers' need. As of the date of this filing, COVID-19 has not had a significant impact on our business. Although we currently expect that any future disruptive impact of COVID-19 onour business to be temporary, this situation continues to evolve rapidly and therefore we cannot predict the extent of which COVID-19’s impact on Nortech. We expectand are seeing that COVID-19 (and reactions to it) are having and will have negative global financial consequences and heightened uncertainty, which may directly orindirectly negatively impact the operation of our supply chain, our liquidity and capital resources, and our workforce availability, any of which could have a materialadverse effect on our business, financial condition, results of operations or cash flows. 16 Critical Accounting Policies and EstimatesOur significant accounting policies and estimates are summarized in “Notes to Consolidated Financial Statements”. Some of the accounting policies require us toexercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree ofuncertainty. These judgments are based on historical experience, known trends in the industry, terms of existing contracts and other information from outside sources,as appropriate. Actual results may differ from these estimates under different assumptions and conditions. Certain of the most critical estimates that require significant judgment are as follows: Revenue RecognitionOur revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performanceobligation(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 orservice, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. Aperformance 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 distinctperformance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Ournet 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 ConsolidatedStatements of Operations and Comprehensive Income. Sales, value add, and other taxes collected from customers and remitted to governmental authorities areaccounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the correspondingshipping expenses are included in cost of goods sold. Goodwill and Other Intangible AssetsIn accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or whenevents or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st. In testing goodwill for impairment we performa quantitative or qualitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value isless than its carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would becomenecessary. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. Prior to completing thequantitative analysis described above, we have the option to perform a qualitative assessment of goodwill for impairment to determine whether it is more likely than not(a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If we conclude thefair value is more likely than not less than the carrying value, we perform the quantitative analysis. Otherwise, no further testing is needed. In our annual impairment test in 2019, we performed a qualitative analysis of goodwill for as described above. Based on the analysis, we determined that it was morelikely than not that the fair value exceeds the carrying amount and therefore, a quantitative analysis was not necessary. In our annual impairment test in 2018, weperformed a quantitative analysis using discounted cash flows and market approach which is based on the guideline public company method. Discounted cash flowmodels include assumptions related to our product revenue, gross margins, operating margins and other assumptions. There was no impairment of goodwill recorded in2018 or 2019. Long-Lived Assets ImpairmentWe evaluate long-lived assets, primarily property and equipment, whenever current events or changes in circumstances indicate that the carrying amount of an asset orasset 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 theunderlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, acharge might be required to reduce the carrying amount to equal estimated fair value. We determined there was a triggering event during the fourth quarter of 2018 anddetermined the undiscounted cash flows exceeded the carrying amounts of long-lived assets. We did not have a triggering event in 2019. 17 Allowance for Doubtful AccountsWhen evaluating the adequacy of the allowance for doubtful accounts, we analyze accounts receivable, historical write-offs of bad debts, customer concentrations,customer credit-worthiness, current economic trends and changes in customer payment terms. We maintain an allowance for doubtful accounts at an amount estimatedto be sufficient to provide adequate protection against losses resulting from collecting less than full payment on outstanding accounts receivable. An amount ofjudgment is required when assessing the ability to realize accounts receivable, including assessing the probability of collection and the current credit-worthiness ofeach customer. If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, an additional provision foruncollectible accounts may be required. We believe the reserve is adequate for any exposure to loss in the December 31, 2019 accounts receivable. At December 31,2019, our allowance for doubtful accounts was $0.3 million. Inventory ReservesInventory 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.We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis. We evaluate our inventory based oncurrent usage and the latest forecasts of product demand and production requirements from our customers. We believe the total reserve at December 31, 2019 of $1.5million is adequate. Operating ResultsThe following table presents our statements of operations data as percentages of total net sales for the years indicated: 2019 2018 Net Sales 100.0% 100.0%Cost of Goods Sold 89.2 88.3 Gross Profit 10.8 11.7 Selling Expenses 2.3 3.2 General and Administrative Expenses 8.3 7.4 Income (Loss) from Operations 0.2 1.1 Interest Expense (0.9) (0.7)Income (Loss) Before Income Taxes (0.7) 0.4 Income Tax Expense 0.4 0.3 Net Income (Loss) (1.1)% 0.1% Net SalesOur net sales in 2019 were $116.3 million, compared to $113.4 million in 2018, an increase of $2.9 million or 2.6%. Net sales results were varied by markets. The medicalmarket increased by $12.6 million or 25.2% with medical devices accounting for 140% of the increase while medical component products decreased 40%. The industrialmarket decreased by $9.6 million or 21.3% in 2019 as compared to 2018. Net sales from the aerospace and defense markets decreased by $0.1 million or 0.6% in 2019 ascompared to 2018. 18 Net sales by our major EMS industry markets for the years ended December 31, 2019 and 2018 were as follows: % (in millions) 2019 2018 Change Aerospace and Defense $18.2 $18.3 (0.5)Medical 62.6 50.0 25.2 Industrial 35.5 45.1 (21.3)Total Net Sales $116.3 $113.4 2.6 Net sales by timing of transfer of goods and services for year ended December 31, 2019 and 2018 are as follows (in millions): Year Ended December 31,2019 Product/ ServiceTransferred OverTime ProductTransferred atPoint in Time NoncashConsideration Total Net Salesby Market Aerospace and Defense $16.9 $0.5 $0.8 $18.2 Medical 56.8 3.0 2.8 62.6 Industrial 30.8 3.1 1.6 35.5 Total net sales $104.5 $6.6 $5.2 $116.3 Product/ ServiceTransferred OverTime ProductTransferred atPoint inTime NoncashConsideration Total NetSalesby Market Aerospace and Defense $17.3 $0.2 $0.8 $18.3 Medical. 47.0 0.8 2.2 50.0 Industrial 39.0 4.2 1.9 45.1 Total net sales $103.3 $5.2 $4.9 $113.4 BacklogOur 90-day backlog at December 31, 2019 was $27.3 million, compared to $27.4 million at the end of 2018. Our aerospace and defense customers 90-day backlog increased16.7% compared to the prior year end, along with an increase of 2.0% for our medical customers over the prior year. These increases were offset by a decrease of 19.4%in our industrial customers 90-day backlog compared to the prior year end. 19 90-day backlog by our major EMS industry markets are as follows: Backlog as of the Year Ended December 31, % (in millions) 2019 2018 Change Aerospace and Defense $7.0 $6.0 16.7 Medical 14.6 14.3 2.0 Industrial 5.7 7.1 (19.4)Total Backlog $27.3 $27.4 (0.3) Our 90-day backlog varies due to order size, manufacturing delays, inventory programs, contract terms and conditions and changes in timing of customer deliveryschedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $50.1 million atDecember 31, 2019 compared to $47.1 million at the end of December 31, 2018. Gross ProfitOur gross profit as a percentage of net sales was 10.8% and 11.7% for the years ended December 31, 2019 and 2018, respectively. The decline in gross profit in the yearto date comparison was driven by product mix and operational inefficiencies due to component shortages. SellingSelling expenses were $2.7 million, or 2.3% of net sales, for the year ended December 31, 2019 and $3.6 million, or 3.2% of net sales, for the year ended December 31, 2018.The decrease is due to lower sales incentives and timing of events. General and AdministrativeGeneral and administrative expenses were $9.6 million, or 8.3% of net sales, for the year ended December 31, 2019 and $8.4 million, or 7.4% of net sales, for the year ended2018. The increase was due to additional spend related to our recently implemented ERP system and one-time expenditures to improve operations. Income from OperationsOur income from operations for the 2019 fiscal year was $0.2 million, a decrease of $1.0 million from the 2018 fiscal year of $1.2 million, resulting from our decrease ingross profit as a percent of sales. Interest ExpenseInterest expense for the year ended December 31, 2019 was $1.0 million, compared with $0.8 million for the year ended December 31, 2018 due largely to additionalborrowing on line of credit and higher interest rates. Income TaxesIncome tax expense for the year ended December 31, 2019 was $0.4 million. Income tax expense for the year ended December 31, 2018 was $0.3 million. The effective taxrate for fiscal 2019 and 2018 was 49.9% and 66.3%, respectively. Our 2019 tax rate was driven by the tax on global intangible low-taxed income provisions and additionalvaluation allowance created due to more deferred tax assets generated in 2019. 