10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2015

OR

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

For the transition period from                      to                          

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

Executive Offices: 7550 Meridian Circle N, Maple Grove, MN 55369

Telephone number: (952) 345-2244

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

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

Large Accelerated Filer o	Accelerated Filer o
Non-accelerated Filer o	Smaller Reporting Company x

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

Number of shares of $.01 par value common stock outstanding at October 30, 2015 - 2,746,325

(The remainder of this page was intentionally left blank.)

TABLE OF CONTENTS

			PAGE
PART I - FINANCIAL INFORMATION
Item 1	-	Financial Statements
		Consolidated Balance Sheets	3
		Consolidated Statements of Operations	4-5
		Consolidated Statements of Cash Flows	6
		Condensed Notes to Consolidated Financial Statements	7-18
Item 2	-	Management’s Discussion and Analysis of Financial Condition And Results of Operations	18-25
Item 4	-	Controls and Procedures	25
PART II - OTHER INFORMATION
Item 1	-	Legal Proceedings	25
Item 6	-	Exhibits	26
SIGNATURES			26

2

PART 1

ITEM 1.  FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	September 30			DECEMBER 31
	2015			2014
	(Unaudited)
ASSETS
Current Assets
Cash	$	12,234		$	66,371
Accounts Receivable, Less Allowance for Uncollectible Accounts	19,193,424			17,367,668
Inventories, Less Reserve for Excess and Obsolete	20,262,206			18,528,418
Prepaid Expenses	1,224,697			816,775
Income Taxes Receivable	995,264			465,236
Deferred Income Taxes	416,964			436,000
Total Current Assets	42,104,789			37,680,468
Property and Equipment, Net	10,789,523			10,888,717
Finite Life Intangibles	2,100,084			34,395
Goodwill	3,283,453			75,006
Other Assets	7,726			7,726
Total Assets	$	58,285,575		$	48,686,312
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	1,399,860			732,835
Accounts Payable	14,296,078			9,008,426
Accrued Payroll and Commissions	3,433,767			2,896,557
Other Accrued Liabilities	2,863,629			732,012
Total Current Liabilities	21,993,334			13,369,830
Long-Term Liabilities
Line of Credit	6,896,452			7,998,184
Long-Term Debt, Net of Current Maturities	6,101,664			4,072,506
Deferred Income Taxes	185,649			149,000
Other Long-Term Liabilities	961,942			268,400
Total Long-Term Liabilities	14,145,707			12,488,090
Total Liabilities	36,139,041			25,857,920
Shareholders’ Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized:
250,000 Shares Issued and Outstanding	250,000			250,000
Common Stock - $0.01 par value; 9,000,000 Shares Authorized:
2,746,325 Shares Issued and Outstanding	27,463			27,430
Additional Paid-In Capital	15,764,024			15,751,160
Accumulated Other Comprehensive Loss	(62,936		)	(62,936		)
Retained Earnings	6,167,983			6,862,738
Total Shareholders’ Equity	22,146,534			22,828,392
Total Liabilities and Shareholders’ Equity	$	58,285,575		$	48,686,312

See Accompanying Condensed Notes to Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	THREE MONTHS ENDED
	SEPTEMBER 30
	2015			2014
Net Sales	$	30,409,064		$	28,037,865
Cost of Goods Sold	27,518,479			24,510,862
Gross Profit	2,890,585			3,527,003
Operating Expenses
Selling Expenses	1,244,521			1,303,920
General and Administrative Expenses	1,623,521			1,749,593
Total Operating Expenses	2,868,042			3,053,513
Income (Loss) From Operations	22,543			473,490
Other Expense
Interest Expense	(133,960		)	(89,598		)
Miscellaneous Expense, net	(88,189		)	(13,195		)
Total Other Expense	(222,149		)	(102,793		)
Income (Loss) Before Income Taxes	(199,606		)	370,697
Income Tax Expense (Benefit)	(76,000		)	38,000
Net Income (Loss)	$	(123,606	)	$	332,697
Earnings (Loss) Per Common Share:
Basic	$	(0.05	)	$	0.12
Weighted Average Number of Common Shares Outstanding - Basic	2,746,325			2,742,992
Diluted	$	(0.05	)	$	0.12
Weighted Average Number of Common Shares Outstanding - Diluted	2,746,325			2,747,943

See Accompanying Condensed Notes to Consolidated Financial Statements

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	NINE MONTHS ENDED
	SEPTEMBER 30
	2015			2014
Net Sales	$	83,750,159		$	81,595,474
Cost of Goods Sold	75,563,295			71,711,557
Gross Profit	8,186,864			9,883,917
Operating Expenses
Selling Expenses	3,918,318			3,570,066
General and Administrative Expenses	4,930,964			5,256,963
Total Operating Expenses	8,849,282			8,827,029
Income (Loss) From Operations	(662,418		)	1,056,888
Other Expense
Interest Expense	(341,148		)	(271,661		)
Miscellaneous Expense, net	(88,189		)	(46,672		)
Total Other Expense	(429,337		)	(318,333		)
Income (Loss) Before Income Taxes	(1,091,755		)	738,555
Income Tax Expense (Benefit)	(397,000		)	73,000
Net Income (Loss)	$	(694,755	)	$	665,555
Earnings (Loss) Per Common Share:
Basic	$	(0.25	)	$	0.24
Weighted Average Number of Common Shares Outstanding - Basic	2,745,568			2,742,992
Diluted	$	(0.25	)	$	0.24
Weighted Average Number of Common Shares Outstanding - Diluted	2,745,568			2,747,552

See Accompanying Condensed Notes to Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	NINE MONTHS ENDED
	SEPTEMBER 30
	2015			2014
Cash Flows From Operating Activities
Net Income (Loss)	$	(694,755	)	$	665,555
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities
Depreciation	1,618,791			1,517,153
Amortization	50,312			3,969
Compensation on Stock-Based Awards	1,320			22,445
Compensation on Equity Appreciation Rights	(94,652		)	—
Loss on Disposal of Property and Equipment	1,129			1,837
Deferred Taxes	55,685			51,680
Changes in Current Operating Items, Net of Acquisition
Accounts Receivable	(1,625,756		)	424,782
Inventories	(1,729,429		)	(2,988,729		)
Prepaid Expenses	(377,554		)	(340,252		)
Income Taxes Receivable	(530,028		)	(259,877		)
Accounts Payable	5,238,304			1,443,580
Accrued Payroll and Commissions	422,436			687,373
Other Accrued Liabilities	1,592,378			175,669
Net Cash Provided by (Used in) Operating Activities	3,928,181			1,405,185
Cash Flows from Investing Activities
Business Acquisition, Net of Cash Acquired	(1,990,143		)	—
Purchases of Property and Equipment	(1,456,795		)	(1,800,819		)
Net Cash Used in Investing Activities	(3,446,938		)	(1,800,819		)
Cash Flows from Financing Activities
Borrowings on Line of Credit	83,642,816			83,477,209
Repayments on Line of Credit	(84,744,548		)	(82,881,103		)
Proceeds from Long-Term Debt	1,358,767			510,000
Principal Payments on Long-Term Debt	(755,247		)	(506,990		)
Debt Issuance Costs	(48,745		)	—
Excess Tax Benefit from Stock-Based Compensation	911			—
Proceeds from Issuance of Common Stock	10,666			—
Net Cash Provided by (Used in) Financing Activities	(535,380		)	599,116
Net Increase in Cash	(54,137		)	203,482
Cash - Beginning	66,371			—
Cash - Ending	$	12,234		$	203,482
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest	$	320,381		$	268,371
Cash Paid During the Period for Income Taxes	—			417,615
Supplemental Noncash Investing and Financing Activities
Capital Expenditures in Accounts Payable	13,700			35,720

See Accompanying Condensed Notes to Consolidated Financial Statements

6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

We recognize manufacturing revenue when we ship goods or the goods are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services.  If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled.  We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is generally recognized on a time and material basis or upon completion of the engineering process.  In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer.  Our net sales for services were less than 5% of our total sales for all periods presented, and accordingly, are included in net sales in the consolidated statement of operations.  Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock Options

Following is the status of all stock options outstanding as of September 30, 2015:

7

	Shares		Weighted- Average  Exercise  Price Per  Share		Weighted- Average  Remaining  Contractual  Term  (in years)	Aggregate  Intrinsic Value
Outstanding - January 1, 2015	181,000		$	6.36
Granted	—		—
Exercised	(3,333	)	3.20
Cancelled	(37,917	)	5.52
Outstanding - September 30, 2015	139,750		$	6.66	2.24	$	16,800
Exercisable - September 30, 2015	134,917		$	6.78	2.06	$	11,725

The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $8,166.  Cash received from options exercised during the three and nine months ended September 30, 2015 was $10,666.  There were no options exercised during the three and nine months ended September 30, 2014.  There were no stock options granted during the three and nine months ended September 30, 2015 and 2014.

Total compensation expense related to stock options for the three months ended September 30, 2015 and 2014 was $1,989 and $7,482, respectively.  Total compensation expense related to stock options for the nine months ended September 30, 2015 and 2014 was $1,320 and $22,445, respectively.  As of September 30, 2015, there was approximately $3,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 0.37 years.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015 and approved by the shareholders on May 6, 2015.  The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the value as of the redemption date.

During the nine months ended September 30, 2015, we granted 57,500 Units with a base date of January 1, 2015 and vesting dates through January 1, 2018.

8

Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $(37,000) and $38,000 for the three months ended September 30, 2015 and 2014, respectively and $(95,000) and $119,000 for the nine months ended September 30, 2015 and 2014, respectively.  The income for the three and nine months ended September 30, 2015 was the result of a change in the assumption of the appreciation of book value per share of common stock.

As of September 30, 2015 and December 31, 2014, approximately $118,000 and $259,000 is accrued under this plan, respectively.  As of September 30, 2015, approximately $55,000 of this balance is included in Other Accrued Liabilities and the remaining $63,000 balance was included in Other Long-term Liabilities.  As of December 31, 2014, approximately $47,000 of this balance is included in Other Accrued Liabilites and the remaining $212,000 was included in Other Long-term Liabilities.

Earnings per Common Share

For the three and nine months ended September 30, 2015, the effect of all stock options is antidilutive due to the net loss incurred and, therefore, were not included in the computation of per-share amounts.  For the three and nine months ended September 30, 2015, stock options of 123,750 and 125,500, respectively, were excluded because their inclusion would be antidilutive.

For both the three and nine months ended September 30, 2014, 26,750 stock options were included in the computation of diluted per share amounts as their impact was dilutive.  For the three and nine months ended September 30, 2014, stock options of 169,250 and 178,139, respectively were excluded because their inclusion would be antidilutive.

