NORTECH SYSTEMS INC (Form: 10-Q, Received: 08/05/2015 16:48:28)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

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

Former Name. Former Address and Former Fiscal Year, if Changed Since Last Report: 1120

Wayzata Blvd E., Suite 201, Wayzata, MN 55391

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 July 31, 2015 - 2,746,325

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

Table of Contents

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	7-15

Item 2	-	Management’s Discussion and Analysis of Financial Condition And Results of Operations	15-21

Item 4	-	Controls and Procedures	21

		PART II - OTHER INFORMATION

Item 1	-	Legal Proceedings	22

Item 6	-	Exhibits	22

SIGNATURES			23

Table of Contents

PART 1

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	June 30			DECEMBER 31
	2015			2014
	(Unaudited)
ASSETS
Current Assets
Cash	$	68,783		$	66,371
Accounts Receivable, Less Allowance for Uncollectible Accounts	16,656,851			17,367,668
Inventories	20,605,081			18,528,418
Prepaid Expenses	1,308,360			816,775
Income Taxes Receivable	842,106			465,236
Deferred Income Taxes	436,000			436,000
Total Current Assets	39,917,181			37,680,468

Property and Equipment, Net	11,042,807			10,888,717
Other Assets	114,481			117,127
Total Assets	$	51,074,469		$	48,686,312

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current Maturities of Long-Term Debt	857,027			732,835
Accounts Payable	11,016,512			9,008,426
Accrued Payroll and Commissions	2,542,976			2,896,557
Other Accrued Liabilities	818,120			732,012
Total Current Liabilities	15,234,635			13,369,830

Long-Term Liabilities
Line of Credit	8,471,042			7,998,184
Long-Term Debt, Net of Current Maturities	4,819,406			4,072,506
Deferred Income Taxes	149,000			149,000
Other Long-Term Liabilities	132,235			268,400
Total Long-Term Liabilities	13,571,683			12,488,090
Total Liabilities	28,806,318			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	15,762,035			15,751,160
Accumulated Other Comprehensive Loss	(62,936		)	(62,936		)
Retained Earnings	6,291,589			6,862,738
Total Shareholders’ Equity	22,268,151			22,828,392
Total Liabilities and Shareholders’ Equity	$	51,074,469		$	48,686,312

See Accompanying Condensed Notes to Consolidated Financial Statements

Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	THREE MONTHS ENDED
	JUNE 30
	2015			2014

Net Sales	$	26,801,473		$	27,408,467

Cost of Goods Sold	24,371,349			24,125,488

Gross Profit	2,430,124			3,282,979

Operating Expenses
Selling Expenses	1,310,355			1,145,245
General and Administrative Expenses	1,603,129			1,790,557
Total Operating Expenses	2,913,484			2,935,802

Income (Loss) From Operations	(483,360		)	347,177

Other Expense
Interest Expense	(112,002		)	(92,083		)
Miscellaneous Expense, net	—			(23,393		)
Total Other Expense	(112,002		)	(115,476		)

Income (Loss) Before Income Taxes	(595,362		)	231,701

Income Tax Expense (Benefit)	(217,000		)	(15,000		)

Net Income (Loss)	$	(378,362	)	$	246,701

Earnings (Loss) Per Common Share:

Basic	$	(0.14	)	$	0.09

Weighted Average Number of Common Shares Outstanding - Basic	2,746,325			2,742,992

Diluted	$	(0.14	)	$	0.09

Weighted Average Number of Common Shares Outstanding - Diluted	2,746,325			2,746,856

See Accompanying Condensed Notes to Consolidated Financial Statements

Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	SIX MONTHS ENDED
	JUNE 30
	2015			2014

Net Sales	$	53,341,095		$	53,557,609

Cost of Goods Sold	48,044,816			47,200,695

Gross Profit	5,296,279			6,356,914

Operating Expenses
Selling Expenses	2,673,797			2,266,146
General and Administrative Expenses	3,307,443			3,507,370
Total Operating Expenses	5,981,240			5,773,516

Income (Loss) From Operations	(684,961		)	583,398

Other Expense
Interest Expense	(207,188		)	(182,063		)
Miscellaneous Expense, net	—			(33,477		)
Total Other Expense	(207,188		)	(215,540		)


Income (Loss) Before Income Taxes	(892,149		)	367,858

Income Tax Expense (Benefit)	(321,000		)	35,000

Net Income (Loss)	$	(571,149	)	$	332,858

Earnings (Loss) Per Common Share:

Basic	$	(0.21	)	$	0.12

Weighted Average Number of Common Shares Outstanding - Basic	2,745,183			2,742,992

Diluted	$	(0.21	)	$	0.12

Weighted Average Number of Common Shares Outstanding - Diluted	2,745,183			2,747,357