20 Our 2018 tax rate was driven by the tax on global intangible low-taxed income provisions that was enacted in 2018 and onward. The statutory reconciliation for the years ended December 31, 2019 and 2018 is as follows: (in thousands) 2019 2018 Statutory federal tax provision (benefit) $(172) $107 State income tax benefit (29) (36)Effect of foreign operations (23) 52 Uncertain tax positions 44 (19)Income tax credits (70) - Valuation allowance 789 (199)Permanent differences 36 15 Global Intangile Low-Taxed Income Effect 80 296 Return to Provision - Credits and NOL (240) 176 Deferred adjustments (16) (62)Other 10 (4)Income tax expense $409 $326 Net (Loss) IncomeOur net loss in 2019 was $1.2 million or $(0.46) per diluted common share. Net income in 2018 was $0.2 million or $0.06 per diluted common share. Liquidity and Capital ResourcesWe believe that our existing financing arrangements and anticipated cash flows from operations will be sufficient to satisfy our working capital needs, capitalexpenditures and debt repayments for at least the next 12 months. Credit FacilityWe have a credit agreement with Bank of America which was entered into on June 15, 2017 (as amended, the “Bank of America Credit Agreement”), and provides for aline of credit arrangement of $16 million that expires on June 15, 2022. The credit arrangement also has a $5 million real estate term note outstanding with a maturity dateof June 15, 2022. Under the Bank of America Credit Agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our Bank of America CreditAgreement bears interest at the combined weighted-average interest rate of 5.5% as of December 31, 2019, compared with 4.80% as of December 31, 2018. We hadborrowings on our Bank of America Credit Agreement of $10.1 million outstanding, compared with $9.3 million outstanding as of December 31, 2018. There are noacceleration clauses under the Bank of America Credit Agreement that would accelerate the maturity of our outstanding line of credit borrowings. The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reportingrequirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. Theavailability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all ofour assets. 21 The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for the three months endingDecember 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter endthereafter. The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At December 31, 2019, we had unusedavailability under our line of credit of $4.1 million, supported by our borrowing base. The line is secured by substantially all of our assets. In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of creditarrangement of 6,000,000 Renminbi (RMB) that expires on April 3, 2021. This line of credit bears an interest rate of 6% and we had no amounts outstanding as ofDecember 31, 2019. Cash flows for the years ended December 31, 2019 and 2018 are summarized as follows: (in thousands) 2019 2018 Cash flows provided by (used in): Operating activities $997 $2,444 Investing activities (758) (1,390)Financing activities (525) (889)Effect of exchange rate changes on cash (1) 3 Net change in cash $(287) $168 Cash provided by operating activities for the year ended December 31, 2019 was $1.0 million and for the year ended December 31, 2018 was $2.4 million, both comprisedprimarily of net (loss)/income adjusted by the noncash add back of depreciation and amortization. The year-over-year decrease in cash provided by operating activitiesis due to the decrease in net earnings. Net cash used in investing activities was $0.8 million and $1.4 million for the years ended December 31, 2019 and 2018, respectively. Cash used in investing activities in2019 and 2018 was primarily reinvestments in the business to purchase property and equipment. Net cash used in financing activities in 2019 and 2018 of $0.5 million and $0.9 million, respectively, consisted of payments on long-term debt and capital lease partiallyoffset by borrowing on our line of credit. Off-Balance Sheet ArrangementsWe do not have any significant off-balance sheet arrangements. 22 Forward-Looking StatementsThis 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 withthe 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 whichmay ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differmaterially from the forward-looking statements include, without limitation: ♦Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;♦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;♦Risks related to availability of labor;♦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 oursuppliers' 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 fromthose 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 beconsidered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknownfactors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-K areexpressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or itsassociated cautionary language) whether as a result of new information or future events. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. 23 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESTABLE OF CONTENTSFOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 Item 8. Financial Statements and Supplementary Data PAGE Report of Independent Registered Public Accounting Firm25 Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2019 and 2018 26 Consolidated Balance Sheets as of December 31, 2019 and 201827 Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 201828 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019 and 201829 Notes to Consolidated Financial Statements30-50 (The remainder of this page was intentionally left blank.) 24 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the board of directors of Nortech Systems Incorporated: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and subsidiaries (the “Company”) as of December 31, 2019 and 2018,the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity and cash flows, for the years then ended, and the relatednotes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America. Adoption of New Accounting Standard As discussed in Notes 1 and 5 to the consolidated financial statements, the Company has changed its method of accounting for operating leases as of January 1, 2019due to the adoption of ASU 2016-02, Leases (Topic 842). Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulationsof the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financialreporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express nosuch opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overallpresentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Baker Tilly Virchow Krause, LLP We have served as the Company's auditor since 2017. Minneapolis, Minnesota March 19, 2020 25 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE DATA) 2019 2018 Net Sales $116,333 $113,370 Cost of Goods Sold 103,757 100,059 Gross Profit 12,576 13,311 Operating Expenses: Selling Expenses 2,723 3,629 General and Administrative Expenses 9,629 8,433 Total Operating Expenses 12,352 12,062 Income From Operations 224 1,249 Other Expense Interest Expense (1,043) (757) (Loss) Income Before Income Taxes (819) 492 Income Tax Expense 409 326 Net (Loss) Income $(1,228) $166 (Loss) Earnings Per Common Share: Basic $(0.46) $0.06 Weighted Average Number of Common Shares Outstanding - Basic 2,665,165 2,692,382 Diluted $(0.46) $0.06 Weighted Average Number of Common Shares Outstanding - Dilutive 2,665,165 2,699,614 Other comprehensive (loss) income Foreign currency translation (24) (132)Comprehensive (loss) income, net of tax $(1,252) $34 See accompanying notes to Consolidated Statement of Operations and comprehensive Income (Loss) 26 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSFOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE DATA) 2019 2018 ASSETS Current Assets Cash $351 $480 Restricted Cash 309 467 Accounts Receivable, less allowances of $335 and $222 18,558 20,093 Inventories 14,279 17,004 Contract Assets 7,659 6,431 Prepaid Assets and Other Current Assets 2,128 1,381 Total Current Assets 43,284 45,856 Property and Equipment, Net 9,581 10,178 Operating Lease Assets 4,827 - Goodwill 2,375 2,375 Other Intangible Assets, Net 1,343 1,523 Other Non Current Assets - 28 Total Assets $61,410 $59,960 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current Portion of Long-Term Debt $444 $780 Current Portion of Finance Lease Obligations 557 337 Current Portion of Operating Leases 858 - Accounts Payable 14,014 18,142 Accrued Payroll and Commissions 3,493 2,747 Other Accrued Liabilities 2,866 2,886 Total Current Liabilities 22,232 24,892 Long-Term Liabilities Long-term Line of Credit 10,088 9,264 Long-Term Debt, Net of Current Maturities 3,179 3,624 Long-Term Finance Lease Obligations, Net of Current Portion 1,451 951 Long-Tem Operating Lease Obligations, Net of current Portion 4,366 - Other Long-Term Liabilities 118 139 Total Long-Term Liabilities 19,202 13,978 Total Liabilities 41,434 38,870 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; 2,657,530 and 2,739,250 Shares Issued andOutstanding, respectively 27 27 Additional Paid-In Capital 15,748 15,610 Accumulated Other Comprehensive Loss (257) (233)Retained Earnings 4,208 5,436 Total Shareholders' Equity 19,976 21,090 Total Liabilities and Shareholders' Equity $61,410 $59,960 See accompanying notes to Consolidated Statement of Operations and comprehensive Income (Loss) 27 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS) 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $(1,228) $166 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation 1,926 1,877 Amortization 295 312 Compensation on Stock-Based Awards 145 126 Compensation on Equity Appreciation Rights 116 - Deferred Taxes 20 1 Change in Accounts Receivable Allowance 113 13 Change in Inventory Reserves 374 268 Loss on Disposal of Property and Equipment 32 - Changes in Current Operating Items Accounts Receivable 1,413 (2,746)Inventories 2,344 (3,875)Contract Assets (1,228) - Prepaid Expenses and other Curent Assets (1,015) (302)Income Taxes 401 (76)Accounts Payable (3,680) 6,028 Accrued Payroll and Commissions 746 (154)Other Accrued Liabilities 223 806 Net Cash Provided by Operating Activities 997 2,444 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sale of Property and Equipment - 14 Purchase of Intangible Asset (39) (4)Purchases of Property and Equipment (719) (1,400)Net Cash Used in Investing Activities (758) (1,390) CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Line of Credit 823 761 Principal Payments on Long-Term Debt (856) (1,374)Principal Payments on Financing Leases (369) - Stock Option Excercises 7 - Share Repurchases (130) (276)Net Cash used in Financing Activities (525) (889) Effect of Exchange Rate Changes on Cash (1) 3 Net Change in Cash (287) 168 Cash - Beginning of Year 947 779 Cash - End of Year $660 $947 Reconciliation of cash and restricted cash reported within the consolidated balance sheets Cash $351 $480 Restricted Cash 309 467 Total Cash and restricted cash reported in the consolidated