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Accounts Receivable and Allowance for Doubtful Accounts

We grant credit to customers in the normal course of business.  Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts.  The allowance for doubtful accounts was $130,000 and $137,000 at September 30, 2015 and December 31, 2014, respectively.  We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole.  We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.

9

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	September 30			December 31
	2015			2014
Raw Materials	$	14,238,633		$	12,745,623
Work in Process	3,840,602			3,653,670
Finished Goods	2,999,565			2,861,373
Reserve	(816,594		)	(732,248		)
Total	$	20,262,206		$	18,528,418

Finite Life Intangible Assets

Finite life intangible assets at September 30, 2015 and December 31, 2014 are as follows:

	September 30, 2015
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Customer Relationships	9.0	$	1,302,000	$	36,167	$	1,265,833
Trade Names	20.0	$	814,000	$	10,174	$	803,826
Bond Issue Costs	6.0	$	79,373	$	48,948	$	30,425
Totals		$	2,195,373	$	95,289	$	2,100,084

	December 31, 2014
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	7.0	$	79,373	$	44,978	$	34,395
Totals		$	79,373	$	44,978	$	34,395

Amortization expense for the three months ended September 30, 2015 and 2014 was $47,665 and $1,323, respectively.  Amortization expense for the nine months ended September 30, 2015 and 2014 was $50,312 and $3,969, respectively.

Estimated future amortization expense related to these assets is as follows:

10

Remainder of 2015	$	49,000
2016	160,000
2017	160,000
2018	160,000
2019	160,000
Thereafter	1,411,084
Total	$	2,100,084

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board issued changes to the subsequent measurement of inventory. Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes do not apply to inventories measured using LIFO (last-in, first-out) or the retail inventory method. Currently, Nortech applies the net realizable value market option to measure non-LIFO inventories at the lower of cost or market. These changes become effective for Nortech on January 1, 2017. Management has determined that the adoption of these changes will not have an impact on the Consolidated Financial Statements.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance.  In the first quarter of 2015, the FASB approved a deferral of the effective date to January 1, 2018.  Upon adoption in 2018, the company will record an adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods

11

presented under the new rules, or January 1, 2018, without restating prior periods presented.  Management has not yet determined which transition reporting option it will apply.

In April 2014, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs is not affected by the new guidance.  The updated standard will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued.  The guidance should be adopted on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance.  The Company has adopted ASU 2015-03 and presented its debt issuance costs as a component of long term debt.

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  With regard to cash, we maintain our excess cash balances in checking accounts at two high-credit quality financial institutions.  These accounts may at times exceed federally insured limits.  We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

Our largest customer, General Electric, has two divisions that collectively account for more than 10% of net sales for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2015		2014		2015		2014
GE Healthcare	18	%	23	%	18	%	24	%
GE Transportation	11		7		9		5
Total General Electric	29	%	30	%	27	%	29	%

Combined accounts receivable from both divisions represented 22% and 20% of total accounts receivable at September 30, 2015 and December 31, 2014, respectively.

Export sales represented 12% of net sales for the three and nine months ended September 30, 2015.  Export sales represented 13% of net sales for the three and nine months ended September 30, 2014.

12

NOTE 3. FINANCING ARRANGEMENTS

We have a credit agreement with Wells Fargo Bank (WFB) which was most recently amended on May 7, 2015 and provides for a line of credit arrangement of $15.0 million that expires, if not renewed, on May 31, 2018.  The credit arrangement also has a $1.8 million real estate term note outstanding with a maturity date of March 31, 2027, an additional $1.7 million real estate term note outstanding that is due, if not renewed, on December 31, 2027, an equipment loan for $2.7 million and a new term loan facility of up to $1.0 million for capital expenditures, both with maturity dates of May 31, 2018.  We incurred $54,838 of related costs and fees associated with the amended credit agreement.  These fees were capitalized as a debt discount and are being amortized as interest expense over the term of the debt agreement.  As of September 30, 2015, we have not borrowed against the $1.0 million capital term note.

Long-term debt at September 30, 2015 and December 31, 2014 consisted of the following:

	September 30			December 31
	2015			2014
Real Estate Term Loan 1, interest at three month LIBOR + 2.75%, due in installments through March 31, 2027	$	1,326,611		$	1,415,461
Real Estate Term Loan 2, interest at three month LIBOR + 2.75%, due in installments through December 31, 2027	1,376,400			1,460,100
Equipment loan, interest at three month LIBOR + 2.75%, due January 31, 2016	—			102,917
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	—			1,117,863
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	—			349,000
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	2,552,480			—
Blue Earth Bond, which bears a variable interest rate, due in installments through June 30, 2021	280,000			360,000
Devicix Acq Note 1, subordinate debt, interest at 4.0% due July 1, 2019	942,070
Devicix Acq Note 2, subordinate debt, interest at 4.0% due July 1, 2019	1,224,691
Discount on Devicix Notes Payable	(151,984		)
Debt Issuance Costs	(48,744		)	—
Total debt	7,501,524			4,805,341
Less current maturities	1,399,860			732,835
Long-term debt	$	6,101,664		$	4,072,506

Under the 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 interest at three-month LIBOR + 2.25% (approximately 2.6% at September 30, 2015) while our real estate term notes bear interest at three-month LIBOR + 2.75% (approximately 3.1% at September 30, 2015).  The weighted-average interest rate on our line of credit was 2.6% and 2.8% for the three and nine months ended September 30, 2015.  We had borrowing on our line of credit of $6,896,452 and $7,998,184 outstanding as of September 30, 2015 and December 31, 2014, respectively.  The line of credit requires a lock box arrangement; however there are no acceleration clauses that would accelerate the maturity of our outstanding borrowings.

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1.0 million and $1.3 million.  The $1.0 million promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $22,579 and is subject to offsets if certain revenue levels are not met.  The $1.3 million promissory note has a four year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29,353 and is not subject to

13

offset.  The fair value of these loans is approximately $931,000 and $1,210,000, respectively assuming a market rate of 8%.

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

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender.  At September 30, 2015, we have net unused availability under our line of credit of approximately $7.5 million.  The line is secured by substantially all of our assets.

NOTE 4.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.  Our effective tax rate for the three and nine months ended September 30, 2015 was 38% and 36%, respectively. Our effective tax rate for the three and nine months ended September 30, 2014 was 10%. The lower effective tax rate for 2014 was the result of a favorable audit settlement with the Minnesota Department of Revenue which included the acceptance of our research and development credits of $100,000 which were previously reserved for as an uncertain position.  The effective tax rate for the year ended December 31, 2015 is expected to be 36% compared to 8.4% for the year ended December 31, 2014.  The decreased tax rate in 2014 was largely due to the result of the favorable audit settlement with the Minnesota Department of Revenue.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2015 and 2014 are as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
Statutory federal tax provision (benefit)	$	(57,000	)	$	129,000		$	(327,000	)	$	259,000
State income taxes (benefits)	(6,000		)	14,000			(32,000		)	33,000
Income tax credits	(14,000		)	(19,000		)	(39,000		)	(33,000		)
Change in uncertain tax positions	(4,000		)	1,000			(4,000		)	(99,000		)
Return to provision true-up	5,000			(84,000		)	5,000			(84,000		)
Other	—			(3,000		)	—			(3,000		)
Income tax expense (benefit)	$	(76,000	)	$	38,000		$	(397,000	)	$	73,000

At September 30, 2015, we had $51,750 of net uncertain tax benefit positions remaining in other long-term liabilities related to research and development credits that would increase our effective income tax rate if recognized.  At December 31, 2014, we had $56,000 of net uncertain tax

14

benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.

NOTE 5.  COMMITMENTS AND CONTINGENCIES

We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on various dates through 2022.

On April 1, 2015, we entered into an 89 month lease for approximately 19,000 square feet of space in Maple Grove, Minnesota for our new corporate headquarters.  Annual rent payments during the lease term will increase from approximately $139,000 to $165,000.  In addition to this rent obligation, we will also be responsible for certain costs, among other things, operating expenses, taxes, and insurance costs.

Rent expense for the three months ended September 30, 2015 and 2014 amounted to approximately $272,000 and $163,000, respectively.  Rent expense for the nine months ended September 30, 2015 and 2014 amounted to approximately $635,000 and $499,000, respectively.

Approximate future minimum lease payments under non-cancelable leases subsequent to September 30, 2015 are as follows:

Years Ending
December 31,	Amount
2015	$	231,710
2016	594,365
2017	551,734
2018	556,906
2019	400,299
Thereafter	452,303
Total	$	2,787,317

NOTE 6.  ACQUISITIONS

On July 1, 2015, the company completed the acquisition of substantially all of the assets of Devicix, LLC upon the terms and conditions contained in an Asset Purchase Agreement entered into on June 17, 2015.

Devicix is an innovative medical product design and engineering firm with a proven track record of helping clients move from concept to production. The addition of Devicix will enhance and broaden our capabilities for complete design, manufacturing and service, particularly for regulated medical devices.

15

Acquisition date fair value of the consideration transferred totaled $5.1 million which was comprised of cash payments of $2.0 million from our operating line of credit at closing, $0.5 million of customer deposits with the majority of the work to be completed by 2015 year end, assumed working capital deficit of $0.5 million and two promissory notes payable to the seller in the aggregate principal amounts of $1.0 million and $1.3 million.  The $1.0 million promissory note has a four-year term, bearing interest at 4% per annum and is subject to offsets if certain revenue levels are not met.  The $1.3 million promissory note has a four year term and bears interest at 4% per annum and is not subject to offset.  The fair value of these loans is approximately $931,000 and $1,210,000, respectively assuming a market rate of 8%.

The asset purchase agreement also includes additional consideration payable within 90 days of the completion of each of the first four 12-month periods after July 1, 2015.  The earnout will be equal to 15% of eligible engineering revenue over a $6,000,000 threshold and 3% of eligible production revenue generated from Devicix customers.  The maximum dollar amount of earnout payments under the Asset Purchase Agreement is $2,500,000. We estimated the fair value of the contingent consideration to be $851,000 using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

16

	July 1, 2015
Cash	$	131,054
Accounts Receivable	372,736
AR due to Seller	(172,736		)
Prepaid Expenses and Inventory	34,727
Total Current Assets	365,781
Fixed Assets	83,149
Trade Names	814,000
Customer Relationship	1,302,000
Goodwill	3,208,447
Total Assets	$	5,773,378
Accounts Payable	$	63,048
Accrued Payroll, Benefits and Other Current Liab	121,837
Customer Deposits	474,887
Total Current Liabilities	$	659,772
Loans to Seller	$	2,141,408
Cash Paid at 7/1	2,002,162
Adjustment Paid in August	119,035
Contingent Consideration	851,000
Business Enterprise Value	5,113,605
Total Liabilities & Equity	$	5,773,378

Pending finalization of the earnout and fair value of the intangible assets in the fourth quarter of 2015, the Devicix acquisition has preliminarily resulted in $3.2 million of goodwill, which is expected to be deductible for tax purposes.  Specifically, the goodwill recorded as part of the acquisition of Devicix includes the following:

·the expected synergies and other benefits that we believe will result from combining the operations of Devicix with the operations of Nortech Systems;

·any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products.