See Accompanying Condensed Notes to Consolidated Financial Statements

Table of Contents

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	SIX MONTHS ENDED
	JUNE 30
	2015			2014
Cash Flows From Operating Activities
Net Income (Loss)	$	(571,149	)	$	332,858
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities
Depreciation	1,062,951			999,234
Amortization	2,646			2,646
Compensation on Stock-Based Awards	(669		)	14,963
Compensation on Equity Appreciation Rights	(58,310		)	—
Loss on Disposal of Property and Equipment	1,129			1,150
Deferred Taxes	—			51,680
Changes in Operating Assets and Liabilities:Changes in Current Operating Items
Accounts Receivable	710,817			869,595
Inventories	(2,076,663		)	(1,963,079		)
Prepaid Expenses	(491,585		)	(76,768		)
Income Taxes Receivable	(376,870		)	(107,577		)
Accounts Payable	1,998,289			1,641,621
Accrued Payroll and Commissions	(353,581		)	(375,076		)
Other Accrued Liabilities	16,225			(63,288		)
Net Cash Provided by (Used in) Operating Activities	(136,770		)	1,327,959
Cash Flows from Investing Activities
Purchases of Property and Equipment	(1,214,489		)	(1,128,141		)
Net Cash Used in Investing Activities	(1,214,489		)	(1,128,141		)
Cash Flows from Financing Activities
Borrowings on Line of Credit	56,462,817			54,795,076
Repayments on Line of Credit	(55,989,959		)	(54,863,663		)
Proceeds from Long-Term Debt	1,352,159			230,000
Principal Payments on Long-Term Debt	(427,752		)	(361,231		)
Debt Issuance Costs	(54,838		)	—
Excess Tax Benefit from Stock-Based Compensation	911			—
Proceeds from Issuance of Common Stock	10,333			—
Net Cash Provided by Financing Activities	1,353,671			(199,818		)
Net Increase in Cash	2,412			—
Cash - Beginning	66,371			—
Cash - Ending	$	68,783		$	—
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest	$	200,645		$	181,981
Cash Paid During the Period for Income Taxes	—			237,615

Supplemental Noncash Investing and Financing Activities
Capital Expenditures in Accounts Payable	19,604			25,866

See Accompanying Condensed Notes to Consolidated Financial Statements

Table of Contents

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 subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc. 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 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 June 30, 2015:

Table of Contents

	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 - June 30, 2015	139,750		$	6.66	2.49	$	18,400
Exercisable - June 30, 2015	134,917		$	6.78	2.31	$	12,842

The total intrinsic value of options exercised during the three and six months ended June 30, 2015 was $8,166. Cash received from options exercised during the three and six months ended June 30, 2015 was $10,333. There were no options exercised during the three and six months ended June 30, 2014. There were no stock options granted during the three and six months ended June 30, 2015 and 2014.

Total compensation expense (income) related to stock options for the three months ended June 30, 2015 and 2014 was $(4,338) and $7,482, respectively. Total compensation expense (income) related to stock options for the six months ended June 30, 2015 and 2014 was $(669) and $14,963, respectively. As of June 30, 2015, there was approximately $5,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 0.62 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 this plan shall be paid in cash within 90 days after we determine the value as of the redemption date.

During the six months ended June 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 $(46,000) and $38,000 for the three months ended June 30, 2015 and 2014, respectively and $(58,000) and $80,000 for the

Table of Contents

six months ended June 30, 2015 and 2014, respectively. The income for the three and six months ended June 30, 2015 was the result of a change in the assumption of the appreciation of book value per share of common stock.

As of June 30, 2015 and December 31, 2014, approximately $154,000 and $259,000 is accrued under this plan, respectively. As of June 30, 2015, approximately $78,000 of this balance is included in Other Accrued Liabilities and the remaining $76,000 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 six months ended June 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 six months ended June 30, 2015, stock options of 123,750 and 126,375, respectively, were excluded because their inclusion would be antidilutive.

For both the three and six months ended June 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 six months ended June 30, 2014, stock options of 189,250 and 169,250, 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 June 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

Table of Contents

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:

	June 30			December 31
	2015			2014

Raw Materials	$	14,686,768		$	12,745,623
Work in Process	3,654,868			3,653,670
Finished Goods	3,026,931			2,861,373
Reserve	(763,486		)	(732,248		)

Total	$	20,605,081		$	18,528,418

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 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.

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

Table of Contents

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 six months ended June 30, 2015 and 2014:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2015		2014		2015		2014
GE Healthcare	17	%	24	%	17	%	24	%
GE Transportation	8		6		8		5
Total General Electric	25	%	30	%	25	%	29	%

Combined accounts receivable from both divisions represented 18% and 19% of total accounts receivable at June 30, 2015 and December 31, 2014, respectively.

Export sales represented 13% and 14% of net sales for the three months ended June 30, 2015 and 2014, respectively. Export sales represented 12% and 13% of net sales for the six months ended June 30, 2015 and 2014, respectively.

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

Table of Contents

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 June 30, 2015, we have not borrowed against the $1.0 million capital term note.

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

	June 30			December 31
	2015			2014
Real Estate Term Loan 1, interest at three month LIBOR + 2.75%, due in installments through March 31, 2027	$	1,356,228		$	1,415,461
Real Estate Term Loan 2, interest at three month LIBOR + 2.75%, due in installments through December 31, 2027	1,404,300			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	2,689,220			—
Blue Earth Bond, which bears a variable interest rate, due in installments through June 30, 2021	280,000			360,000
Debt Issuance Costs	(53,315		)	—
Total debt	5,676,433			4,805,341
Less current maturities	857,027			732,835
Long-term debt	$	4,819,406		$	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 2.5% at June 30, 2015) while our real estate term notes bear interest at three-month LIBOR + 2.75% (approximately 3.0% at June 30, 2015). The weighted-average interest rate on our line of credit was 2.8% for the three and six months ended June 30, 2015. We had borrowing on our line of credit of $8,471,042 and $7,998,184 outstanding as of June 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.