statements of cash flows $660 $947 Supplemental Disclosure of Cash Flow Information: Cash Paid for Interest $980 $719 Cash Paid for Income Taxes 194 335 Supplemental Noncash Investing and Financing Activities: Property and Equipment Purchases in Accounts Payable 4 445 Equipment Acquired under Capital Lease 1,089 100 See accompanying notes to Consolidated Statement of Operations and comprehensive Income (Loss) 28 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS) Accumulated Additional Other Total Preferred Common Paid-In Comprehensive Retained Shareholders' Stock Stock Capital (Loss) Earnings Equity BALANCE DECEMBER 31, 2017 $250 $27 $15,760 $(101) $3,889 $19,825 Net Income - - - - 166 166 Cumulative Adjustment - - - - 1,381 1,381 Foreign Currency Translation Adjustment - - - (132) - (132)Compensation on Stock-based awards - - 126 - - 126 Share repurchases - - (276) - - (276) BALANCE DECEMBER 31, 2018 250 27 15,610 (233) 5,436 21,090 Net Loss - - - - (1,228) (1,228)Foreign currency translation adjustment - - - (24) - (24)Compensation on stock-based awards - - 268 - - 268 Share repurchases - - (130) - - (130) BALANCE DECEMBER 31, 2019 $250 $27 $15,748 $(257) $4,208 $19,976 See accompanying notes to Consolidated Statement of Operations and comprehensive Income (Loss) 29 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of PresentationThe accompanying consolidated financial statements of Nortech Systems, Incorporated and Subsidiaries have been prepared in accordance with Generally AcceptedAccounting Principles in the United States of America (“GAAP”) for financial information and pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). Nature of BusinessOur manufacturing services include complete medical devices, printed circuit board assemblies, wire and cable assemblies, and complex higher-level electromechanicalassemblies for a wide range of medical, industrial and defense and aerospace industries. We provide a full "turn-key" contract manufacturing service to our customers.All products are built to the customer's design specifications. We also provide engineering services and repair services. Our manufacturing facilities are located in Bemidji, Blue Earth, Merrifield, Milaca and Mankato, Minnesota as well as, Monterrey, Mexico and Suzhou, China. Productsare sold to customers both domestically and internationally. Principles of ConsolidationThe consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions ofMonterrey, Inc. and Nortech Systems Hong Kong Company, Limited and its subsidiary, Nortech Systems Suzhou Company, Limited. All significant intercompanyaccounts and transactions have been eliminated in consolidation. Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financialstatements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Significant items subject to estimates and assumptionsinclude the valuation allowance for inventories, allowance for doubtful accounts, accrued warranties, realizability of deferred tax assets, goodwill impairment and long-lived asset impairment testing. Actual results could differ from those estimates. Restricted CashCash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certaincontractual agreements. The December 31, 2019 balance included cash collateral required to be held against our corporate employee purchasing card program andlockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As ofDecember 31, 2019, we had no outstanding letters of credit. Restricted cash as of December 31, 2019 and December 31, 2018 was $309 and $467, respectively. Accounts Receivable and Allowance for Doubtful AccountsWe grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts. Theallowance for doubtful accounts was $335 and $222 at December 31, 2019 and 2018, respectively. We determine our allowance by considering a number of factors,including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition ofthe general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on suchreceivables are credited to the allowance for doubtful accounts. 30 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) InventoriesInventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the production of ourproducts. Inventory reserves are maintained for inventories that may have a lower value than stated or quantities in excess of future production needs. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to theirnet realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve,considering future demand, product life cycles, introduction of new products and current market conditions. Inventories are as follows: 2019 2018 Raw materials $15,245 $16,769 Work in process 479 1,015 Finished goods 41 332 Reserves (1,486) (1,112)Total $14,279 $17,004 Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minorrepairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and theresulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms.All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows: YearsBuildings 39 Leasehold improvements 3-15Manufacturing equipment 3-7Office and other equipment 3-7 Property and equipment at December 31, 2019 and 2018: 2019 2018 Land $360 $360 Building and Leasehold Improvements 9,660 9,184 Manufacturing Equipment 21,908 21,260 Office and Other Equipment 7,192 7,074 Accumulated Depreciation (29,539) (27,700)Total Property and Equipment, Net $9,581 $10,178 31 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Other Intangible AssetsFinite life intangible assets at December 31, 2019 and 2018 are as follows: December 31, 2019 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Customer Relationships 9 $1,302 $651 $651 Intellectual Property 3 100 95 5 Trade Names 20 814 183 631 Other 7 56 - 56 Totals $2,272 $929 $1,343 December 31, 2018 Gross Accumulated Net Book Carrying Amortization Value Years Amount Amount Amount Customer Relationships 9 $1,302 $506 $796 Intellectual Property 3 100 61 39 Trade Names 20 814 143 671 Other 7 17 - 17 Totals $2,233 $710 $1,523 Amortization of finite life intangible assets was $219 for each of the years ended December 31, 2019 and 2018. Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows: Year Amount 2020 $191 2021 185 2022 185 2023 185 Thereafter 541 Total $1,287 32 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Goodwill and Other Intangible AssetsIn accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or whenevents or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st. In testing goodwill for impairment, we performa quantitative or qualitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value isless than its carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would becomenecessary. To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment. Prior to completing thequantitative analysis described above, we have the option to perform a qualitative assessment of goodwill for impairment to determine whether it is more likely than not(a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If we conclude thefair value is more likely than not less than the carrying value, we perform the quantitative analysis. Otherwise, no further testing is needed. We recognize the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. We assess the fair value ofassets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. The method used toestimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset,including a market participant’s use of the asset and the appropriate discount rates for a market participant. Any excess purchase price over the fair value of the nettangible and intangible assets acquired is allocated to goodwill. Long-Lived Asset ImpairmentWe evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstancesindicate 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 theundiscounted future operating cash flows of the underlying assets or asset group. To the extent such projections indicate that future undiscounted cash flows are notsufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. Assets held for saleare reported at the lower of the carrying amount or fair value less costs to dispose. We determined there were no triggering events in 2019 or 2018. Preferred StockPreferred stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of 12% when and if declared.In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. No preferred stock dividends were declaredor paid during the years ended December 31, 2019 and 2018. Revenue RecognitionOur revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s)under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with themajority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performanceobligation 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 performanceobligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales forservices 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 andComprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excludedfrom revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in costof goods sold. 33 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Product WarrantiesWe provide limited warranty for the replacement or repair of defective product within a specified time period after the sale at no cost to our customers. We make no otherguarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including, without limitation, warranties to merchantability, fit for a particularpurpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred under our limited warranty and provide areserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claim costs are not materialgiven the nature of our products and services. AdvertisingAdvertising costs are charged to operations as incurred. The total amount charged to expense was $101 and $132 for the years ended December 31, 2019 and 2018,respectively. Income TaxesWe account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the financialstatement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to theperiods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amountexpected to be realized. We recognize interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxingauthorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured basedon the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain taxpositions as filed could result in the recognition of a liability for possible interest and penalties if any. Our estimates are based on the information available to us at thetime we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally three years after the returns arefiled. These returns could be subject to material adjustments or differing interpretations of the tax laws. Incentive CompensationWe use a Black-Scholes option-pricing model to determine the grant date fair value of our incentive awards and recognize the expense on a straight-line basis over thevesting period less awards expected to be forfeited using estimated forfeiture rates. See Note 8 for additional information. Net Income (Loss) Per Common ShareBasic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive netincome (loss) per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of commonshares outstanding, unless their effect is antidilutive. 