The company incurred $62,000 in legal, professional, and other costs related to this acquisition accounted for as selling and administrative expenses. The weighted-average useful life of intangible assets acquired is 11.4 years.

The table below reflects our unaudited pro forma combined results of operations as if the acquisition had taken place as of January 1, 2014:

17

	Pro Forma		Pro Forma		Pro Forma
	Three Months Ended		Nine Months Ended		Nine Months Ended
	September 30, 2014		September 30, 2014		September 30, 2015
	(unaudited)		(unaudited)		(unaudited)
Net Sales	$	29,091,310	$	84,997,713	$	86,065,773
Income (Loss) from Operations	$	433,417	$	1,005,358	$	(449,260	)
Net Income (Loss)	$	290,951	$	623,218	$	(519,516	)
Basic & Diluted
Income (Loss) per Common Share	$	0.11	$	0.23	$	(0.19	)

The pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented.  In addition they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:

We are a Maple Grove, Minnesota based full-service electronics manufacturing services (EMS) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries.  We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the aerospace and defense, medical, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Eden Prairie, Mankato, Merrifield, and Milaca, Minnesota; Augusta, Wisconsin; and Monterrey, Mexico.  All of our facilities are certified to one or more of the ISO standards, including 9001 and 13485, with most having additional certifications based on the needs of the customers they serve.

Summary of Results:

Our third quarter results reported increases in revenue and backlog over prior quarter along with improved income and cash provided from operations.  Our net income and EPS were again impacted by customer and market mix and further investment costs associated with growth initiatives including the acquisition of Devicix, expansion of PCB assembly operations in Mexico and business development activities in Asia.

Actions taken during the first half of the year to improve the gross margin are showing some signs of improvement but not to the levels needed to achieve expected profitablity.  Increased focus on lean initiatives by work order and improvements to our NPI (new product introduction) process to reduce ramp up costs and time to market are underway.  Additional business strategy adjustments and improvements to the pipe line qualification and quoting processes are being

18

implemented. Other longer-term actions include reductions to excess capacity and possible divestitures of non-profitable businesses and a continued committement to our growth iniatitives.

Major events in the third quarter included the strategic acquisition of Devicix LLC, a medical product design and engineering firm that completes our sevice offering in the Medical market accounting for an increase in revenue in the third quarter of $1.1 million. We shipped approximately $400,000 of our first production runs of PCB assemblies in the quarter out of our Mexico operation and we relocated our Corporate offices from Wayzata MN to Maple Grove MN.

Revenue in the third quarter of 2015 was up approximately 8% or $2.4 million compared to third quarter of 2014, and up approximately 13% or $3.6 million compared to second quarter of 2015 along with backlog increasing over both prior year and previous quarter.

Our gross profit percentage for the three months ended September 30, 2015 was 9.5% compared to 12.6% for the three months ended September 30, 2014.  Our gross profit percentage for the nine months ended September 30, 2015 was 9.8% compared to 12.1% for the nine months ended September 30, 2014.  The gross profit percentage is being negatively affected by customer and market mix, new part start up costs and ramp up expense in Mexico.  The quarter also had approximately $700,000 in excess material sales with low margin.

We reported $23,000 Income from Operations in the third quarter after two quarters of losses in fiscal 2015. Revenue increases and associated margin dollars account for the majority of the profit improvement along with continued SG&A expense controls.

Net loss for the three months ended September 30, 2015 was approximately $124,000 or $0.05 per diluted common share, compared to net income for the three months ended September 30, 2014 of approximately $333,000 or $0.12 per diluted common share.  Net loss for the first nine months of 2015 was approximately $695,000 or $0.25 per diluted common share, compared to net income of approximately $666,000 or $0.24 per diluted common share for the same period in 2014.

Cash provided by operating activities for the first nine months of 2015 was approximately $3.9 million.  Cash was generated from the noncash addback of depreciation and amortization and the timing of working capital changes.  Working capital increases in accounts receivable and inventory were offset by extending accounts payable terms and conditions.

Results of Operations:

The following table presents statements of operations data as percentages of total net sales for the periods indicated:

19

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2015		2014		2015		2014
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	90.5		87.4		90.2		87.9
Gross Profit	9.5		12.6		9.8		12.1
Selling Expenses	4.1		4.7		4.7		4.4
General and Administrative Expenses	5.3		6.2		5.9		6.4
Income (Loss) from Operations	0.1		1.7		(0.8	)	1.3
Other Expenses, Net	(0.7	)	(0.4	)	(0.5	)	(0.4	)
Income (Loss) Before Income Taxes	(0.6	)	1.3		(1.3	)	0.9
Income Tax Expense (Benefit)	(0.2	)	0.1		(0.5	)	0.1
Net Income (Loss)	(0.4	)%	1.2	%	(0.8	)%	0.8	%

Net Sales:

We reported net sales of approximately $30.4 million and $28.0 million for the three months ended September 30, 2015 and 2014, respectively.  We reported net sales of approximately $83.8 million and $81.6 million for the nine months ended September 30, 2015 and 2014, respectively.  Our Industrial customers are leading the increase in revenue up 14% over prior year for both the quarter and nine months and our Devicix acquisition accounted for $1.1 million of the increase.  Net sales by our major EMS industry markets for the three and nine month periods ended September 30, 2015 and 2014 were as follows:

	Three Months Ended			Nine Months Ended
	September 30			September 30
	2015	2014	%	2015	2014	%
(in thousands)	$	$	Change	$	$	Change
Aerospace and Defense	4,004	3,656	10	10,724	11,737	(9	)
Medical	10,887	10,792	1	28,376	30,837	(8	)
Industrial	15,518	13,590	14	44,650	39,021	14
Total Sales	30,409	28,038	8	83,750	81,595	3

Backlog:

Our 90-day order backlog as of September 30, 2015 increased 23% to approximately $24.0 million, compared to approximately $19.4 million at the beginning of the quarter.  Backlog for our industrial and defense customers have increased over prior year and prior quarter.  Backlog for our medical customers, which includes $1.3 million in Devicix backlog, rebounded in the third quarter.  Our manufacturing backlog consists of firm purchase orders and we expect a

20

major portion of the current 90 day backlog to be realized as revenue during the following quarter.  Our services backlog consists of contractual commitments for engineering services.

90 day backlog by our major EMS industry markets are as follows:

	Backlog as of the Quarter Ended
	September 30		June 30		September 30
(in thousands)	2015		2015		2014
Aerospace and Defense	$	5,455	$	4,307	$	3,689
Medical	9,120		6,143		10,112
Industrial	9,396		8,990		7,127
Total Backlog	$	23,971	$	19,440	$	20,928

Our 90 day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next.

Gross Profit:

Gross profit as a percent of net sales for the three months ended September 30, 2015 and 2014 was 9.5% and 12.6%, respectively.  Gross profit as a percent of net sales for the nine months ended September 30, 2015 and 2014 was 9.8% and 12.1%, respectively.  The gross profit percentage is being negatively affected by customer and market mix, new part number start up costs and ramp up costs related to Mexico.  The quarter also had approximately $700,000 in excess material sales with low margin.

Selling Expense:

Selling expense for the three months ended September 30, 2015 and 2014 was approximately $1.2 million or 4.1% of sales and approximately $1.3 million or 4.7% of sales, respectively.  Selling expense for the nine months ended September 30, 2015 and 2014 was approximately $3.9 million or 4.7% of sales and approximately $3.6 million or 4.4% of sales, respectively.  We will continue to match sales expense with demand to support business development activities needed to support growth initiatives.

General and Administrative Expense:

General and administrative expenses for the three months ended September 30, 2015 and 2014 were approximately $1.6 million or 5.3% of sales and approximately $1.7 million or 6.2% of sales, respectively.  General and administrative expenses for the nine months ended September 30, 2015 and 2014 were approximately $4.9 million or 5.9% of sales and approximately $5.3 million or 6.4% of sales, respectively.  The decrease in general and administrative expense was due to cost reduction activities needed to match current customer demand.

21

Income Taxes:

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.  Our effective tax rate for the three and nine months ended September 30, 2015 was 38% and 36%, respectively. Our effective tax rate for the three and nine months ended September 30, 2014 was 10%. The lower effective tax rate for 2014 was the result of a favorable audit settlement with the Minnesota Department of Revenue which included the acceptance of our research and development credits of $100,000 which were previously reserved for as an uncertain position.  The effective tax rate for the year ended December 31, 2015 is expected to be 36% compared to 8.4% for the year ended December 31, 2014.  The decreased tax rate in 2014 was largely due to the result of the favorable audit settlement with the Minnesota Department of Revenue.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2015 and 2014 are as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
Statutory federal tax provision (benefit)	$	(57,000	)	$	129,000		$	(327,000	)	$	259,000
State income taxes (benefits)	(6,000		)	14,000			(32,000		)	33,000
Income tax credits	(14,000		)	(19,000		)	(39,000		)	(33,000		)
Change in uncertain tax positions	(4,000		)	1,000			(4,000		)	(99,000		)
Return to provision true-up	5,000			(84,000		)	5,000			(84,000		)
Other	—			(3,000		)	—			(3,000		)
Income tax expense (benefit)	$	(76,000	)	$	38,000		$	(397,000	)	$	73,000

Liquidity and Capital Resources:

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and an operating line of credit through WFB.  We also have real estate and equipment term loans.  On May 7, 2015, we entered into an amendment to our credit agreement with WFB providing for a $15.0 million line of credit through May 31, 2018, which is a $1.5 million increase from the previous line. The amendment also provides a new equipment term note in the amount of approximately $1.0 million, which is in addition to the existing equipment term notes in the aggregate amount of approximately $2.7 million, all of which equipment term notes having a maturity date of May 31, 2018.  In addition, the amendment provides for a new term loan of up to $1.0 million for capital expenditures to be made prior to May 31, 2018 with a maturity date of May 31, 2018.  The amendment did not amend any terms of the two real estate term loans outstanding in an aggregate amount of approximately $3.5 million under the existing agreement.

22

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates.  The line of credit, real estate term notes, and equipment loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  The availability 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 of our assets.

On September 30, 2015, we had outstanding advances of $6.9 million under the line of credit and unused availability of $7.5 million supported by our borrowing base.  We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs.  Our working capital was $20.1 million and $24.3 million as of September 30, 2015 and December 31, 2014, respectively.