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 June 30, 2015, we have net unused availability under our line of credit of approximately $5.5 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

Table of Contents

refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and six months ended June 30, 2015 was 36%. Our effective tax rate for the three and six months ended June 30, 2014 was (6%) and 10%, respectively. 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 six months ended June 30, 2015 and 2014 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2015			2014			2015			2014
Statutory federal tax provision (benefit)	$	(188,000	)	$	79,000		$	(270,000	)	$	130,000
State income taxes (benefits)	(16,000		)	12,000			(26,000		)	19,000
Income tax credits	(12,000		)	(6,000		)	(25,000		)	(14,000		)
Change in uncertain tax positions				(100,000		)				(100,000		)
Other	(1,000		)	—						—
Income tax expense (benefit)	$	(217,000	)	$	(15,000	)	$	(321,000	)	$	35,000

At June 30, 2015, we had $56,500 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.

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 June 30, 2015 and 2014 amounted to approximately $183,000 and $166,000, respectively. Rent expense for the six months ended June 30, 2015 and 2014 amounted to approximately $363,000 and $335,000, respectively.

Table of Contents

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

Years Ending
December 31,	Amount
2015	$	376,975
2016	439,902
2017	393,556
2018	397,161
2019	400,229
Thereafter	535,883
Total	$	2,543,706

NOTE 6. SUBSEQUENT EVENT (UNAUDITED)

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.

The purchase price of $5.3 million was funded by net 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. 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 asset purchase agreement also includes an earnout 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.

Table of Contents

Due to the timing of the acquisition we have not yet completed our valuation of the fair value of acquired assets and assumed liabilities nor the fair value of the contingent consideration, we expect this to be completed in the third quarter. We expect that the amortization of any goodwill will be deductible for tax purposes.

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 manufacturing facilities in Baxter, Bemidji, Blue Earth, 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 second quarter results were again impacted by customer and market mix and further investment costs associated with growth initiatives in Mexico and Asia. Our opportunity for growth in China is due to our existing customers’ need to serve Asian customers with regional manufacturing.

Immediate actions are being implemented to mitigate the current margin trends with 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.

On a long-term basis we continue to consider alternatives to reduce excess capacity and possible divestitures of non-profitable businesses and we are committed to execute on our growth initiatives.

Revenue in the second quarter of 2015 was up sequentially 1% compared to our first quarter on mixed results and down 2% compared to the second quarter of 2014. Our larger global customers’ demand continues to be impacted by market and economic issues related to the strong US dollar, the depressed oil and gas industry and challenging global economies in China, Asia Pacific and Europe. Their shortfalls are being offset by new business and growth from both our industrial and defense customers.

Table of Contents

Our gross profit percentage for the three months ended June 30, 2015 was 9.1% compared to 12.0% for the three months ended June 30, 2014. Our gross profit percentage for the six months ended June 30, 2015 was 9.9% compared to 11.9% for the six months ended June 30, 2014. In 2015 gross profit percentage is being negatively affected by customer mix, with decreased revenue from our higher margin medical customers, partially offset by revenue from lower margin industrial customers.

Operating profits continue to be impacted by the mix of customer orders and our continued investments in long term growth strategies. Industrial customer margins historically have experienced lower than our average margins while medical customer margins have been higher than our average. Defense margins have been depressed due to DOD budget constraints and increased competition for the programs that are being funded. Margin loss accounts for more than half of the operating loss, while investments in China/Asia expansion, Mexico PCB assembly operation startup costs and increases in selling expense to maintain current business development activities account for the other portion of the loss.

Net loss for the three months ended June 30, 2015 was $378,000 or $0.14 per diluted common share, compared to net income for the three months ended June 30, 2014 of $247,000 or $0.09 per diluted common share. Net loss for the first six months of 2015 was approximately $571,000 or $0.21 per diluted common share, compared to net income of approximately $333,000 or $0.12 per diluted common share for the same period in 2014.

Cash used in operating activities for the first six months of 2015 was approximately $137,000. Cash used resulted from increased inventories and the operating loss partially offset by the noncash addback of depreciation and the timing of working capital changes.

Results of Operations:

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

Table of Contents

	Three Months Ended				Six Months Ended
	June 30				June 30
	2015		2014		2015		2014
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	90.9		88.0		90.1		88.1
Gross Profit	9.1		12.0		9.9		11.9

Selling Expenses	4.9		4.2		5.0		4.2
General and Administrative Expenses	6.0		6.5		6.2		6.6
Income (Loss) from Operations	(1.8	)	1.3		(1.3	)	1.1

Other Expenses, Net	(0.4	)	(0.4	)	(0.4	)	(0.4	)
Income (Loss)Before Income Taxes	(2.2	)	0.9		(1.7	)	0.7

Income Tax Expense (Benefit)	(0.8	)	0.0		(0.6	)	0.1
Net Income (Loss)	(1.4	)%	0.9	%	(1.1	)%	0.6	%

Net Sales:

We reported net sales of $26.8 million and $27.4 million for the three months ended June 30, 2015 and 2014, respectively. We reported net sales of $53.3 million and $53.6 million for the six months ended June 30, 2015 and 2014, respectively.