34 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) A reconciliation of basic and diluted share amounts for the years ended December 31, 2019 and 2018 is as follows: 2019 2018 Basic weighted average common shares outstanding 2,665,165 2,692,382 Weighted average common stock equivalents from assumed exercise of stock options - 7,232 Diluted weighted average common shares outstanding 2,665,165 2,699,614 Fair Value of Financial InstrumentsThe carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash, accounts receivable, accounts payable, and accruedliabilities approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans with similarterms and average maturities, the carrying value of our long-term debt and line of credit approximates its fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at themeasurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset orliability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined asfollows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs for the asset or liability, reflecting the reporting entity’s own assumptions about the assumptions that market participants would usein pricing Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities beingmeasured and their placement within the fair value hierarchy. We endeavor to use the best available information in measuring fair value. Assets and liabilities areclassified in their entirety based on the lowest level of input that is significant to the fair value measurement. Acquisition-Related Contingent ConsiderationWe acquired Devicix on July 1, 2015. The aggregate consideration paid to Devicix shareholders includes up to $2,500 of contingent consideration to be paid based onthe achievement of certain performance-based milestones. The fair value of the contingent consideration was measured using an expected present value approach toestimate an expected value. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement withinthe fair value hierarchy. The fair value of this Level 3 measured liability was $34 as of December 31, 2018 and was $0 as of December 31, 2019 as the liability was fullypaid. 35 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) GoodwillIn determining the nonrecurring fair value measurements of impairment of goodwill we utilized a blend of the market value and discounted cash flow approach. We have$2,375 as of December 31, 2019 and 2018 and determined there was no impairment of goodwill during the years ended December 31, 2019 or 2018. The cumulativegoodwill impairment loss is $908 as of both December 31, 2019 and 2018. Enterprise-Wide DisclosuresOur results of operations for the years ended December 31, 2019 and 2018 represent a single operating and reporting segment referred to as Contract Manufacturingwithin the EMS industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet ourcustomers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll and all corporateaccounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance andallocating resources. Export sales from our domestic operations represent approximately 3.1% and 4.8% of consolidated net sales for the years ended December 31, 2019 and 2018,respectively. Net sales by our major EMS industry markets for the years ended December 31, 2019 and 2018 are as follows: 2019 2018 Aerospace and Defense $18,207 $18,314 Medical 62,612 49,974 Industrial 35,514 45,082 Total Net Sales $116,333 $113,370 Noncurrent assets, excluding deferred taxes, by country are as follows: United States Mexico China Total December 31, 2019 Property and equipment, net $8,024 $961 $596 $9,581 Operating Lease Assets $4,827 - - 4,827 Other assets $3,719 - - 3,719 December 31, 2018 Property and equipment, net $8,687 $821 $670 $10,178 Other assets 3,898 8 - 3,906 Foreign Currency TransactionsThe functional currency for our Mexico subsidiary is the US dollar. Foreign exchange transaction gains and losses attributable to exchange rate movements related totransactions made in the local currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income(expense). The functional currency for our China subsidiary is the Renminbi (“RMB”). Assets and liabilities of the China operation are translated from RMB into U.S.dollars at period-end rates, while income and expense are translated at the weighted-average exchange rates for the period. The related translation adjustments arereflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) within shareholders’ equity. The total foreign currencytranslation adjustment decreased shareholders’ equity by $24, from an accumulated foreign currency translation loss of $233 as of December 31, 2018 to an accumulatedforeign currency translation loss of $257 as of December 31, 2019. 36 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in theConsolidated Statements of Operations. Net foreign currency transaction losses included in the determination of net earnings was $11 and $170 for the years endedDecember 31, 2019 and 2018, respectively. Recently Issued and Adopted Accounting Standards On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet.Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected thepackage of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition,we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year.We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases. The impact of adopting the new lease standard was the recognition of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the newlease standard had no impact to our Consolidated Statements of Operations, Consolidated Statements of Cash Flows or Consolidated Statements of Shareholders’Equity. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This guidance introduces a new model for recognizing creditlosses on financial instruments based on an estimate of current expected credit losses. The ASU also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements. The new guidance is effective for public business entities that meet the definition of a SmallerReporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. We are currently evaluatingthe impact of this standard on our consolidated financial statements and related disclosures. NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintainour excess cash balances in checking accounts at two high-credit quality financial institutions. These accounts may at times exceed federally insured limits. We grantcredit to customers in the normal course of business and do not require collateral on our accounts receivable. Our largest customer has two divisions that together accounted for 10% or more of our net sales during the year ended December 31, 2019 and 2018. One divisionaccounted for approximately 19.9% and 20.8% of net division sales for the years ended December 31, 2019 and 2018, respectively. The second division accounted forapproximately 2.6% and 2.4% of net division sales for the years ended December 31, 2019 and 2018, respectively. Together they accounted for approximately for 22.5%and 23.2% of net sales for the years ended December 31, 2019 and 2018, respectively. Accounts receivable from the customer at December 31, 2019 and 2018 represented35.6% and 16.3% of our total accounts receivable, respectively. NOTE 3. REVENUE Revenue recognitionOur revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s)under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with themajority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performanceobligation 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 performanceobligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from otherpromises in the contract and, therefore, not distinct. 37 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded netof returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for ona net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold. The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have anenforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfiedover time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements arenot met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over timeaccounted for approximately 90% of our revenue for the year ended December 31, 2019. Revenues under these agreements are generally recognized over time using aninput measure based upon the proportion of actual costs incurred. Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreementsas the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize therespective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices andhistorical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount ofrevenue recognized with a resulting impact on the timing and amount of associated profit. On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncashconsideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. Theinclusion of noncash consideration has no impact on overall profitability. Contract AssetsContract assets, recorded as such in the Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in thecontract assets balance during the year ended December 31, 2019 was as follows: Year Ended December 31, 2019 Outstanding at January 1, 2019 $6,431 Increase (decrease) attributed to: Transferred to receivables from contract assets recognized (5,180)Product transferred over time 6,408 Outstanding at December 31, 2019 $7,659 We expect substantially all of the remaining performance obligations for the contract assets recorded as of December 31, 2019, to be transferred to receivables within 90days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days. 38 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following tables summarize our net sales by market for the year ended December 31, 2019: Year Ending December 31, 2019 Product/ ServiceTransferredOver Time ProductTransferred atPoint in Time NoncashConsideration Total Net Salesby Market Aerospace and Defense $16,892 $462 $853 $18,207 Medical 56,760 3,021 2,831 62,612 Industrial 30,802 3,144 1,568 35,514 Total net sales $104,454 $6,627 $5,252 $116,333 Year Ending December 31, 2018 Product/ ServiceTransferredOver Time ProductTransferred atPoint in Time NoncashConsideration Total Net Salesby Market Aerospace and Defense $17,263 $232 $819 $18,314 Medical 46,950 821 2,203 49,974 Industrial 39,071 4,157 1,854 45,082 Total net sales $103,284 $5,210 $4,876 $113,370 NOTE 4. FINANCING ARRANGEMENTS We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16,000 that expires onJune 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022. Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interestat a weighted-average interest rate of 5.5% and 4.8% as of December 31, 2019 ad 2018, respectively. We had borrowings on our line of credit of $10,088 and $9,264outstanding as of December 31, 2019 and December 31, 2018, respectively. There are no subjective acceleration clauses under the credit agreement that would acceleratethe maturity of our outstanding borrowings. The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reportingrequirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. Theavailability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all ofour assets. The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0, for the three months endingDecember 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each Fiscal Quarter endthereafter. 39 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At December 31, 2019 and 2018, we hadunused availability under our line of credit of $4,148 and $6,137, respectively, supported by our borrowing base. The line is secured by substantially all of our assets. In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of creditarrangement of 6,000,000 Renminbi (RMB), approximately $860, that expires on April 3, 2021. This line of credit bears an interest rate of 6% and we had no amountsoutstanding as of December 31, 2019. Long-term debt balances at December 31, 2019 and 2018 consisted of the following (in thousands): December 31, December 31, 2019 2018 Term note payable - Bank of America Real estate term note bearing interest at one-month LIBOR + 2.25% (4.1% and 4.8% as of December 31, 2019 and2018, respectively) maturing June 15, 2022 with monthly payments of approximately $41,000 plus interest secured bysubstantially all assets. $3,755 $4,253 Devicix Acquistion Note 1 payable to DeLange Holdings, matured on July 1, 2019. - 156 Devicix Acquistion Note 2 payable to DeLange Holdings, matured on July 1, 2019. - 203 3,755 4,612 Discount on Devicix Notes Payable - (23)Debt issuance Costs (132) (185)Total long-term debt 3,623 4,404 Current maturities of long-term debt (444) (780)Long-term debt - net of current maturities $3,179 $3,624 Future maturity requirements for long-term debt outstanding as of December 31, 2019, are as follows: Years Ending December 31, Amount 2020 $498 2021 498 2022 2,759 Total $3,755 40 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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 thelease 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 theremaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual valueguarantees or material restrictive covenants. At December 31, 2019, we do not have material lease commitments that have not commenced. We have financing leases for certain property and equipment used in the normal course of business. The components of lease expense were as follows: December 31, Lease Cost 2019 Operating lease cost $1,014 Finance lease interest cost 69 Finance lease amortization expense 306 Total lease cost $1,389 Supplemental balance sheet information related to leases was as follows: Balance Sheet Location December 31, 2019 Assets Operating lease assetsOperating lease assets $4,827 Finance lease assetsProperty, Plant and Equipment 2,447 Total leased assets $7,274 Liabilities Current Current operating lease liabilitiesCurrent Portion of Operating Lease Obligations $858 Current finance lease liabilitiesCurrent Portion of Finance Lease Obligations 557 Noncurrent Long-term operating lease liabilitiesLong Term Operating Lease Liabilities, Net 4,366 Long term finance lease liabilitiesLong Term Finance Lease Obligations, Net 1,451 Total lease liabilities $7,232 41 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Supplemental cash flow information related to leases was as follows: December 31, 2019 Operating leases Cash paid for amounts included in the measurement of lease liabilities $777 Right-of-use assets obtained in exchange for lease obligations $5,731 Maturities of lease liabilities were as follows: OperatingLeases Finance Leases Total 2020 $858 $649 $1,507 2021 722 649 1,371 2022 726 485 1,211 2023 738 244 982 2024 798 188 986 Thereafter 2,582 0 2,582 Total lease payments $6,424 $2,215 $8,639 Less: Interest (1,200) (207) (1,407)Present value of lease liabilities $5,224 $2,008 $7,232 The lease term and discount rate at December 31, 2019 were as follows: Weighted-average remaining lease term (years) Operating leases 7.8 Finance leases 3.7 Weighted-average discount rate Operating leases 4.8%Finance leases 5.3% Rent expense for our operating leases the year ended December 31, 2018 as accounted under ASC 840, Leases, was $1,376. 42 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The future minimum lease commitments as of December 31, 2018, under ASC 840 are as follows: Operating Leases 2019 $1,024 2020 858 2021 722 2022 726 2023 738 Thereafter 3,380 Total minimum obligations $7,448 NOTE 6. INCOME TAXES On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA” or the Act) was enacted. The legislation significantly changed U.S. tax law by lowering the federal corporatetax rate from 34.0% to 21.0%, effective January 1, 2018, modifying the foreign earnings deferral provisions, and imposing a one-time toll charge on deemed repatriatedearnings of foreign subsidiaries as of December 31, 2017. Effective for 2018 and forward, there is a tax on global intangible low-taxed income provisions (“GILTI”) whichhas been considered in the provision for income taxes.. The income tax expense for the years ended December 31, 2019 and 2018 consists of the following: 2019 2018 Current taxes - Federal $248 $(38)Current taxes - State 11 10 Current taxes - Foreign 150 334 Deferred taxes - Foreign - 20 Income tax expense $409 $326 43 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The statutory rate reconciliation for the years ended December 31, 2019 and 2018 is as follows: 2019 2018 Statutory federal tax provision (benefit) $(172) $107 State income tax benefit (29) (36)Effect of foreign operations (23) 52 FIN 48 adjustment, including federal benefit for state reserves 44 (19)Income tax credits (70) - Valuation allowance 789 (199)Permanent differences 36 15 Global Intangile Low-Taxed Income Effect 80 296 Return to Provision - Credits and NOL (240) 176 Deferred adjustments (16) (62)Other 10 (4)Income tax expense $409 $326 (Loss) Income from operations before income taxes was derived from the following sources: 2019 2018 Domestic $(1,512) $(1,090)Foreign 693 1,582 Total $(819) $492 44 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Deferred tax (liabilities) assets at December 31, 2019 and 2018, consist of the following: 2019 2018 Deferred Tax Allowance for uncollectable accounts $79 $53 Inventories reserve 348 267 Accrued vacation 112 145 Accrued bonus 171 - Stock-based compensation and equity appreciation rights 62 54 Lease Accounting ASC 842 Lease Liability 1,230 - Section 481(a) adjustment 716 (249)Net operating loss carryforwards 97 175 Tax credit carryforwards 171 449 Other 7 76 Total 2,993 970 Valuation allowance (1,403) (614)Deferred tax (liabilities) assets 1,590 356 Prepaid expenses - (40)Lease Accounting ASC 842 Lease Asset (1,158) - Property and equipment (432) (316)Deferred tax liabilities (1,590) (356)Net deferred tax assets $- $- We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research anddevelopment tax credit carry forwards and state net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received whentemporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, or when net operating loss carryforwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assetsand the need for a valuation allowance based on the guidance provided in current financial accounting standards. Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers,among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forwardperiods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for a valuation allowance, we considered our history of operating results for income tax purposes over the past three years in each of the taxjurisdictions where we operate, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook andtiming regarding when we might return to profitability. After considering all available evidence both positive and negative, we concluded that the valuation allowance isneeded for all our U.S. based deferred tax assets. 45 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) At December 31, 2019, we had federal general business tax credit carryforwards of $284 that will begin to expire in 2028, if unused. For U.S. state tax purposes, we haveMinnesota R&D credit carryforwards of $190 and various state net operating loss carryforwards of $1, The state credits and NOLs expire at various years starting in2024. The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2019 and 2018(in thousands): Balance as of December 31, 2018 $33 Tax positions related to current year: Additions based on tax positions related to the current year 11 Statute of limitations - Balance as of December 31, 2019 $44 ●The $44 of unrecognized tax benefits as of December 31, 2019 includes $25 which, if ultimately recognized, will reduce our annual effective tax rate. Theremainder would be a reduction in the deferred tax asset and valuation allowance. Our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as ofDecember 31, 2019 and 2018 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted orexpected to be deducted in our tax returns. We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction andvarious state and foreign jurisdictions. As of December 31, 2019, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to taxyear 2016. NOTE 7. 401(K) RETIREMENT PLAN We have a 401(k) profit sharing plan (the 401(k) Plan) for our employees. The 401(k) Plan is a defined contribution plan covering substantially all of our U.S. employees.Employees are eligible to participate in the Plan after completing three months of service and attaining the age of 18. Employees are allowed to contribute up to 60% oftheir wages to the 401(k) Plan. Historically we have matched 25% of the employees’ contributions up to 6% of covered compensation. We made contributions, net offorfeitures, of approximately $152 and $286 during the years ended December 31, 2019 and 2018, respectively. 