Our credit agreement with WFB requires us to maintain a minimum fixed charge coverage ratio of not less than 1.10 to 1.00 for the trailing twelve month period ending January 31, 2015, up to and including September 30, 2015, and 1.20 to 1.00 for each period therafter.  The minimum fixed charge coverage ratio at September 30, 2015 was 1.22 to 1.00.  We believe our performance will be sufficient to comply with this covenant going forward.

Net cash provided by operating activities for the nine months ended September 30, 2015 was $3.9 million.  Cash was generated by the noncash addback of amortization and depreciation and the timing of accounts payable.

Net cash used in investing activities of $3.4 million for the nine months ended September 30, 2015 is comprised of $1.4 million of property and equipment purchases to support the business, and $2.0 million related to the Devicix acquisition.

Off-Balance Sheet Arrangements:

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

Critical Accounting Policies and Estimates:

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2014.  There have been no significant changes in these critical accounting policies since December 31, 2014.  Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates.  Such judgments are subject to an inherent degree of uncertainty.  These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate.  Actual results could differ from these estimates.

23

Recent Accounting Pronouncements:

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance.  In the first quarter of 2015, the FASB approved a deferral of the effective date to January 1, 2018.  Upon adoption in 2018, the company will record an adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods presented under the new rules, or January 1, 2018, without restating prior periods presented.  Management has not yet determined which transition reporting option it will apply.

Forward-Looking Statements:

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes.  Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate.  Forward-looking statements involve a number of risks and uncertainties.  Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

·Volatility in the marketplace which may affect market supply and demand for our products;

·Increased competition;

·Changes in the reliability and efficiency of operating facilities or those of third parties;

·Risks related to availability of labor;

·Increase in certain raw material costs such as copper;

·Commodity and energy cost instability;

·General economic, financial and business conditions that could affect our financial condition and results of operations; and

·Availability of raw material components.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us.  Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.  All forward-looking

24

statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements.  We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our report on Form 10-K for the fiscal year ended December 31, 2014.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

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

Changes in Internal Control Over Financial Reporting:

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1.    LEGAL PROCEEDINGS

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

25

ITEM 6. EXHIBITS

Exhibits
10.1	Restated Amendment to Employment Agreement restated as of August 5, 2015 between the Company and Michael J. Degen
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
32*	Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Financial statements from the quarterly report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Consolidated Financial Statements.

*Filed herewith

Signatures

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

Nortech Systems Incorporated and Subsidiaries
Date: November 4, 2015	by	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Inc.
Date: November 4, 2015	by	/s/ Paula M. Graff
	Paula M. Graff
	Vice President and Chief Financial Officer
	Nortech Systems Inc.

26

EX-10.1

Exhibit 10.1

RESTATED AMENDMENT TO EMPLOYMENT AGREEMENT

This Restated Amendment to Employment Agreement (“Amendment”) dated November 5, 2014, amends that certain Employment Agreement dated October 1, 2005 as amended by the First Amendment to Employment Agreement dated July 12, 2009 (hereafter “the Employment Agreement”), between Nortech Systems Incorporated (“Nortech”) and Michael J. Degen (“Degen”).

RECITALS

WHEREAS, the Board of Directors of Nortech (the “Board”) during its duly noticed meetings on November 20 and December 11, 2013 approved the following:

(a)That Degen will remain employed with Nortech until December 31, 2014 pursuant to the terms of the Employment Agreement, except that Degen’s annual salary for 2014 will be $140,800 instead of $352,000, but Degen will also receive an executive bonus of 15% of his base annual salary grossed-up for taxes and an incentive bonus of no less than $70,400 and no more than $140,800 for the 2014 calendar year if earned based on financial performance of Nortech;

(b)That for calendar year 2014, Degen shall receive all other benefits as set forth under Nortech’s Benefits plan as administered by Insperity;

(c)That Degen shall receive all equity rights per the Equity Appreciation Rights Plan documents, and that all of Degen’s stock options which have been granted will be administered per the approved plan documents;

(d)That for the calendar year 2014 Nortech will provide to Degen and his wife, Ruth Degen, $10,000 for financial planning and tax preparation services, to be used by April 15, 2015;

(e)That for the calendar years 2014, 2015, 2016, 2017, and 2018, Nortech will reimburse Degen and his wife, Ruth Degen, for the cost of their annual physical examinations; to be conducted at The Mayo Clinic;

(f)That, consistent with the First Amendment to Employment Agreement dated July 12, 2009, Nortech will reimburse Degen and Ruth Degen for their health and dental insurance (Blue Cross/Blue Shield Senior Gold or the equivalent) for the rest of their lives, subject to the terms of this Amendment.

(g)That the Change in Control Agreement entered into as of October 1, 2002 will remain in effect until December 31, 2014, and shall terminate on such date; and

WHEREAS, on August 5, 2015, the Board approved this Amendment as restated.

NOW, THEREFORE, NORTECH AND DEGEN AGREE AS FOLLOWS:

1.All of the recitals listed above are hereby incorporated into this Amendment.  All references to Nortech’s payment of life insurance premiums on a policy or policies of insurance on Degen’s life in the Employment Agreement are hereby deleted.

2.The references to Nortech’s payment of premiums on policies of supplemental health insurance for Degen and his spouse for their lives in the Employment Agreement are hereby amended by adding the following provision:

A.Nortech shall reimburse Degen and his wife for the annual cost of coverage for Degen and his wife under the Blue Cross/Blue Shield Senior Gold plan with all coverage options, the Blue Cross/Blue Shield Medicare Blue Rx Standard plan, and the Blue Cross/Blue Shield Dental Plan, or equivalent plans in the discretion of Degen and his wife, for the rest of each of their lives.

IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the day and year first above written, restated as of August 5, 2015.

NORTECH SYSTEMS INCORPORATED
By:	/s/ Richard G. Wasielewski	By:	/s/ Michael J. Degen
	Richard G. Wasielewski, CEO		Michael J. Degen

2

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

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

I, Richard G. Wasielewski, certify that:

1.I have reviewed this quarterly report on Form 10-Q 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

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

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

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

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

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about

the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

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

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

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

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

Date: November 4, 2015	By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Incorporated

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

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

I, Paula M. Graff, certify that:

1.I have reviewed this quarterly report on Form 10-Q 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

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

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

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

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

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

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

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

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

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

Date: November 4, 2015	By:	/s/ Paula M. Graff
	Paula M. Graff
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

EX-32

Exhibit 32

Written Statement of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Richard G. Wasielewski, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 4, 2015
By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Incorporated

Written Statement of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Paula M. Graff, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 4, 2015

By:	/s/ Paula M. Graff
	Paula M. Graff
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

XML

ACQUISITIONS (Details )		3 Months Ended	9 Months Ended
	Jul. 01, 2015 USD ($) item	Sep. 30, 2014 USD ($) $ / shares	Sep. 30, 2015 USD ($) $ / shares	Sep. 30, 2014 USD ($) $ / shares	Dec. 31, 2014 USD ($)
Summary of estimated fair values of assets acquired and liabiities assumed at acquisition date
Goodwill			$ 3,283,453		$ 75,006
Devicix LLC
Business Acquisition
Purchase price	$ 5,100,000
Net cash payments	2,002,162
Prepaid customer deposits	500,000
Assumed working capital items	$ 500,000
Number of promissory notes | item	2
Earnout payable payment due date after measurement period	90 days
Measurement period for earnout	12 months
Number of 12 month periods	4 years
Earnout as a percentage of engineering revenue	15.00%
Engineering revenue threshold for earnout	$ 6,000,000
Earnout as a percentage of production revenue	3.00%
Market rate	8.00%
Summary of estimated fair values of assets acquired and liabiities assumed at acquisition date
Cash	$ 131,054
Accounts Receivable	372,736
AR due to Seller	(172,736)
Prepaid Expenses and inventory	34,727
Total Current Assets	365,781
Fixed Assets	83,149
Goodwill	3,208,447
Total Assets	5,773,378
Accounts Payable	63,048
Accrued Payroll, Benefits and Other Current Liabilities	121,837
Customer Deposits	474,887
Total Current Liabilities	659,772
Loans to Seller	2,141,408
Cash Paid at 7/1	2,002,162
Adjustment Paid in August	119,035
Contingent Considertion	851,000
Business Enterprise Value	5,113,605
Total Liabilities & Equity	5,773,378
Legal, professional and other costs	$ 62,000
Weighted-Average useful life of intangible assets acquired	11 years 4 months 24 days
Unaudited pro forma combined results of operations
Net Sales		$ 29,091,310	86,065,773	$ 84,997,713
Income (Loss) from Operations		433,417	(449,260)	1,005,358
Net Income (Loss)		$ 290,951	$ (519,516)	$ 623,218
Basic & Diluted
Income (Loss) per Common Share | $ / shares		$ 0.11	$ (0.19)	$ 0.23
Devicix LLC | Maximum
Business Acquisition
Maximum earnout	$ 2,500,000
Devicix LLC | Line of credit
Business Acquisition
Net cash payments	2,000,000
Summary of estimated fair values of assets acquired and liabiities assumed at acquisition date
Cash Paid at 7/1	2,000,000
Devicix LLC | Promissory note subject to offsets
Business Acquisition
Promissory note liability	$ 1,000,000
Term of promissory note	4 years
Interest rate per annum	4.00%
Fair value of loans	$ 931,000
Devicix LLC | Promissory note not subject to offsets
Business Acquisition
Promissory note liability	$ 1,300,000
Term of promissory note	4 years
Interest rate per annum	4.00%
Fair value of loans	$ 1,210,000
Trade Names | Devicix LLC
Summary of estimated fair values of assets acquired and liabiities assumed at acquisition date
Intangible Assets	814,000
Customer Relationships | Devicix LLC
Summary of estimated fair values of assets acquired and liabiities assumed at acquisition date
Intangible Assets	$ 1,302,000

XML

INCOME TAXES

9 Months Ended

Sep. 30, 2015

INCOME TAXES

INCOME TAXES

NOTE 4.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.  Our effective tax rate for the three and nine months ended September 30, 2015 was 38% and 36%, respectively. Our effective tax rate for the three and nine months ended September 30, 2014 was 10%. The lower effective tax rate for 2014 was the result of a favorable audit settlement with the Minnesota Department of Revenue which included the acceptance of our research and development credits of $100,000 which were previously reserved for as an uncertain position.  The effective tax rate for the year ended December 31, 2015 is expected to be 36% compared to 8.4% for the year ended December 31, 2014.  The decreased tax rate in 2014 was largely due to the result of the favorable audit settlement with the Minnesota Department of Revenue.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2015 and 2014 are as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
Statutory federal tax provision (benefit)	$	(57,000	)	$	129,000		$	(327,000	)	$	259,000
State income taxes (benefits)	(6,000		)	14,000			(32,000		)	33,000
Income tax credits	(14,000		)	(19,000		)	(39,000		)	(33,000		)
Change in uncertain tax positions	(4,000		)	1,000			(4,000		)	(99,000		)
Return to provision true-up	5,000			(84,000		)	5,000			(84,000		)
Other	—			(3,000		)	—			(3,000		)
Income tax expense (benefit)	$	(76,000	)	$	38,000		$	(397,000	)	$	73,000

At September 30, 2015, we had $51,750 of net uncertain tax benefit positions remaining in other long-term liabilities related to research and development credits that would increase our effective income tax rate if recognized.  At December 31, 2014, we had $56,000 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.

