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 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.