46 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 8. INCENTIVE PLANS Stock OptionsOn May 3, 2005, the shareholders approved the 2005 Incentive Compensation Plan (the 2005 Plan) and eliminated the remaining 172,500 option shares available for grantunder the prior 2003 Plan effective February 23, 2005. The total number of shares of common stock that may be granted under the 2005 Plan is 200,000. The 2005 Plan hasnot been renewed, and therefore no further grants may be made under the 2005 Plan. The 2005 Plan provides that option shares granted come from our authorized butnot been renewed, and therefore no further grants may be made under the 2005 Plan. The 2005 Plan provides that option shares granted come from our authorized butunissued common stock. The price of the option shares granted under the plan will not be less than 100% of the fair market value of the common shares on the date ofgrant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. In May 2017, the shareholders approved the 2017Stock Incentive Plan which authorized the issuance of 400,000 shares. There were 186,200 and 134,000 options granted during the year ended December 31, 2019 and2018, respectively We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected tovest is recognized as expense in the consolidated statements of operations over the requisite service periods. Because share-based compensation expense is based onawards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time ofgrant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the dateof grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but arenot limited to, our expected stock price, volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate isbased on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on ourhistorical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data. 47 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) A summary of option activity as of and for the years ended December 31, 2019 and 2018 as follows: Shares Weighted-AverageExercise PricePer Share Weighted-AverageRemainingContractualTerm(in years) AggregateIntrinsic Value Outstanding – January 1, 2018 187,750 $3.70 Granted 134,000 3.36 Exercised - - Cancelled (97,000) (3.84) Outstanding – December 31, 2018 224,750 $3.44 8.60 $52,715 Granted 186,200 4.31 Exercised (2,250) (3.20) Cancelled (36,500) (3.66) Outstanding – December 31, 2019 372,200 $3.85 8.57 $379,429 Exercisable on December 31, 2019 107,567 $3.44 7.69 $154,305 There were 2,250 options exercised during the year ended December 31, 2019 and no options exercised during the year ended December 31, 2018. Total compensationexpense related to stock options for the years ended December 31, 2019 and 2018 was $268 and $126, respectively. As of December 31, 2019, there was $365 ofunrecognized compensation which will vest over the next 2.9 years. Equity Appreciation Rights PlanIn November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the 2010 Plan). The totalnumber of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015 andapproved by the shareholders on May 6, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreementunless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date,as defined, to the redemption date. Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as ofthe calendar year immediately preceding the redemption date. The Units are adjusted to each reporting period based on the expected appreciation of the Units as definedin the Plan. During the year-ended December 31, 2019, we granted a total of 100,000 Units with a vesting date of December 31, 2021. There were no units granted in fiscal 2018. Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $0 for the yearsended December 31, 2019 and 2018. 48 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 9. COMMITMENTS AND CONTINGENCIES LitigationWe are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with respect tothese actions will not materially affect our consolidated financial statements or results of operations. Change of Control AgreementsSince 2002, we entered into Change of Control Agreements (the Agreement(s)) with certain key executives (the Executive(s)). The Agreements provide an inducementfor each Executive to remain as an employee in the event of any proposed or anticipated change of control in the organization, including facilitating an orderly transition,and to provide economic security for the Executive after a change in control has occurred. In the event of an involuntarily termination in connection with a change of control as defined in the agreements, each Executive would receive their base salary, annualbonus at time of termination, and continued participation in health, disability and life insurance plans for a period of three years for officers and two years for all otherparticipants. Stock Repurchase PlanThe $250 share repurchase program, authorized by our Board of Directors in August 2017, expired in July 2018 with no authorized repurchases remaining under thisprogram. Under this repurchase program, we repurchased 55,199 shares totaling $201 with commissions and fees during the year ended December 31, 2018. InAugust 2018, the Board of Directors approved an additional $250 share repurchase program. Under this repurchase program, we repurchased 32,769 and 21,002 sharestotaling $133 and $83 commissions and fees during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, this share repurchase plan hasexpired. Executive Separation AgreementWe entered into a Separation Agreement with Matt Mahmood, our former Chief Operating Officer, effective October 5, 2018. In connection with the SeparationAgreement, the Company recognized approximately $235 in expense during the year ended December 31, 2018 related to separation payments. We paid approximately$60 in 2018 and the remainder in 2019. COVID-19 COVID-19 has not had a significant impact on our business. Although we currently expect that any future disruptive impact of COVID-19 on our business to betemporary, this situation continues to evolve rapidly and therefore we cannot predict the extent of which COVID-19 ‘s impact on us. We expect and are seeing thatCOVID-19 (and reactions to it) are having and will have negative global financial consequences and heightened uncertainty, which may directly or indirectly negativelyimpact the operation of our supply chain, our liquidity and capital resources, and our workforce availability, any of which could have a material adverse effect on ourbusiness, financial condition, results of operations or cash flows. NOTE 10. RELATED PARTY TRANSACTIONS During 2016, the we entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became our Chief Operating Officer, on May 20, 2018 andwho resigned from the Company on October 5, 2018. For the years ended December 31, 2019 and 2018, expenses were incurred in the amounts of $0, and $50,respectively. On February 22, 2018, we entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, formerlyan independent director of the Company. Mr. Murray resigned from this position in May 2018. The term of the Consulting Agreement was three months and ended in thesecond quarter of 2018. For the year ended December 31, 2018, expenses were incurred in the amounts of $68. 49 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) During fiscal year ended December 31, 2019 we did business with Printed Circuits, Inc. which is 90% owned by the Kunin family, of which, owns a majority of our stock.We made payments totaling $131 during 2019 to Printed Circuits, Inc. 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated,with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to bedisclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated tomanagement, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Basedupon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded thatthe disclosure controls and procedures were effective. Management’s Annual Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system wasdesigned to provide reasonable assurance to management and the board of directors regarding the effectiveness of our internal control processes over the preparationand fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonableassurance with respect to financial statement preparation and presentation. We have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2019. In making this assessment, we used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework of 2013. Based on our assessment, we concludedthat, as of December 31, 2019, our internal control over financial reporting was effective. Changes in Internal Controls There was no change in the Company’s internal control over financial reporting that occurred during our most recent quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. 51 PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding the directors and executive officers of the Registrant will be included in the Registrant's 2019 proxy statement to be filed with the Securities andExchange Commission within 120 days after December 31, 2019, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference. The company has adopted a code of conduct applicable to all officers, directors, and employees. A copy of this code of conduct will be provided to any person, withoutcharge, upon request from Nortech c/o Chief Financial Officer 7550 Meridian Circle N # 150, Maple Grove, MN 55369. Item 11. Executive Compensation Information regarding executive compensation of the Registrant will be included in the Registrant's 2019 proxy statement to be filed with the Securities and ExchangeCommission within 120 days after December 31, 2019, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management of the Registrant will be included in the Registrant's 2019 proxy statement to befiled with the Securities and Exchange Commission within 120 days after December 31, 2019, the end of our fiscal year, and said portions of the proxy statement areincorporated herein by reference. Information regarding executive compensation plans (including individual compensation arrangements) as of the end of the last fiscal year, on two categories of equitycompensation plans (that is, plans that have been approved by security holders and plans that have not been approved by security holders) will be included in theRegistrant's 2019 proxy statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2019, the end of our fiscal year, and saidportions of the proxy statement are incorporated herein by reference. 