XML

FINANCING ARRANGEMENTS

9 Months Ended

Sep. 30, 2015

FINANCING ARRANGEMENTS.

FINANCING ARRANGEMENTS

NOTE 3. FINANCING ARRANGEMENTS

We have a credit agreement with Wells Fargo Bank (WFB) which was most recently amended on May 7, 2015 and provides for a line of credit arrangement of $15.0 million that expires, if not renewed, on May 31, 2018.  The credit arrangement also has a $1.8 million real estate term note outstanding with a maturity date of March 31, 2027, an additional $1.7 million real estate term note outstanding that is due, if not renewed, on December 31, 2027, an equipment loan for $2.7 million and a new term loan facility of up to $1.0 million for capital expenditures, both with maturity dates of May 31, 2018.  We incurred $54,838 of related costs and fees associated with the amended credit agreement.  These fees were capitalized as a debt discount and are being amortized as interest expense over the term of the debt agreement.  As of September 30, 2015, we have not borrowed against the $1.0 million capital term note.

Long-term debt at September 30, 2015 and December 31, 2014 consisted of the following:

	September 30			December 31
	2015			2014
Real Estate Term Loan 1, interest at three month LIBOR + 2.75%, due in installments through March 31, 2027	$	1,326,611		$	1,415,461
Real Estate Term Loan 2, interest at three month LIBOR + 2.75%, due in installments through December 31, 2027	1,376,400			1,460,100
Equipment loan, interest at three month LIBOR + 2.75%, due January 31, 2016	—			102,917
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	—			1,117,863
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	—			349,000
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	2,552,480			—
Blue Earth Bond, which bears a variable interest rate, due in installments through June 30, 2021	280,000			360,000
Devicix Acq Note 1, subordinate debt, interest at 4.0% due July 1, 2019	942,070
Devicix Acq Note 2, subordinate debt, interest at 4.0% due July 1, 2019	1,224,691
Discount on Devicix Notes Payable	(151,984		)
Debt Issuance Costs	(48,744		)	—
Total debt	7,501,524			4,805,341
Less current maturities	1,399,860			732,835
Long-term debt	$	6,101,664		$	4,072,506

Under the 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 interest at three-month LIBOR + 2.25% (approximately 2.6% at September 30, 2015) while our real estate term notes bear interest at three-month LIBOR + 2.75% (approximately 3.1% at September 30, 2015).  The weighted-average interest rate on our line of credit was 2.6% and 2.8% for the three and nine months ended September 30, 2015.  We had borrowing on our line of credit of $6,896,452 and $7,998,184 outstanding as of September 30, 2015 and December 31, 2014, respectively.  The line of credit requires a lock box arrangement; however there are no acceleration clauses that would accelerate the maturity of our outstanding borrowings.

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1.0 million and $1.3 million.  The $1.0 million promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $22,579 and is subject to offsets if certain revenue levels are not met.  The $1.3 million promissory note has a four year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29,353 and is not subject to offset.  The fair value of these loans is approximately $931,000 and $1,210,000, respectively assuming a market rate of 8%.

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

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender.  At September 30, 2015, we have net unused availability under our line of credit of approximately $7.5 million.  The line is secured by substantially all of our assets.

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Current Assets
Cash	$ 12,234	$ 66,371
Accounts Receivable, Less Allowance for Uncollectible Accounts	19,193,424	17,367,668
Inventories, Less Reserve for Excess and Obsolete	20,262,206	18,528,418
Prepaid Expenses	1,224,697	816,775
Income Taxes Receivable	995,264	465,236
Deferred Income Taxes	416,964	436,000
Total Current Assets	42,104,789	37,680,468
Property and Equipment, Net	10,789,523	10,888,717
Finite Life Intangibles	2,100,084	34,395
Goodwill	3,283,453	75,006
Other Assets	7,726	7,726
Total Assets	58,285,575	48,686,312
Current Liabilities
Current Maturities of Long-Term Debt	1,399,860	732,835
Accounts Payable	14,296,078	9,008,426
Accrued Payroll and Commissions	3,433,767	2,896,557
Other Accrued Liabilities	2,863,629	732,012
Total Current Liabilities	21,993,334	13,369,830
Long-Term Liabilities
Line of Credit	6,896,452	7,998,184
Long-Term Debt, Net of Current Maturities	6,101,664	4,072,506
Deferred Income Taxes	185,649	149,000
Other Long-Term Liabilities	961,942	268,400
Total Long-Term Liabilities	14,145,707	12,488,090
Total Liabilities	36,139,041	25,857,920
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding	250,000	250,000
Common Stock - $0.01 par value; 9,000,000 Shares Authorized; 2,746,325 Shares Issued and Outstanding	27,463	27,430
Additional Paid-In Capital	15,764,024	15,751,160
Accumulated Other Comprehensive Loss	(62,936)	(62,936)
Retained Earnings	6,167,983	6,862,738
Total Shareholders' Equity	22,146,534	22,828,392
Total Liabilities and Shareholders' Equity	$ 58,285,575	$ 48,686,312

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2015

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

We recognize manufacturing revenue when we ship goods or the goods are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services.  If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled.  We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is generally recognized on a time and material basis or upon completion of the engineering process.  In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer.  Our net sales for services were less than 5% of our total sales for all periods presented, and accordingly, are included in net sales in the consolidated statement of operations.  Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock Options

Following is the status of all stock options outstanding as of September 30, 2015:

	Shares		Weighted- Average  Exercise  Price Per  Share		Weighted- Average  Remaining  Contractual  Term  (in years)	Aggregate  Intrinsic Value
Outstanding - January 1, 2015	181,000		$	6.36
Granted	—		—
Exercised	(3,333	)	3.20
Cancelled	(37,917	)	5.52
Outstanding - September 30, 2015	139,750		$	6.66	2.24	$	16,800
Exercisable - September 30, 2015	134,917		$	6.78	2.06	$	11,725

The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $8,166.  Cash received from options exercised during the three and nine months ended September 30, 2015 was $10,666.  There were no options exercised during the three and nine months ended September 30, 2014.  There were no stock options granted during the three and nine months ended September 30, 2015 and 2014.

Total compensation expense related to stock options for the three months ended September 30, 2015 and 2014 was $1,989 and $7,482, respectively.  Total compensation expense related to stock options for the nine months ended September 30, 2015 and 2014 was $1,320 and $22,445, respectively.  As of September 30, 2015, there was approximately $3,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 0.37 years.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015 and approved by the shareholders on May 6, 2015.  The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the value as of the redemption date.

During the nine months ended September 30, 2015, we granted 57,500 Units with a base date of January 1, 2015 and vesting dates through January 1, 2018.

Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $(37,000) and $38,000 for the three months ended September 30, 2015 and 2014, respectively and $(95,000) and $119,000 for the nine months ended September 30, 2015 and 2014, respectively.  The income for the three and nine months ended September 30, 2015 was the result of a change in the assumption of the appreciation of book value per share of common stock.

As of September 30, 2015 and December 31, 2014, approximately $118,000 and $259,000 is accrued under this plan, respectively.  As of September 30, 2015, approximately $55,000 of this balance is included in Other Accrued Liabilities and the remaining $63,000 balance was included in Other Long-term Liabilities.  As of December 31, 2014, approximately $47,000 of this balance is included in Other Accrued Liabilites and the remaining $212,000 was included in Other Long-term Liabilities.

Earnings per Common Share

For the three and nine months ended September 30, 2015, the effect of all stock options is antidilutive due to the net loss incurred and, therefore, were not included in the computation of per-share amounts.  For the three and nine months ended September 30, 2015, stock options of 123,750 and 125,500, respectively, were excluded because their inclusion would be antidilutive.

For both the three and nine months ended September 30, 2014, 26,750 stock options were included in the computation of diluted per share amounts as their impact was dilutive.  For the three and nine months ended September 30, 2014, stock options of 169,250 and 178,139, respectively were excluded because their inclusion would be antidilutive.

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Accounts Receivable and Allowance for Doubtful Accounts

We grant credit to customers in the normal course of business.  Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts.  The allowance for doubtful accounts was $130,000 and $137,000 at September 30, 2015 and December 31, 2014, respectively.  We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole.  We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	September 30			December 31
	2015			2014
Raw Materials	$	14,238,633		$	12,745,623
Work in Process	3,840,602			3,653,670
Finished Goods	2,999,565			2,861,373
Reserve	(816,594		)	(732,248		)
Total	$	20,262,206		$	18,528,418

Finite Life Intangible Assets

Finite life intangible assets at September 30, 2015 and December 31, 2014 are as follows:

	September 30, 2015
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Customer Relationships	9.0	$	1,302,000	$	36,167	$	1,265,833
Trade Names	20.0	$	814,000	$	10,174	$	803,826
Bond Issue Costs	6.0	$	79,373	$	48,948	$	30,425
Totals		$	2,195,373	$	95,289	$	2,100,084

	December 31, 2014
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	7.0	$	79,373	$	44,978	$	34,395
Totals		$	79,373	$	44,978	$	34,395

Amortization expense for the three months ended September 30, 2015 and 2014 was $47,665 and $1,323, respectively.  Amortization expense for the nine months ended September 30, 2015 and 2014 was $50,312 and $3,969, respectively.

Estimated future amortization expense related to these assets is as follows:

Remainder of 2015	$	49,000
2016	160,000
2017	160,000
2018	160,000
2019	160,000
Thereafter	1,411,084
Total	$	2,100,084

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board issued changes to the subsequent measurement of inventory. Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes do not apply to inventories measured using LIFO (last-in, first-out) or the retail inventory method. Currently, Nortech applies the net realizable value market option to measure non-LIFO inventories at the lower of cost or market. These changes become effective for Nortech on January 1, 2017. Management has determined that the adoption of these changes will not have an impact on the Consolidated Financial Statements.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance.  In the first quarter of 2015, the FASB approved a deferral of the effective date to January 1, 2018.  Upon adoption in 2018, the company will record an adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods presented under the new rules, or January 1, 2018, without restating prior periods presented.  Management has not yet determined which transition reporting option it will apply.

In April 2014, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs is not affected by the new guidance.  The updated standard will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued.  The guidance should be adopted on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance.  The Company has adopted ASU 2015-03 and presented its debt issuance costs as a component of long term debt.