Net sales by our major EMS industry markets for the three and six month periods ended June 30, 2015 and 2014 were as follows:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2015	2014	%		2015	2014	%
(in thousands)	$	$	Change `		$	$	Change
Aerospace and Defense	3,639	3,633	0		6,691	8,032	(17	)
Medical	9,027	10,787	(16	)	18,192	20,645	(12	)
Industrial	14,136	12,989	9		28,458	24,881	14
Total Sales	26,802	27,409	(2	)	53,341	53,558	(0	)

Backlog:

Our 90-day order backlog as of June 30, 2015 increased 6% to approximately $19.4 million, compared to approximately $18.3 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 major medical customers is being impacted globally by the strong U. S. dollar and weak global economy. Our backlog consists of firm purchase orders and we expect a major portion of the current 90 day backlog to be realized as revenue during the following quarter.

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

Table of Contents

	Backlog as of the Quarter Ended
	June 30		March 31		June 30
(in thousands)	2015		2015		2014

Aerospace and Defense	$	4,307	$	3,834	$	3,647
Medical	6,143		6,129		8,638
Industrial	8,990		8,316		6,917
Total Backlog	$	19,440	$	18,279	$	19,202

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 June 30, 2015 and 2014 was 9.1% and 12.0%, respectively. Gross profit as a percent of net sales for the six months ended June 30, 2015 and 2014 was 9.9% and 11.9%, respectively. Gross profit percentage in 2015 is being negatively affected by customer mix, with decreased revenue from our higher margin medical customers, partially offset by revenue from lower margin industrial customers.

Selling Expense:

Selling expense for the three months ended June 30, 2015 and 2014 was $1.3 million or 4.9% of sales and $1.1 million or 4.2% of sales, respectively. Selling expense for the six months ended June 30, 2015 and 2014 was $2.7 million or 5.0% of sales and $2.3 million or 4.2% of sales, respectively. The increase in selling expense is related to increased business development activities needed to support growth initiatives and add manufacturing capabilities in China.

General and Administrative Expense:

General and administrative expenses for the three months ended June 30, 2015 and 2014 were $1.6 million or 6.0% of sales and $1.8 million or 6.5% of sales, respectively. General and administrative expenses for the six months ended June 30, 2015 and 2014 were $3.3 million or 6.2% of sales and $3.5 million or 6.6% of sales, respectively. The decrease in general and administrative expense was due to cost reductions implemented during first and second quarter to match current customer demand.

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

Table of Contents

jurisdiction. Our effective tax rate for the three and six months ended June 30, 2015 was 36%. Our effective tax rate for the three and six months ended June 30, 2014 was (6%) and 10%, respectively. 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 six months ended June 30, 2015 and 2014 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2015			2014			2015			2014
Statutory federal tax provision (benefit)	$	(188,000	)	$	79,000		$	(270,000	)	$	130,000
State income taxes (benefits)	(16,000		)	12,000			(26,000		)	19,000
Income tax credits	(12,000		)	(6,000		)	(25,000		)	(14,000		)
Change in uncertain tax positions				(100,000		)				(100,000		)
Other	(1,000		)	—						—
Income tax expense (benefit)	$	(217,000	)	$	(15,000	)	$	(321,000	)	$	35,000

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.

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 June 30, 2015, we had outstanding advances of $8.5 million under the line of credit and unused availability of $5.5 million supported by our borrowing base. A cash payment on July 1, 2015 for a portion of the purchase price of the Devicix acquisition reduced our availability by $2.0 million. 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 $24.7 million and $24.3 million as of June 30, 2015 and December 31, 2014, respectively.

Our credit agreement with 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.

Table of Contents

The minimum fixed charge coverage ratio at June 30, 2015 was 1.71 to 1.00. We believe our performance will be sufficient to comply with this covenant going forward.

Net cash used in operating activities for the six months ended June 30, 2015 was $0.1 million. Cash used was the result of the first quarter loss and increased inventories partially offset by the noncash addback of depreciation and the timing of accounts payable payments and accounts receivable collections.

Net cash used in investing activities of $1.2 million for the six months ended June 30, 2015 is comprised of property and equipment purchases to support the business.

On July 1, 2015, we 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, with Devicix. The purchase price of $5.3 million was funded by net 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 with 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. 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 asset purchase agreement also includes an earnout 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.

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.

Recent Accounting Pronouncements

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

Table of Contents

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 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

Table of Contents

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.

ITEM 6. EXHIBITS

Exhibits

4.1		Nortech Systems lncorporated Restated Equity Appreciation Rights Plan (incorporated herein by reference to Appendix A of the Company's definitive Proxy Statement filed March 24, 2015).

10.1*		Asset Purchase Agreement dated as of June 17, 2015 among the Company, Devicix, LLC, and Peter M. DeLange.

10.2		Seventh Amendment to Third Amended and Restated Credit and Security Agreement effective as of May 7, 2015 between the Company and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed May 7, 2015).

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

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

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

101*		Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 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

Table of Contents

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 Subsidiary

Date: August 5, 2015	by	/s/ Richard G. Wasielewski

	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Inc.

Date: August 5, 2015	by	/s/ Paula M. Graff

	Paula M. Graff
	Vice President and Chief Financial Officer
	Nortech Systems Inc.