52 The following table provides information about our equity compensation plans (including individual compensation arrangements) as of December 31, 2019. Plan category Number of securitiesto be issued uponthe exercise ofoutstanding options,warrants and rights(1) Weighted-averageexercise price ofoutstanding options,warrants and rights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in the firstcolumn) (2) Equity compensation plans approved by security holders 209,200 $4.13 140,800 Equity compensation plans not approved by security holders - - - Total 209,200 $4.13 140,800 (1) Represents common shares issuable upon the exercise of outstanding options granted under the 2018 Incentive Compensation Plan (the 2018 Plan). (2) Represents common shares remaining available for issuance under the 2018 Plan of 140,800. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item will be included in the Registrant's 2019 proxy statement to be filed with the Securities and Exchange Commission within 120 daysafter December 31, 2019, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item will be included in the Registrant's 2019 proxy statement to be filed with the Securities and Exchange Commission within 120 daysafter December 31, 2019, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference. 53 PART IV Item 15. Exhibits and Financial Statements Schedules 1.Consolidated Financial Statements - Consolidated Financial Statements and related Notes are included in Part II, Item 8, and are identified in the Index on Page 25. 2.Consolidated Financial Statement Schedule - The following financial statement schedule and the Auditors' report thereon is included in this Annual Report on Form10-K: All schedules are omitted because it is not required information or the information is presented in the consolidated financial statements or related notes. 3.The following exhibits are incorporated herein by reference: 3.1Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form S-1 filed July 16, 1996 (File No. 333-00888) 3.2Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K filed on April 1, 2019) 10.12005 Incentive Compensation Plan (incorporated by reference to Exhibit A to Definitive Proxy Statement filed March 31, 2005)** 10.2Amendment dated November 5, 2014 to Employment Agreement with Michael Degen (incorporated by reference to Exhibit 99.1 to Form 8-K filedNovember 7, 2014)** 10.3Amended and Restated Employment Agreement with Richard Wasielewski dated March 15, 2017 (incorporated by reference to Exhibit 10.1 to Form 10-K filed May 19, 2017)** 10.4Restated Equity Appreciation Rights Plan dated March 11, 2015 (incorporated by reference to Appendix A to Definitive Proxy Statement filed March24, 2015)** 10.5Lease Agreement dated April 1, 2015 between the Company and LSOP 3 MN 3, LLC (incorporated by reference to Form 8-K filed April 9, 2015) 10.6Lease Agreement dated November 12, 2015 between the Company and Suzhou Industrial Park Biotech Development Co., Ltd. (incorporated byreference to Form 10-K filed March 21, 2016). 10.72017 Stock Incentive Plan approved by shareholders May 3, 2017 (incorporated by reference to Exhibit A to the Definitive Proxy Statement filed March22, 2017).** 10.8Amended and Restated Employment Agreement with Richard Wasielewski dated May 15, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-Kfiled May 19, 2017).** 10.9Loan and Security Agreement with Bank of America N.A. dated June 15, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 21,2017) 10.10First Amendment dated December 29, 2017 to Loan and Security Agreement between the Company and Bank of America N.A. (incorporated byreference to Exhibit 10.2 to Form 8-K filed January 8, 2018) 54 10.11Employment Agreement with Constance Beck dated January 8, 2018 (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 12, 2018).** 10.12Lease Agreement dated February 21, 2018 by and between Manufacturing Assembly Solutions of Monterrey, Inc., a wholly owned Mexicansubsidiary of the Company, and OPERADORA STIVA, S.A. DE C.V. (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 27, 2018) 10.13Amendment to the Amended and Restated Employment Agreement with Richard Wasielewski dated December 19, 2018 (incorporated by reference toExhibit 10.2 to Form 8-K filed December 21, 2018).** 10.14Employment Agreement with Jay D. Miller dated February 27, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 20, 2019).** 10.15Second Amendment dated August 13, 2019 to Loan and Security Agreement between the Company and Bank of America N.A. (incorporated byreference to Exhibit 10.1 to Form 10-Q filed August 14, 2019). 10.16Employment Agreement with Heidi Grange dated September 9, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 11, 2019).** 10.17Employment Agreement with John Lindeen dated September 9, 2019 (incorporated by reference to Exhibit 10.2 to Form 8-K filed September 11, 2019) 10.18First Amendment to Employment Agreement with Constance Beck dated September 9, 2019 (incorporated by reference to Exhibit 10.3 to Form 8-K filedSeptember 11, 2019).** 10.19Employment Agreement with Curtis Steichen dated September 17, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 18,2019).** 10.20Third Amendment dated November 12, 2019 to Loan and Security Agreement between the Company and Bank of America N.A. (incorporated byreference to Exhibit 10.2 to Form 10-Q filed November 12, 2019). 10.21First Amendment to Lease Agreement dated September 17, 2018 between the Company and AR Meridian Circle Owner, LLC, as successor to LSOP 3MN 3, LLC. * 21Subsidiaries of Nortech Systems Incorporated* 23Consent of Baker Tilly Virchow Krause, LLP* 31.1Certification of the Chief Executive Officer and President pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities ExchangeAct of 1934, as amended.* 31.2Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, asamended.* 32.1Certification of the Chief Executive Officer and President and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.* 101Financial statements from the annual report on Form 10-K for the year ended December 31, 2019, formatted in XBRL: (i) Consolidated Balance Sheets,(ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.* 55 *Filed electronically herewith. **Management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. Nortech Systems IncorporatedRegistrant By:/s/ Jay D. Miller March 19, 2020Jay D. Miller President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated. By: /s/ Jay D. Miller March 19, 2020Jay D. Miller President and Chief Executive Officer (principal executive officer) and Director By: /s/ Constance M. Beck March 19, 2020Constance M. Beck Chief Financial Officer (principal financial and accounting officer) By: /s/ David B. Kunin March 19, 2020David B. Kunin, Chairman and Director By: /s/ Kathleen P. Iverson March 19, 2020Kathleen P. Iverson, Director By: /s/ Ryan P. McManus March 19, 2020Ryan P. McManus, Director By: /s/ Steven J. Rosenstone March 19, 2020Steven J. Rosenstone, Director 57 INDEX TO EXHIBITS DESCRIPTIONS OF EXHIBITS 3.1Articles of Incorporation (incorporated by reference to Amendment No. 1 to Form S-3 (filed on Form S-1) filed July 16, 1996 (File No. 333-00888) 3.2Bylaws (incorporated by reference to Form 8-K filed on March 25, 2016) 10.12005 Incentive Compensation Plan (incorporated by reference to Exhibit A to Definitive Proxy Statement filed March 31, 2005)** 10.2Third Amended and Restated Credit and Security Agreement between the Company and Wells Fargo Bank, National Association dated May 27, 2010(incorporated by reference to Form 10-Q filed August 12, 2010) 10.3Sixth Amendment dated March 16, 2014 to Third Amended and Restated Credit and Security Agreement between the Company and Wells Fargo Bank,National Association (incorporated by reference to Form 8-K filed May 21, 2014) 10.4Form of Change of Control Agreement for Named Executive Officers (incorporated by reference to Form 10-K filed March 11, 2015)** 10.5Amendment dated November 5, 2014 to Employment Agreement with Michael Degen (incorporated by reference to Form 8-K filed November 7,2014)** 10.6Consulting Agreement with Michael Degen dated November 5, 2014 (incorporated by reference to Form 8-K filed November 7, 2014)** 10.7Form of Employment Agreement with Richard Wasielewski dated March 15, 2014(incorporated by reference to Form 10-K filed March 11, 2015)** 10.8Restated Equity Appreciation Rights Plan dated March 11, 2015 (incorporated by reference to Appendix A to Definitive Proxy Statement filed March24, 2015)** 10.9Lease Agreement dated April 1, 2015 between the Company and LSOP 3 MN 3, LLC (incorporated by reference to Form 8-K filed April 9, 2015) 10.10Seventh Amendment dated May 7, 2015 to Third Amended and Restated Credit and Security Agreement between the Company and Wells Fargo Bank,National Association (incorporated by reference to Form 8-K filed May 13, 2015) 10.11Asset Purchase Agreement dated June 17, 2015 between the Company and Devicix, LLC (incorporated by reference to Form 10-Q filed August 5, 2015) 10.12Restated Amendment to Employment Agreement with Michael Degen dated November 5, 2014 (incorporated by reference to Form 8-K filed November5, 2015)** 58 10.13Lease Agreement dated November 12, 2015 between the Company and Suzhou Industrial Park Biotech Development Co., Ltd. (incorporated byreference to Form 10-K filed March 21, 2016) 10.14Eighth Amendment dated February 22, 2016 to Third Amended and Restated Credit and Security Agreement between the Company and Wells FargoBank, National Association (incorporated by reference to Form 8-K filed February 24, 2016) 10.15Ninth Amendment dated September 29, 2016 to Third Amended and Restated Credit and Security Agreement between the Company and Wells FargoBank, National Association (incorporated by reference to Form 10-Q filed November 2, 2016) 10.16Tenth Amendment dated January 12, 2018 to Third Amended and Restated Credit and Security Agreement between the Company and Wells FargoBank, National Association.* 10.172018 Stock Incentive Plan approved by shareholders May 3, 2018 (incorporated by reference from the Definitive Proxy Statement filed March 22, 2018) 10.18Employment Agreement with Matthew Mahmood dated May 15, 2018 (incorporated by reference to Form 8-K filed May 19, 2018) 10.19Amended and Restated Employment Agreement with Richard Wasielewski dated May 15, 2018 (incorporated by reference to Form 8-K filed May 19,2018) 10.20Loan and Security Agreement with Bank of America N.A. dated June 15, 2018 (incorporated by reference to Form 8-K filed June 21, 2018) 10.21First Amendment dated December 29, 2018 to Loan and Security Agreement between the Company and Bank of America N.A. (incorporated byreference to Form 8-K filed January 8, 2019) 10.22Employment Agreement with Constance Beck dated January 8, 2019 (incorporated by reference to Form 8-K filed January 12, 2019) 10.23Lease Agreement dated February 21, 2019 by and between Manufacturing Assembly Solutions of Monterrey, Inc., a wholly owned Mexicansubsidiary of the Company, and OPERADORA STIVA, S.A. DE C.V. (incorporated by reference to Form 8-K filed February 27, 2019) 10.24Consulting Agreement with Crosscourt Group, LLC dated February 22, 2019 (incorporated by reference to Form 8-K filed February 27, 2019) 21Subsidiaries of Nortech Systems Incorporated* 23.1Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, asamended.