XML

FINANCING ARRANGEMENTS (Details)			3 Months Ended	9 Months Ended
	Jul. 01, 2015 USD ($) item	May. 07, 2015 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
Financing arrangements
Costs and fees related to amended credit agreement		$ 54,838		$ 48,745
Discount on Devicix Notes Payable			$ (151,984)	(151,984)
Debt Issuance Costs			(48,744)	(48,744)
Total debt			7,501,524	7,501,524	$ 4,805,341
Less current maturities			1,399,860	1,399,860	732,835
Long-term debt			6,101,664	6,101,664	4,072,506
Devicix LLC
Financing arrangements
Number of promissory notes | item	2
Market rate	8.00%
Line of credit
Financing arrangements
Maximum borrowing capacity			$ 15,000,000	$ 15,000,000
Variable rate basis				three-month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.25%
Interest rate (as a percent)			2.60%	2.60%
Weighted-average interest rate (as a percent)			2.60%	2.80%
Outstanding balance			$ 6,896,452	$ 6,896,452	7,998,184
Unused availability supported by entity's borrowing base			$ 7,500,000	$ 7,500,000
Real estate term note
Financing arrangements
Variable rate basis				three-month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Interest rate (as a percent)			3.10%	3.10%
Real estate term note maturing on March 31, 2027
Financing arrangements
Debt instrument, face amount			$ 1,800,000	$ 1,800,000
Variable rate basis				three month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Total debt			1,326,611	$ 1,326,611	1,415,461
Real estate term note 2 maturing on December 31, 2027
Financing arrangements
Debt instrument, face amount			1,700,000	$ 1,700,000
Variable rate basis				three month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Total debt			1,376,400	$ 1,376,400	1,460,100
Term loan
Financing arrangements
Outstanding balance			1,000,000	1,000,000
Term loan | Maximum
Financing arrangements
Debt instrument, face amount			1,000,000	1,000,000
Equipment term loan tied to equipment purchased in Mankato acquisition
Financing arrangements
Debt instrument, face amount			2,700,000	$ 2,700,000
Equipment Loan Due January 2016
Financing arrangements
Variable rate basis				three month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Total debt					102,917
Equipment Loan One Due May 2018
Financing arrangements
Variable rate basis				three month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Total debt					1,117,863
Equipment Loan Two Due May 2018
Financing arrangements
Variable rate basis				three month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Total debt					349,000
Equipment Loan Three Due May 2018
Financing arrangements
Variable rate basis				three month LIBOR
Interest rate margin on variable rate basis (as a percent)				2.75%
Total debt			2,552,480	$ 2,552,480
Industrial revenue bond payable to the City of Blue Earth, Minnesota
Financing arrangements
Total debt			$ 280,000	$ 280,000	$ 360,000
Devicix Acq Note 1, subordinate debt, due July 1, 2019
Financing arrangements
Interest rate (as a percent)			4.00%	4.00%
Total debt			$ 942,070	$ 942,070
Devicix Acq Note 2, subordinate debt, due July 1, 2019
Financing arrangements
Interest rate (as a percent)			4.00%	4.00%
Total debt			$ 1,224,691	$ 1,224,691
Promissory note subject to offsets | Devicix LLC
Financing arrangements
Promissory note liability	$ 1,000,000
Term of promissory note	4 years
Interest rate per annum	4.00%
Principal and interest payments	$ 22,579
Fair value of loans	931,000
Promissory note not subject to offsets | Devicix LLC
Financing arrangements
Promissory note liability	$ 1,300,000
Term of promissory note	4 years
Interest rate per annum	4.00%
Principal and interest payments	$ 29,353
Fair value of loans	$ 1,210,000

XML

COMMITMENTS AND CONTINGENCIES (Details)		3 Months Ended		9 Months Ended
	Apr. 01, 2015 USD ($) ft²	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)
Lease term	89 months
Office space (in square feet) | ft²	19,000
Rent expense		$ 272,000	$ 163,000	$ 635,000	$ 499,000
Operating Leases
2015		231,710		231,710
2016		594,365		594,365
2017		551,734		551,734
2018		556,906		556,906
2019		400,299		400,299
Thereafter		452,303		452,303
Total		$ 2,787,317		$ 2,787,317
Minimum
Annual rent payments	$ 139,000
Maximum
Annual rent payments	$ 165,000

XML

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

9 Months Ended

Sep. 30, 2015

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  With regard to cash, we maintain our excess cash balances in checking accounts at two high-credit quality financial institutions.  These accounts may at times exceed federally insured limits.  We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

Our largest customer, General Electric, has two divisions that collectively account for more than 10% of net sales for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2015		2014		2015		2014
GE Healthcare	18	%	23	%	18	%	24	%
GE Transportation	11		7		9		5
Total General Electric	29	%	30	%	27	%	29	%

Combined accounts receivable from both divisions represented 22% and 20% of total accounts receivable at September 30, 2015 and December 31, 2014, respectively.

Export sales represented 12% of net sales for the three and nine months ended September 30, 2015.  Export sales represented 13% of net sales for the three and nine months ended September 30, 2014

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2015	Dec. 31, 2014
CONSOLIDATED BALANCE SHEETS
Preferred Stock, par value (in dollars per share)	$ 1	$ 1
Preferred Stock, Shares Authorized	1,000,000	1,000,000
Preferred Stock, Shares Issued	250,000	250,000
Preferred Stock, Shares Outstanding	250,000	250,000
Common Stock - par value (in dollars per share)	$ 0.01	$ 0.01
Common Stock - Shares Authorized	9,000,000	9,000,000
Common Stock - Shares Issued	2,746,325	2,746,325
Common Stock - Shares Outstanding	2,746,325	2,746,325

XML

COMMITMENTS AND CONTINGENCIES (Tables)

9 Months Ended

Sep. 30, 2015

COMMITMENTS AND CONTINGENCIES

Schedule of future minimum lease payments under non-cancelable leases

Years Ending
December 31,	Amount
2015	$	231,710
2016	594,365
2017	551,734
2018	556,906
2019	400,299
Thereafter	452,303
Total	$	2,787,317

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Oct. 30, 2015
Document and Entity Information
Entity Registrant Name	NORTECH SYSTEMS INC
Entity Central Index Key	0000722313
Document Type	10-Q
Document Period End Date	Sep. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,746,325
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3

XML

ACQUISITIONS (Tables)

9 Months Ended

Sep. 30, 2015

ACQUISITIONS

Summary of estimated fair values of assets acquired and liabiities assumed at acquisition date

	July 1, 2015
Cash	$	131,054
Accounts Receivable	372,736
AR due to Seller	(172,736		)
Prepaid Expenses and Inventory	34,727
Total Current Assets	365,781
Fixed Assets	83,149
Trade Names	814,000
Customer Relationship	1,302,000
Goodwill	3,208,447
Total Assets	$	5,773,378
Accounts Payable	$	63,048
Accrued Payroll, Benefits and Other Current Liab	121,837
Customer Deposits	474,887
Total Current Liabilities	$	659,772
Loans to Seller	$	2,141,408
Cash Paid at 7/1	2,002,162
Adjustment Paid in August	119,035
Contingent Consideration	851,000
Business Enterprise Value	5,113,605
Total Liabilities & Equity	$	5,773,378

Schedule of unaudited pro forma combined results of opertions

	Pro Forma		Pro Forma		Pro Forma
	Three Months Ended		Nine Months Ended		Nine Months Ended
	September 30, 2014		September 30, 2014		September 30, 2015
	(unaudited)		(unaudited)		(unaudited)
Net Sales	$	29,091,310	$	84,997,713	$	86,065,773
Income (Loss) from Operations	$	433,417	$	1,005,358	$	(449,260	)
Net Income (Loss)	$	290,951	$	623,218	$	(519,516	)
Basic & Diluted
Income (Loss) per Common Share	$	0.11	$	0.23	$	(0.19	)

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
CONSOLIDATED STATEMENTS OF OPERATIONS
Net Sales	$ 30,409,064	$ 28,037,865	$ 83,750,159	$ 81,595,474
Cost of Goods Sold	27,518,479	24,510,862	75,563,295	71,711,557
Gross Profit	2,890,585	3,527,003	8,186,864	9,883,917
Operating Expenses
Selling Expenses	1,244,521	1,303,920	3,918,318	3,570,066
General and Administrative Expenses	1,623,521	1,749,593	4,930,964	5,256,963
Total Operating Expenses	2,868,042	3,053,513	8,849,282	8,827,029
Income (Loss) From Operations	22,543	473,490	(662,418)	1,056,888
Other Expense
Interest Expense	(133,960)	(89,598)	(341,148)	(271,661)
Miscellaneous Expense, net	(88,189)	(13,195)	(88,189)	(46,672)
Total Other Expense	(222,149)	(102,793)	(429,337)	(318,333)
Income (Loss) Before Income Taxes	(199,606)	370,697	(1,091,755)	738,555
Income Tax Expense (Benefit)	(76,000)	38,000	(397,000)	73,000
Net Income (Loss)	$ (123,606)	$ 332,697	$ (694,755)	$ 665,555
Earnings (Loss) Per Common Share:
Basic (in dollars per share)	$ (0.05)	$ 0.12	$ (0.25)	$ 0.24
Weighted Average Number of Common Shares Outstanding - Basic (in shares)	2,746,325	2,742,992	2,745,568	2,742,992
Diluted (in dollars per share)	$ (0.05)	$ 0.12	$ (0.25)	$ 0.24
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)	2,746,325	2,747,943	2,745,568	2,747,552

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2015

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

Revenue Recognition

We recognize manufacturing revenue when we ship goods or the goods are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services.  If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled.  We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is generally recognized on a time and material basis or upon completion of the engineering process.  In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer.  Our net sales for services were less than 5% of our total sales for all periods presented, and accordingly, are included in net sales in the consolidated statement of operations.  Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock Options

Stock Options

Following is the status of all stock options outstanding as of September 30, 2015:

	Shares		Weighted- Average  Exercise  Price Per  Share		Weighted- Average  Remaining  Contractual  Term  (in years)	Aggregate  Intrinsic Value
Outstanding - January 1, 2015	181,000		$	6.36
Granted	—		—
Exercised	(3,333	)	3.20
Cancelled	(37,917	)	5.52
Outstanding - September 30, 2015	139,750		$	6.66	2.24	$	16,800
Exercisable - September 30, 2015	134,917		$	6.78	2.06	$	11,725

The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $8,166.  Cash received from options exercised during the three and nine months ended September 30, 2015 was $10,666.  There were no options exercised during the three and nine months ended September 30, 2014.  There were no stock options granted during the three and nine months ended September 30, 2015 and 2014.

Total compensation expense related to stock options for the three months ended September 30, 2015 and 2014 was $1,989 and $7,482, respectively.  Total compensation expense related to stock options for the nine months ended September 30, 2015 and 2014 was $1,320 and $22,445, respectively.  As of September 30, 2015, there was approximately $3,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 0.37 years.