Exhibit 10.1

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “ Agreement ”) is made and entered into as of June 17, 2015, by and between Devicix, LLC, a Minnesota limited liability company (“ Seller ”), Peter M. DeLange as shareholder of Seller (the “ Shareholder ” and collectively referred to with the Seller as the “ Seller Parties ”), and Nortech Systems Incorporated, a Minnesota corporation (“ Purchaser ”).

INTRODUCTION

Seller is a multi-disciplinary engineering firm that delivers design solutions and provides product development services, including concept design, prototyping, product design and development, regulatory consulting, validation and verification, testing and commercialization services in the medical device industry (the “ Business ”). Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser, substantially all of the assets used in the Business upon the terms and conditions set forth in this Agreement. Purchaser also desires to assume from Seller, and Seller desires to assign to Purchaser, certain liabilities and obligations of Seller relating to such assets, upon the terms and conditions set forth in this Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing facts and premises hereby made a part of this Agreement, and the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Purchase and Sale of Assets .

(a) Purchased Assets . Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees to sell, assign, transfer and deliver, and Purchaser hereby agrees to purchase and accept from Seller, at the Closing, as defined in Section 4(a) below, all of Seller’s right, title and interest in and to the all of the assets and rights of Seller used in the Business, including without limitation the following properties, assets and rights (collectively, the “ Purchased Assets ”):

(i) all customer and supplier lists, customer and supplier files, and related accounts;

(ii) all rights under: (A) customer contracts and purchase orders, whether oral or written, including without limitation as listed on Schedule 1(a)(ii) (the “ Customer Contracts ”); and (B) all other contracts, agreements and licenses, whether oral or written, and works in process, including without limitation as set forth on Schedule 1(a)(ii) (all such contracts and agreements referred to in this Section 1(a)(ii), including the Customer Contracts, being collectively referred to as the “ Assumed Contracts ”);

(iii) all Purchased Intellectual Property, as defined in Section 5(i) below, of Seller, including without limitation the Intellectual Property listed on Schedule 1(a)(iii) ;

(iv) all leases of tangible personal property and all leases of real property listed on Schedule 1(a)(iv) (collectively, the “ Assumed Leases ”);

(v) all machinery, equipment, furniture, trade fixtures, furnishing, vehicles, leasehold improvements and other tangible personal property including without limitation, all artwork, desks, chairs, tables, copiers, telephone lines and numbers, facsimile machines and other telecommunication equipment, cubicles and miscellaneous office furnishings and supplies and computer and computer-related hardware, including without limitation computers, file servers, facsimile servers, scanners, color printers, laser printers and networks;

(vi) to the extent transferable, all permits, authorizations and governmental licenses;

(vii) all of Seller’s outstanding accounts receivable as of the Closing Date, summarized on Schedule 1(a)(vii), except for those listed on Schedule 1(b)(xiii) (those receivable listed on Schedule 1(a)(vii) being referred to as the “ Accounts Receivable ”);

(viii) all deposits and prepaid expenses as set forth on Schedule 1(a)(viii) ;

(ix) to the extent assignable, all of Seller’s rights under all third-party manufacturing warranties relating to any of the Purchased Assets;

(x) all insurance proceeds, claims and causes of action existing as of the Closing Date and relating to the Purchased Assets;

(xi) all cash, including but not limited to petty cash, money-market, checking, savings and similar type accounts, and cash equivalents of Seller;

(xii) all of Seller’s books, records, files and papers relating to the Purchased Assets or the conduct of the Business at any time prior to the Closing;

(xiii) all goodwill associated with the Business and the Purchased Assets; and

(xiv) any and all other properties, assets, rights and privileges of Seller which are used in the Business and not expressly described, listed or referred to in Section 1(b) below.

(b) Excluded Assets . Notwithstanding paragraph (a) above, the properties, assets and rights of Seller listed in Schedule 1(b) hereto shall not be included within the definition of Purchased Assets, and shall not be transferred to Purchaser pursuant to this Agreement.

2. Assumption of Liabilities . Subject to the terms and conditions of this Agreement, at the Closing, Purchaser shall assume and agree to pay and perform the obligations of Seller under (a) the Assumed Leases, (b) the Assumed Contracts, (c) Seller’s trade accounts payable to third parties in connection with the Business that remain unpaid as of the Closing Date (solely to the extent comprising a part of the Working Capital Adjustment Amount or Actual Working Capital Adjustment Amount), and (d) obligations expressly assumed under Section 8 below with respect to Transferred Employees, exclusively as each of such obligations relate to the Business and only to the extent that such obligations are to be performed from and after the Closing Date (collectively, the “ Assumed Liabilities ”).

Other than as expressly set forth above, Purchaser shall not assume nor be responsible to pay, perform or discharge any other obligation or liability of Seller, whether absolute or contingent, known or unknown, contractual or otherwise (collectively, the “ Excluded Liabilities ”), including without limitation the following: (i) any liabilities or obligations arising out of or relating to Seller’s ownership or operation of the Business and the Purchased Assets prior to the Closing; (ii) any liabilities or obligations relating to

or arising out of the Excluded Assets; (iii) any liabilities or obligations for Taxes relating to the Business, the Purchased Assets or the Assumed Liabilities for any taxable period ending on or prior to the Closing Date, or any other Taxes of Seller or any members of Seller for any taxable period (except for Transfer Taxes as set forth in Section 14(p) below); or (iv) except as specifically provided in Section 8, any liabilities or obligations of Seller relating to or arising out of the employment or termination of employment of any Employee prior to the Closing, or workers’ compensation claims of any Employee relating to events occurring prior to the Closing, or employee-benefit or pension-plan liabilities.