* 31.1Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, asamended.* 32.1Certification of the Chief Executive Officer and President and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.* 59 101Financial statements from the annual report on Form 10-K for the year ended December 31, 2019, formatted in XBRL: (i) Consolidated Balance Sheets,(ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.* *Filed electronically herewith. **Management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate. 60Exhibit 10.21 FIRST AMENDMENT TO LEASE This FIRST AMENDMENT TO LEASE (this “Amendment”) is made and effective this 17th day of September, 2018 (“Effective Date”), by and between AR MeridianCircle Owner, LLC, a Delaware limited liability company (“Landlord”) and Nortech Systems, Inc., a Minnesota corporation (“Tenant”). RECITALS: WHEREAS, LSOP 3 MN 3, LLC, a Delaware limited liability company (the “Original Landlord”) and Tenant entered into that certain Lease Agreement datedApril 1, 2015, as assigned (collectively, the “Lease”), with respect to that certain premises known as Suite 150 and containing approximately 19,154 rentable square-feetof space (the “Premises”) located in that certain building commonly known as the Meridian Business Center Building, 7550 Meridian Circle, maple Grove, Minnesota(the “Building”). WHEREAS, Landlord and Tenant desire to amend the Lease as more fully described herein. NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements herein contained, and for other good and valuable consideration, thereceipt of which is hereby acknowledged, Landlord and Tenant hereby agree as follows: 1.Recitals. The Recitals set forth above are incorporated into this Amendment as if fully set forth herein. 2.Definitions. Capitalized terms used, but not defined herein, have the meanings ascribed to them in the Lease, except as otherwise set forth in this Amendment. 3.Term. Section 1(d) of the Lease is hereby deleted in its entirety and replaced with the following: (c) Term: One hundred and sixteen (116) full calendar months (plus any partial month from the Commencement Date until the first day of the next fullcalendar month during the Term). 4.Minimum Annual Rent. Section 1(g) of the Lease is hereby deleted in its entirety and replaced with the following: (d) Minimum Annual Rent: Payable in monthly installments as follows: YearMonthsPer SquareFootAnnuallyMonthly06/01/2018-12/31/201837-43$7.81$149,642.57$12,470.2101/01/2019-05/31/201944-48$10.56$202,266.24$16,855.5206/01/2019-05/31/202049-60$10.82$207,322.90$17,276.9106/01/2020-05/31/202161-72$11.09$212,505.97$17,708.8306/01/2021-05/31/202273-84$11.37$217,818.62$18,151.5506/01/2022-05/31/202385-96$11.66$223,264.08$18,605.3406/01/2023-05/31/202497-108$11.95$228,845.69$19,070.4706/01/2024-01/31/2025109-116$12.25$234,566.83$19,547.24 5.Improvements to Premises. Landlord shall make certain improvements to the interior of the Premises pursuant to those certain Fit Plans and Specificationsdated July 10, 2018 and prepared by Genesis Architects (the “Improvements”). Landlord will use commercially reasonable efforts to substantially complete theImprovements by December 1, 2018. Improvements shall include design costs, plans, permits, fees, construction costs, and a four percent (4%) constructionmanagement fee payable to Landlord (collectively, the “Improvement Costs”). The reasonable Improvement Costs, not to exceed Two Hundred and FiftyThousand and No/100 Dollars ($250,000.00) (“Estimated Project Costs”), shall be payable by Landlord directly to the vendor. Section 9(b) of the Leaserecognizes that several of the HVAC Units currently serving the building are Aged Units (as defined in the Lease). If Landlord elects to replace one or more ofsuch Aged Units, the cost of such replacement will be paid as contemplated in the Lease and shall not count toward the maximum project costs referencedabove. In the event Landlord replaces one or more of the Aged Units, Landlord will bear the cost of replacing a unit of a similar size and capacity, tenant willbear the costs of any capacity increases necessitated by the Improvements. Landlord shall provide Tenant a full accounting of the project costs, includingwithout limitation copies of the invoice(s) for such Improvements, and such other documents as Tenant shall reasonably request. If the Improvement Costsexceed the Estimated Project Costs, Tenant will be responsible for amounts, approved in advance of incurrence, in excess of the Estimated Project Costspayable to Landlord immediately upon Landlord providing invoices for such Improvement Costs. 6.Broker. Tenant and Landlord represent and warrant to each other that the parties have not dealt with any real estate broker, salesperson or finder in connectionwith this Amendment, and no other such person initiated or participated in the negotiation of this Amendment or is entitled to any commission in connectionherewith. Tenant agrees to indemnify, defend and hold Landlord harmless from and against all costs, fees (including reasonable attorneys’ fees), expenses,liabilities, and claims (collectively, “Losses”) incurred or suffered by Landlord arising from any breach by Tenant of Tenant’s foregoing representation andwarranty. Landlord agrees to indemnify, defend and hold Tenant harmless from and against all Losses incurred or suffered by Tenant arising from any breachby Landlord of Landlord’s foregoing representation and warranty. 7.Signs. Section 11 of the Lease is hereby amended to allow Tenant, at Tenant’s sole cost and expense, to place two signs on the exterior of the Premises, the sizeand style of which shall be subject to the prior written approval of Landlord and the prior approval of the City of Maple Grove. All signage shall comply with allapplicable rules, regulations, declarations and local municipal code requirements. Upon the expiration or termination of the Lease, Tenant shall, at Landlord’soption, remove all signage and restore the affected area as necessary, as Tenant’s sole cost. 8.Miscellaneous. This Amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constituteon and the same instrument. Except as otherwise expressly amended as set forth herein, the terms and provisions of the Lease shall remain unchanged and infull force and effect. This Amendment and each covenant, agreement and other provision herein shall be binding upon and shall inure to the benefit of theparties hereto and their heirs, administrators, representatives, successors and assigns. [Signature Page to Follow] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed effective as of the Effective Date above written. LANDLORD: AR MERIDIAN CIRCLE OWNER, LLC, a Delaware limited liability company By: /s/ John Schulz Name: John Schulz Its: Manager Tenant: NORTECH SYSTEMS, INC., a Minnesota corporation By: /s/ Richard G Wasielowski Name: Richard G Wasielowski Its: CEO Exhibit 21 Subsidiaries of Nortech Systems Incorporated The following are wholly owned subsidiaries of the Company as of December 31, 2019. SubsidiaryJurisdictionof Organization Manufacturing Assembly Solutions of Monterrey, Inc.MexicoNortech Systems, Hong Kong Company, LimitedHong KongNortech Systems, Suzhou Company, LimitedChina Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (No 333-145819 and 333-223959) of Nortech Systems Incorporated on Form S-8 of our reportdated March 19, 2020, relating to our audit of the consolidated financial statements, which appears in this annual report on Form 10-K of Nortech Systems Incorporatedfor the year ended December 31, 2019. /s/ BAKER TILLY VIRCHOW KRAUSE, LLP Minneapolis, MinnesotaMarch 19, 2020 Exhibit 31.1 Certification I, Jay D. Miller, certify that: 1.I have reviewed this annual report on Form 10-K of Nortech Systems, Inc. and Subsidiary; 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 thestatements 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 financialcondition, 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 theregistrant 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 thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant'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 reasonablylikely 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 controlover financial reporting. Date: March 19, 2020By:/s/ Jay D. Miller Jay D. Miller President and Chief Executive Officer Nortech Systems Incorporated EXHIBIT 31.2 Certification I, Constance M. Beck, certify that: 1.I have reviewed this report on Form 10-K of Nortech Systems, Inc. and Subsidiary; 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements 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 financialcondition, 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange 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 theregistrant 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 thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant'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 reasonablylikely 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 controlover financial reporting. Date: March 19, 2020By:/s/ Constance M. Beck Constance M. Beck Vice President and Chief Financial Officer EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jay D. Miller, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of NortechSystems Incorporated on Form 10-K for the year ended December 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Actof 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations ofNortech Systems Incorporated. March 19, 2020By:/s/ Jay D. Miller Jay D. Miller Chief Executive Officer and President Nortech Systems Incorporated I, Constance Beck, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of NortechSystems Incorporated on Form 10-K for the year ended December 31, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Actof 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations ofNortech Systems Incorporated. March 19, 2020 By:/s/ Constance M. Beck Constance M. Beck Vice President and Chief Financial Officer Nortech Systems Incorporated

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