Equity Appreciation Rights Plan

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”). The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015 and approved by the shareholders on May 6, 2015.  The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the value as of the redemption date.

During the nine months ended September 30, 2015, we granted 57,500 Units with a base date of January 1, 2015 and vesting dates through January 1, 2018.

Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $(37,000) and $38,000 for the three months ended September 30, 2015 and 2014, respectively and $(95,000) and $119,000 for the nine months ended September 30, 2015 and 2014, respectively.  The income for the three and nine months ended September 30, 2015 was the result of a change in the assumption of the appreciation of book value per share of common stock.

As of September 30, 2015 and December 31, 2014, approximately $118,000 and $259,000 is accrued under this plan, respectively.  As of September 30, 2015, approximately $55,000 of this balance is included in Other Accrued Liabilities and the remaining $63,000 balance was included in Other Long-term Liabilities.  As of December 31, 2014, approximately $47,000 of this balance is included in Other Accrued Liabilites and the remaining $212,000 was included in Other Long-term Liabilities.

Earnings per Common Share

Earnings per Common Share

For the three and nine months ended September 30, 2015, the effect of all stock options is antidilutive due to the net loss incurred and, therefore, were not included in the computation of per-share amounts.  For the three and nine months ended September 30, 2015, stock options of 123,750 and 125,500, respectively, were excluded because their inclusion would be antidilutive.

For both the three and nine months ended September 30, 2014, 26,750 stock options were included in the computation of diluted per share amounts as their impact was dilutive.  For the three and nine months ended September 30, 2014, stock options of 169,250 and 178,139, respectively were excluded because their inclusion would be antidilutive.

Segment Reporting Information

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts

We grant credit to customers in the normal course of business.  Accounts receivable are unsecured and are presented net of an allowance for doubtful accounts.  The allowance for doubtful accounts was $130,000 and $137,000 at September 30, 2015 and December 31, 2014, respectively.  We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole.  We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.

Inventories

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	September 30			December 31
	2015			2014
Raw Materials	$	14,238,633		$	12,745,623
Work in Process	3,840,602			3,653,670
Finished Goods	2,999,565			2,861,373
Reserve	(816,594		)	(732,248		)
Total	$	20,262,206		$	18,528,418

Finite Life Intangible Assets

Finite Life Intangible Assets

Finite life intangible assets at September 30, 2015 and December 31, 2014 are as follows:

	September 30, 2015
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Customer Relationships	9.0	$	1,302,000	$	36,167	$	1,265,833
Trade Names	20.0	$	814,000	$	10,174	$	803,826
Bond Issue Costs	6.0	$	79,373	$	48,948	$	30,425
Totals		$	2,195,373	$	95,289	$	2,100,084

	December 31, 2014
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	7.0	$	79,373	$	44,978	$	34,395
Totals		$	79,373	$	44,978	$	34,395

Amortization expense for the three months ended September 30, 2015 and 2014 was $47,665 and $1,323, respectively.  Amortization expense for the nine months ended September 30, 2015 and 2014 was $50,312 and $3,969, respectively.

Estimated future amortization expense related to these assets is as follows:

Remainder of 2015	$	49,000
2016	160,000
2017	160,000
2018	160,000
2019	160,000
Thereafter	1,411,084
Total	$	2,100,084

Impairment Analysis

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board issued changes to the subsequent measurement of inventory. Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes do not apply to inventories measured using LIFO (last-in, first-out) or the retail inventory method. Currently, Nortech applies the net realizable value market option to measure non-LIFO inventories at the lower of cost or market. These changes become effective for Nortech on January 1, 2017. Management has determined that the adoption of these changes will not have an impact on the Consolidated Financial Statements.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance.  In the first quarter of 2015, the FASB approved a deferral of the effective date to January 1, 2018.  Upon adoption in 2018, the company will record an adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods presented under the new rules, or January 1, 2018, without restating prior periods presented.  Management has not yet determined which transition reporting option it will apply.

In April 2014, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs is not affected by the new guidance.  The updated standard will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued.  The guidance should be adopted on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance.  The Company has adopted ASU 2015-03 and presented its debt issuance costs as a component of long term debt.

XML

ACQUISITIONS

9 Months Ended

Sep. 30, 2015

ACQUISITIONS

ACQUISITIONS

NOTE 6.  ACQUISITIONS

On July 1, 2015, the company completed the acquisition of substantially all of the assets of Devicix, LLC upon the terms and conditions contained in an Asset Purchase Agreement entered into on June 17, 2015.

Devicix is an innovative medical product design and engineering firm with a proven track record of helping clients move from concept to production. The addition of Devicix will enhance and broaden our capabilities for complete design, manufacturing and service, particularly for regulated medical devices.

Acquisition date fair value of the consideration transferred totaled $5.1 million which was comprised of cash payments of $2.0 million from our operating line of credit at closing, $0.5 million of customer deposits with the majority of the work to be completed by 2015 year end, assumed working capital deficit of $0.5 million and two promissory notes payable to the seller in the aggregate principal amounts of $1.0 million and $1.3 million.  The $1.0 million promissory note has a four-year term, bearing interest at 4% per annum and is subject to offsets if certain revenue levels are not met.  The $1.3 million promissory note has a four year term and bears interest at 4% per annum and is not subject to offset.  The fair value of these loans is approximately $931,000 and $1,210,000, respectively assuming a market rate of 8%.

The asset purchase agreement also includes additional consideration payable within 90 days of the completion of each of the first four 12-month periods after July 1, 2015.  The earnout will be equal to 15% of eligible engineering revenue over a $6,000,000 threshold and 3% of eligible production revenue generated from Devicix customers.  The maximum dollar amount of earnout payments under the Asset Purchase Agreement is $2,500,000. We estimated the fair value of the contingent consideration to be $851,000 using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

	July 1, 2015
Cash	$	131,054
Accounts Receivable	372,736
AR due to Seller	(172,736		)
Prepaid Expenses and Inventory	34,727
Total Current Assets	365,781
Fixed Assets	83,149
Trade Names	814,000
Customer Relationship	1,302,000
Goodwill	3,208,447
Total Assets	$	5,773,378
Accounts Payable	$	63,048
Accrued Payroll, Benefits and Other Current Liab	121,837
Customer Deposits	474,887
Total Current Liabilities	$	659,772
Loans to Seller	$	2,141,408
Cash Paid at 7/1	2,002,162
Adjustment Paid in August	119,035
Contingent Consideration	851,000
Business Enterprise Value	5,113,605
Total Liabilities & Equity	$	5,773,378

Pending finalization of the earnout and fair value of the intangible assets in the fourth quarter of 2015, the Devicix acquisition has preliminarily resulted in $3.2 million of goodwill, which is expected to be deductible for tax purposes.  Specifically, the goodwill recorded as part of the acquisition of Devicix includes the following:

· the expected synergies and other benefits that we believe will result from combining the operations of Devicix with the operations of Nortech Systems;

· any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products.

The company incurred $62,000 in legal, professional, and other costs related to this acquisition accounted for as selling and administrative expenses. The weighted-average useful life of intangible assets acquired is 11.4 years.

The table below reflects our unaudited pro forma combined results of operations as if the acquisition had taken place as of January 1, 2014:

	Pro Forma		Pro Forma		Pro Forma
	Three Months Ended		Nine Months Ended		Nine Months Ended
	September 30, 2014		September 30, 2014		September 30, 2015
	(unaudited)		(unaudited)		(unaudited)
Net Sales	$	29,091,310	$	84,997,713	$	86,065,773
Income (Loss) from Operations	$	433,417	$	1,005,358	$	(449,260	)
Net Income (Loss)	$	290,951	$	623,218	$	(519,516	)
Basic & Diluted
Income (Loss) per Common Share	$	0.11	$	0.23	$	(0.19	)

The pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest periodpresented.  In addition they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.

XML

INCOME TAXES (Details) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2015	Dec. 31, 2014
Effective income tax rate (as a percent)	38.00%	10.00%	36.00%	10.00%		8.40%
Reconciliation of federal income taxes and reported income taxes
Statutory federal tax provision (benefit)	$ (57,000)	$ 129,000	$ (327,000)	$ 259,000
State income taxes (benefits)	(6,000)	14,000	(32,000)	33,000
Income tax credits	(14,000)	(19,000)	(39,000)	(33,000)
Change in uncertain tax positions	(4,000)	1,000	(4,000)	(99,000)
Return to provision true-up	5,000	(84,000)	5,000	(84,000)
Other		(3,000)		(3,000)
Income tax expense (benefit)	(76,000)	38,000	(397,000)	73,000
Unrecognized tax benefits
Net uncertain tax benefit positions that would increase (reduce) effective income tax rate, if recognized	$ 51,750		$ 51,750			$ 56,000
Minnesota Tax Authority
Unrecognized tax benefits
Research and development credits		$ 100,000		$ 100,000
Forecast
Effective income tax rate (as a percent)					36.00%

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014	Nov. 30, 2010
Earnings Per Common Share
Weighted average common stock equivalents from assumed exercise of stock options (in shares)		26,750		26,750
Outstanding options excluded from computation of earnings per share as effect would be antidilutive (in shares)	123,750	169,250	125,500	178,139
Maximum | Total Sales
Revenue Recognition
Percentage of sales (as a percent)			5.00%
Stock Options
Options
Balance at the beginning of the period(in shares)			181,000
Granted (in shares)	0	0	0	0
Exercised (in shares)		0	(3,333)	0
Cancelled (in shares)	0		(37,917)
Balance at the end of the period (in shares)	139,750		139,750		181,000
Exercisable at the end of the period (in shares)	134,917		134,917
Weighted-Average Exercise Price Per Share
Outstanding at the beginning of the period (in dollars per share)			$ 6.36
Exercised (in dollars per share)			3.20
Cancelled (in dollars per share)			5.52
Outstanding at the end of the period (in dollars per share)	$ 6.66		6.66		$ 6.36
Exercisable at the end of the period (in dollars per share)	$ 6.78		$ 6.78
Weighted-Average Remaining Contractual Term
Outstanding at the end of the period			2 years 2 months 27 days
Exercisable at the end of the period			2 years 22 days
Aggregate Intrinsic Value
Outstanding at the end of the period	$ 16,800		$ 16,800
Exercisable at the end of the period	11,725		11,725
Additional disclosures
Intrinsic value of options exercised	8,166		8,166
Cash received from options exercised	10,666		10,666
Compensation expense	1,989	$ 7,482	1,320	$ 22,445
Unrecognized compensation related to unvested awards	$ 3,000		$ 3,000
Weighted-average period over which unrecognized compensation costs expected to be recognized			4 months 13 days
Equity Appreciation Rights Plan
Awards exercised (in shares)		0	3,333	0
Granted (in shares)	0	0	0	0
2010 Plan | Equity Appreciation Rights Plan
Additional disclosures
Compensation expense	$ (37,000)	$ 38,000	$ (95,000)	$ 119,000
Equity Appreciation Rights Plan
Vesting period from the base date			3 years
Redemption cash payment period			90 days
Shares granted (in units)			57,500
Accrued compensation	118,000		$ 118,000		$ 259,000
2010 Plan | Equity Appreciation Rights Plan | Other Accrued Liabilities
Equity Appreciation Rights Plan
Accrued compensation	55,000		55,000		47,000
2010 Plan | Equity Appreciation Rights Plan | Other Long-term Liabilities
Equity Appreciation Rights Plan
Accrued compensation	$ 63,000		$ 63,000		$ 212,000
2010 Plan | Equity Appreciation Rights Plan | Maximum
Equity Appreciation Rights Plan
Number of common shares authorized						1,000,000

XML

FINANCING ARRANGEMENTS (Tables)

9 Months Ended

Sep. 30, 2015

FINANCING ARRANGEMENTS.