3. Purchase Price . The purchase price for the Purchased Assets shall be an amount up to $5,300,000 plus amounts paid under the Earnout (the “ Purchase Price ”), subject to adjustment as provided below. The Purchase Price shall be payable in separate components as follows: (a) the Closing Date Purchase Price, (b) the Seller Notes and (c) the Earnout.

(a) Closing Date Purchase Price . At the Closing, Purchaser shall pay Seller $3,000,000 minus customer deposits listed on Schedule 3(a) and plus or minus the “Working Capital Adjustment Amount” (as such term is defined below), all as such items are set forth on the Closing Statement delivered by Seller to Purchaser and accepted by Purchaser, as described below (the “ Closing Date Purchase Price ”). In this regard, the “ Working Capital Adjustment Amount ” shall be the dollar amount, if any, by which Seller’s cash plus accounts receivable less trade and accounts payable and less accrued but unpaid employee wages as of the Closing Date, excluding any obligations relating to PTO (which obligations are being assumed pursuant to Section 8 below) wages relating to services that have not been invoiced (the “ Closing Date Working Capital ”) is less than or more than $622,838.

At least three business days before the Closing Date, Seller will deliver to Purchaser a schedule setting forth the cash, accounts receivable, trade and accounts payable and accrued but unpaid employee wages (excluding wages relating to services that have not been invoiced) of Seller as of the Closing Date, and the estimated Working Capital Adjustment Amount (“ Estimated Working Capital Adjustment ”) as of the Closing Date (such schedule, the “ Closing Statement ”), which Closing Statement shall be reviewed and subject to Purchaser’s acceptance. If the Estimated Working Capital Adjustment Amount is a positive number, the Closing Date Purchase Price shall be increased by the amount of the Estimated Working Capital Adjustment Amount and paid to Seller at Closing. If the Estimated Working Capital Adjustment Amount is a negative number, the Purchase Price shall be reduced by the amount of the Estimated Working Capital Adjustment Amount and shall reduce the amount of the Closing Date Purchase Price.

Within 60 days after the Closing Date, Purchaser shall calculate the actual Working Capital Adjustment Amount as of the Closing Date and provide a written reconciliation (together with supporting detail) (the “ Reconciliation ”) of the difference, if any, between the Estimated Working Capital Adjustment Amount contained in the Closing Statement and the Working Capital Adjustment Amount as of the Closing Date (the “ Actual Working Capital Adjustment Amount ”). Seller shall thereupon have ten days in which to review the Reconciliation and accept or dispute the same in writing. If the Reconciliation is accepted, then either (1) Purchaser shall promptly pay to Seller the positive difference, if any, of the Actual Working Capital Adjustment Amount less the Estimated Working Capital Adjustment Amount, or (2) Seller shall promptly pay to Purchaser the positive difference, if any, of Estimated Working Capital Adjustment Amount less the Actual Working Capital Adjustment Amount. In the event of a dispute regarding the Reconciliation, the Chief Executive Officers of Purchaser and Seller shall attempt to settle such dispute within ten days thereafter. If no such settlement is obtained within such ten-day period, the dispute shall be governed by the mandatory arbitration provisions contained in Section 13.

(b) Seller Notes .

(i) At the Closing, Purchaser shall issue a promissory note in favor of Seller in the form attached hereto as Exhibit A (the “ Seller Note (Offset) ”) in the aggregate principal amount of $1,000,000. The principal amount of the Seller Note (Offset) shall be subject to offset for losses payable pursuant to the indemnification provisions of Section 12, as provided in Section 12(g), and shall be subject to reduction in certain other events as provided in the Seller Note (Offset). The Seller Note (Offset) shall have a four-year term, bear interest at 4% per annum, and be payable (subject to the aforementioned offset rights) in monthly installments on the first business day of each month, beginning with the first business day of the month next following the month in which the Closing occurs. The Seller Note (Offset) will be expressly subordinated to Purchaser’s indebtedness and other secured obligations to Wells Fargo Bank, N.A. (including all amendments, extensions, renewals and replacements thereof, and including other senior secured debt obtained after the date hereof, collectively referred to as “ Senior Secured Debt ”), but senior in priority to all other unsecured indebtedness of Purchaser (and pari passu with the Seller Note (No Offset)).

(ii) At the Closing, Purchaser shall issue a promissory note in favor of Seller in the form attached hereto as Exhibit B (the “ Seller Note (No Offset) ”) in the aggregate principal amount of $1,300,000. The principal amount of the Seller Note (No Offset) shall not be subject to any offset whether for losses payable pursuant to the indemnification provisions of Section 12 or otherwise. The Seller Note shall have a four-year term, bear interest at 4% per annum, and be payable in monthly installments on the first business day of each month, beginning with the first business day of the month next following the month in which the Closing occurs. The Seller Note (No Offset) will be expressly subordinated to Purchaser’s Senior Secured Debt, but senior in priority to all other unsecured indebtedness of Purchaser (and pari passu with the Seller Note (Offset)). The Seller Note (Offset) and Seller Note (No Offset) may be referred to herein collectively as the “ Seller Notes .”

(i) Subject to the limitations of paragraph (iii) below, Purchaser shall pay Seller the following amounts (collectively, the “ Earnout ”), within 90 days after the completion of each of the first four 12-month periods after the Closing Date (i.e., on or prior to October 1, 2016, which is 90 days after the one-year anniversary of the Closing Date, and October 1, 2017, which is 90 days after the two-year anniversary of the Closing Date, etc.): (A) 15% of the Eligible Engineering Revenue; and (B) 3% of the Production Revenue.

(ii) For purposes of this Agreement, “ Eligible Engineering Revenue ” means those gross cash receipts of the Business for the applicable 12-month period (as opposed to revenue recognized on Purchaser’s income statement for financial reporting purposes) including any future customers of the Business, but solely to the extent such gross cash receipts exceed $6,000,000 for that particular year. Furthermore, “ Production Revenue ” means those gross cash receipts of the Purchaser for the applicable 12-month (as opposed to revenue recognized on Purchaser’s income statement for financial reporting purposes), derived from Purchaser’s provision of manufacturing and production services rendered to those customers generated by the Business as the same shall be agreed to by Purchaser and Seller.

(iii) Notwithstanding anything to the contrary contained herein, the maximum dollar amount of Earnout payments that Purchaser shall be obligated to make under this Agreement is $2,500,000. In addition, Purchaser shall immediately be relieved of any obligation to pay the Earnout payments under this Section 3(c) as contemplated in Section 6(d) of the Consulting Agreement between Purchaser and Shareholder dated as of the Closing Date, and as contemplated in Section 4 of the Non-Competition and Non-Solicitation Agreements by and between Purchaser and Shareholder, and Purchaser and Seller, dated as of the Closing Date. All Earnout payments payable hereunder shall be paid by Purchaser in cash or by wire transfer to an account designated in writing by Seller.

4. Closing .

(a) Closing Date and Process . The closing of the transactions contemplated by this Agreement (the “ Closing ”) will take place at 8:00 a.m. Central Standard Time on July 1, 2015 (or such earlier date as determined by the parties) (as applicable, the “ Closing Date ”), at a mutually agreed upon location (or upon release of earlier transmitted signature pages); provided, however, that all conditions to the obligations of the parties to consummate the transactions contemplated by this Agreement (other than actions the parties will take at the Closing itself) shall have been satisfied or waived.

(b) Closing Deliveries . At the Closing:

(i) Seller will execute and deliver to Purchaser: (A) a General Assignment and Bill of Sale conveying title to the Purchased Assets to Purchaser; (B) the Non-Competition Agreement to which it is a party; (C) the certificates of an officer/manager of Seller required by Section 9(c); and (D) such other instruments as Purchaser or its counsel may reasonably request. In addition, Seller will deliver or cause to be delivered executed counterparts to the Non-Competition Agreements of the Shareholders, executed counterparts to the Retention Agreements, and an executed counterpart of the Consulting Agreement. All of the above-described deliveries are collectively referred to as the “ Seller Deliveries .” Seller shall have also earlier delivered the Closing Statement as required by Section 3(a).

(ii) Purchaser will deliver to Seller, by wire transfer of immediately available federal funds to an account designated by Seller, an amount equal to the Closing Date Purchase Price, and shall execute and deliver to Seller the following: (A) the Non-Competition Agreement to which Seller is a party; (B) the certificates of an officer of Purchaser required by Section 10(a); (C) Seller Note (Offset) executed by Purchaser and (D) the Seller Note (No Offset) executed by Purchaser. In addition, Purchaser will deliver to the Shareholder an executed counterpart to the Non-Competition Agreements to which each such Shareholder is a party, and will deliver to the applicable parties thereto an executed counterpart to the Retention Agreements and the Consulting Agreement. All of the above-described deliveries are collectively referred to as the “ Purchaser Deliveries .” The Seller Deliveries and Purchaser Deliveries are collectively referred to in this Agreement as the “ Ancillary Documents .”

(c) Allocation . The parties will allocate the Purchase Price and all other costs eligible for capitalization among the Purchased Assets for all purposes, including financial accounting and tax purposes, in accordance with the allocation schedule attached as Schedule 4(c) , which schedule shall be acceptable to Purchaser in its sole discretion.

5. Seller Parties’ Representations and Warranties . To induce Purchaser to enter into this Agreement, Seller Parties hereby jointly and severally represent and warrant to Purchaser as follows:

(a) Organization and Good Standing . Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Minnesota. Seller has the requisite power to own, operate, use and lease the Purchased Assets, as applicable, and to operate the Business as presently being conducted. Seller is qualified or otherwise authorized to transact business as a foreign company in each jurisdiction in which the nature of the Business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the financial condition, operating results, customer, employee or supplier relations, business condition of the Purchased Assets taken as a whole or the Business taken as a whole (any such effect being referred to as a “ Material Adverse Effect ”); provided, however, that “Material Adverse Effect” shall not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to: (i) general economic or political conditions; (ii) conditions generally affecting the industries in which the Business operates; (iii) any action required or permitted by this Agreement or any action taken (or omitted) with the written consent of or at the written request of Purchaser; (iv) any changes in applicable laws or accounting rules (including GAAP) or the enforcement, implementation or interpretation thereof; (v) the announcement, pendency or completion of the transactions contemplated by this Agreement, including losses or threatened losses of employees, customers, suppliers, distributors or others having relationships with the Seller and the Business; or (vi) any failure by the Business to meet any internal or published projections, forecasts or revenue or earnings predictions (provided that the underlying causes of such failures (subject to the other provisions of this definition) shall not be excluded).