Summary of long-term debt balances

	September 30			December 31
	2015			2014
Real Estate Term Loan 1, interest at three month LIBOR + 2.75%, due in installments through March 31, 2027	$	1,326,611		$	1,415,461
Real Estate Term Loan 2, interest at three month LIBOR + 2.75%, due in installments through December 31, 2027	1,376,400			1,460,100
Equipment loan, interest at three month LIBOR + 2.75%, due January 31, 2016	—			102,917
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	—			1,117,863
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	—			349,000
Equipment loan, interest at three month LIBOR + 2.75%, due May 31, 2018	2,552,480			—
Blue Earth Bond, which bears a variable interest rate, due in installments through June 30, 2021	280,000			360,000
Devicix Acq Note 1, subordinate debt, interest at 4.0% due July 1, 2019	942,070
Devicix Acq Note 2, subordinate debt, interest at 4.0% due July 1, 2019	1,224,691
Discount on Devicix Notes Payable	(151,984		)
Debt Issuance Costs	(48,744		)	—
Total debt	7,501,524			4,805,341
Less current maturities	1,399,860			732,835
Long-term debt	$	6,101,664		$	4,072,506

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2015

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Summary of option activity

	Shares		Weighted- Average  Exercise  Price Per  Share		Weighted- Average  Remaining  Contractual  Term  (in years)	Aggregate  Intrinsic Value
Outstanding - January 1, 2015	181,000		$	6.36
Granted	—		—
Exercised	(3,333	)	3.20
Cancelled	(37,917	)	5.52
Outstanding - September 30, 2015	139,750		$	6.66	2.24	$	16,800
Exercisable - September 30, 2015	134,917		$	6.78	2.06	$	11,725

Schedule of inventories

	September 30			December 31
	2015			2014
Raw Materials	$	14,238,633		$	12,745,623
Work in Process	3,840,602			3,653,670
Finished Goods	2,999,565			2,861,373
Reserve	(816,594		)	(732,248		)
Total	$	20,262,206		$	18,528,418

Schedule of intangible assets

	September 30, 2015
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Customer Relationships	9.0	$	1,302,000	$	36,167	$	1,265,833
Trade Names	20.0	$	814,000	$	10,174	$	803,826
Bond Issue Costs	6.0	$	79,373	$	48,948	$	30,425
Totals		$	2,195,373	$	95,289	$	2,100,084

	December 31, 2014
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	7.0	$	79,373	$	44,978	$	34,395
Totals		$	79,373	$	44,978	$	34,395

Schedule of estimated future amortization expense

Remainder of 2015	$	49,000
2016	160,000
2017	160,000
2018	160,000
2019	160,000
Thereafter	1,411,084
Total	$	2,100,084

XML

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Tables)

9 Months Ended

Sep. 30, 2015

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS.

Schedule of accounts receivable percentage pertaining to largest customer

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2015		2014		2015		2014
GE Healthcare	18	%	23	%	18	%	24	%
GE Transportation	11		7		9		5
Total General Electric	29	%	30	%	27	%	29	%

XML

INCOME TAXES (Tables)

9 Months Ended

Sep. 30, 2015

INCOME TAXES

Schedule of statutory rate reconciliation

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
Statutory federal tax provision (benefit)	$	(57,000	)	$	129,000		$	(327,000	)	$	259,000
State income taxes (benefits)	(6,000		)	14,000			(32,000		)	33,000
Income tax credits	(14,000		)	(19,000		)	(39,000		)	(33,000		)
Change in uncertain tax positions	(4,000		)	1,000			(4,000		)	(99,000		)
Return to provision true-up	5,000			(84,000		)	5,000			(84,000		)
Other	—			(3,000		)	—			(3,000		)
Income tax expense (benefit)	$	(76,000	)	$	38,000		$	(397,000	)	$	73,000

XML

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Details) - item	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
General Electric
Major customers and concentration of credit risk
Number of divisions	2	2	2	2
Credit concentration risk
Major customers and concentration of credit risk
Excess cash balance, number of high credit quality financial institution	2
Net sales | Customer concentration risk
Major customers and concentration of credit risk
Percentage of export sales to consolidated net sales	12.00%	13.00%	12.00%	13.00%
Net sales | Customer concentration risk | General Electric
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	10.00%	10.00%	10.00%	10.00%
Net sales | Customer concentration risk | GE Healthcare
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	18.00%	23.00%	18.00%	24.00%
Net sales | Customer concentration risk | GE Transportation
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	11.00%	7.00%	9.00%	5.00%
Net sales | Customer concentration risk | Total General Electric
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)	29.00%	30.00%	27.00%	29.00%
Accounts receivable | Customer concentration risk | Total General Electric
Major customers and concentration of credit risk
Percentage of concentration risk (as a percent)			22.00%		20.00%

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash Flows From Operating Activities
Net Income (Loss)	$ (694,755)	$ 665,555
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used In) Operating Activities
Depreciation	1,618,791	1,517,153
Amortization	50,312	3,969
Compensation on Stock-Based Awards	1,320	22,445
Compensation on Equity Appreciation Rights	(94,652)
Loss on Disposal of Property and Equipment	1,129	1,837
Deferred Taxes	55,685	51,680
Change in Current Operating Items, Net of Acquisition
Accounts Receivable	(1,625,756)	424,782
Inventories	(1,729,429)	(2,988,729)
Prepaid Expenses	(377,554)	(340,252)
Income Taxes Receivable	(530,028)	(259,877)
Accounts Payable	5,238,304	1,443,580
Accrued Payroll and Commissions	422,436	687,373
Other Accrued Liabilities	1,592,378	175,669
Net Cash Provided by (Used In) Operating Activities	3,928,181	1,405,185
Cash Flows from Investing Activities
Business Acquisition, Net of Cash Acquired	(1,990,143)
Purchases of Property and Equipment	(1,456,795)	(1,800,819)
Net Cash Used in Investing Activities	(3,446,938)	(1,800,819)
Cash Flows from Financing Activities
Borrowings on Line of Credit	83,642,816	83,477,209
Repayments on Line of Credit	(84,744,548)	(82,881,103)
Proceeds from Long-Term Debt	1,358,767	510,000
Principal Payments on Long-Term Debt	(755,247)	(506,990)
Debt Issuance Costs	(48,745)
Excess Tax Benefit from Stock-Based Compensation	911
Proceeds from Issuance of Common Stock	10,666
Net Cash Provided by (Used in) Financing Activities	(535,380)	599,116
Net Increase in Cash	(54,137)	203,482
Cash - Beginning	66,371
Cash - Ending	12,234	203,482
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest	320,381	268,371
Cash Paid During the Period for Income Taxes		417,615
Supplemental Noncash Investing and Financing Activities
Capital Expenditures in Accounts Payable	$ 13,700	$ 35,720

XML

COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2015

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 5.  COMMITMENTS AND CONTINGENCIES

We have various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements expiring on various dates through 2022.

On April 1, 2015, we entered into an 89 month lease for approximately 19,000 square feet of space in Maple Grove, Minnesota for our new corporate headquarters.  Annual rent payments during the lease term will increase from approximately $139,000 to $165,000.  In addition to this rent obligation, we will also be responsible for certain costs, among other things, operating expenses, taxes, and insurance costs.

Rent expense for the three months ended September 30, 2015 and 2014 amounted to approximately $272,000 and $163,000, respectively.  Rent expense for the nine months ended September 30, 2015 and 2014 amounted to approximately $635,000 and $499,000, respectively.

Approximate future minimum lease payments under non-cancelable leases subsequent to September 30, 2015 are as follows:

Years Ending
December 31,	Amount
2015	$	231,710
2016	594,365
2017	551,734
2018	556,906
2019	400,299
Thereafter	452,303
Total	$	2,787,317

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Accounts Receivable and Allowance for Doubtful Accounts
Allowance for doubtful accounts	$ 130,000		$ 130,000		$ 137,000
Inventories
Raw Materials	14,238,633		14,238,633		12,745,623
Work in Process	3,840,602		3,840,602		3,653,670
Finished Goods	2,999,565		2,999,565		2,861,373
Reserve	(816,594)		(816,594)		(732,248)
Total	20,262,206		20,262,206		18,528,418
Finite-Lived Intangible Assets
Gross carrying amount	2,195,373		2,195,373		79,373
Accumulated amortization	95,289		95,289		44,978
Net Book Value Amount	2,100,084		2,100,084		34,395
Amortization expense	47,665	$ 1,323	50,312	$ 3,969
Estimated future amortization expense
Remainder of 2015	49,000		49,000
2016	160,000		160,000
2017	160,000		160,000
2018	160,000		160,000
2019	160,000		160,000
Thereafter	1,411,084		1,411,084
Total	2,100,084		$ 2,100,084		$ 34,395
Customer Relationships
Finite-Lived Intangible Assets
Remaining lives			9 years
Gross carrying amount	1,302,000		$ 1,302,000
Accumulated amortization	36,167		36,167
Net Book Value Amount	1,265,833		1,265,833
Estimated future amortization expense
Total	1,265,833		$ 1,265,833
Trade Names
Finite-Lived Intangible Assets
Remaining lives			20 years
Gross carrying amount	814,000		$ 814,000
Accumulated amortization	10,174		10,174
Net Book Value Amount	803,826		803,826
Estimated future amortization expense
Total	803,826		$ 803,826
Bond Issue Costs
Finite-Lived Intangible Assets
Remaining lives			6 years		7 years
Gross carrying amount	79,373		$ 79,373		$ 79,373
Accumulated amortization	48,948		48,948		44,978
Net Book Value Amount	30,425		30,425		34,395
Estimated future amortization expense
Total	$ 30,425		$ 30,425		$ 34,395