(b) Authority; Binding Obligation . Seller has all requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Documents to which it is a party, and perform its obligations hereunder and thereunder. Seller’s execution and delivery of this Agreement and such Ancillary Documents, and performance of its covenants and agreements hereunder and thereunder, have been duly authorized by all necessary company action of Seller. This Agreement and the Ancillary Documents to which Seller is a party have been duly executed and delivered by Seller and constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, subject to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

(c) Financial Statements . Schedule 5(c) attached hereto contains the unaudited balance sheet, income statement and statement of cash flows of Seller for the preceding three complete fiscal years ended December 31 and the unaudited balance sheet, income statement and statement of cash flows of Seller for the quarter ended March 31, 2015 (all of such financial statements shall be collectively referred to herein as the “ Financial Statements ”). The Financial Statements (i) are true, correct and complete in all material respects; (ii) have been prepared from Seller’s books and records; (iii) have been prepared using consistent accounting principles; and (iv) fairly present in all material respects the financial condition and operations of Seller and the Business on the dates indicated and for the periods indicated.

(d) Undisclosed Liabilities . Except as disclosed in the Financial Statements or on Schedule 5(d) , and except for liabilities incurred in the ordinary and usual course of normal day-to-day operations of the Business (the “ Ordinary Course of Business ”), the Business does not have liability of any nature whether or not absolute, contingent or otherwise, that would be required to be disclosed on the Financial Statements pursuant to generally accepted accounting principles in the U.S.

(e) No Conflict . Except as disclosed on Schedule 5(e) , neither the execution and delivery of this Agreement or any of the Ancillary Documents to which Seller is a party, nor the consummation or performance of any of the transactions contemplated by this Agreement or such Ancillary Documents (collectively referred to herein as the “ Contemplated Transactions ”), will directly or indirectly, with or without notice or lapse of time: (i) contravene, conflict with or result in a violation of

or default under any provision of Seller’s Articles of Organization or member control agreement, any resolution adopted by the governors, managers or members of Seller, or any other agreement by and between or among any members of Seller; (ii) contravene, conflict with or result in a violation of or default under, or give any Governmental Body or other Person (as such terms are defined below) the right to challenge any of the Contemplated Transactions or exercise any remedy or obtain any relief under, any federal, state or local law, regulation, ordinance or administrative order or any judgment or decree to which Seller, the Business or the Purchased Assets are subject; (iii) contravene, conflict with or result in a violation or breach of or default under any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate or modify any contract or other arrangement to which Seller is a party or by which Seller is bound except where such contravention, conflict or violation or breach or default would not have a Material Adverse Effect; or (iv) result in the creation of any Lien (as defined below) of any kind or nature upon any of the Purchased Assets.

For all purposes of this Agreement, the definitions set forth below shall apply:

(1) “ Governmental Body ” means any (i) nation, state, city, town, village, district or other jurisdiction of any nature; (ii) federal, state, provincial, local, municipal, foreign or other government; (iii) governmental or quasi-governmental agency, branch, department, official or entity and any court or other tribunal; (iv) multi-national organization or body; or (v) any other body entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature.

(2) “ Person ” means any individual natural person, partnership, limited partnership, corporation, limited liability company, association, joint-stock company, trust, joint venture, unincorporated organization or association, or Governmental Body (or any department, agency or political subdivision thereof).

(3) “ Lien ” means any security interest, mortgage, pledge, lien, charge, encumbrance, right of way, easement or adverse claim of any kind or nature.

(f) Title, Sufficiency and Condition of Assets . Except as disclosed on Schedule 5(f) , Seller has good and marketable title to each asset constituting the Purchased Assets, free and clear of any Liens and, at the Closing, Seller will transfer to Purchaser good and marketable title to each asset constituting the Purchased Assets, free and clear of all Liens. The Purchased Assets are in good condition and repair, ordinary wear and tear excepted, and are usable in the Ordinary Course of Business. There are no defects in the Purchased Assets or other conditions relating thereto which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The Purchased Assets include all assets, both tangible and intangible necessary for the conduct of the Business as it is being conducted as of the date hereof.

(g) Leased Real Property .

(i) Seller owns no real estate that is used in the Business.

(ii) Seller has provided to Purchaser accurate and complete copies of the lease agreements (including all amendments thereof and exhibits or addenda thereto) under which any Seller holds a leasehold interest in any real property used in the Business (the “ Leased Real

Property ”), together with any assignments of such lease agreements. The Leased Real Property comprises all of the real property used or occupied in the operation of the Business.

(iii) Seller owns the leasehold interests in the Leased Real Property created by the applicable Assumed Leases, free and clear of all Liens. Seller is not in violation of any applicable ordinance, statute or other law, regulation or requirement relating to the Leased Real Property or the operation of the Business thereon, and Seller has not received any notice of any such violation, or the existence of any condemnation proceeding with respect to any of the Leased Real Property. Upon Purchaser’s acquisition of the Purchased Assets, Purchaser will be able to operate the Leased Real Property in substantially the same manner as operated by Seller prior to Closing without violating any applicable zoning, use, subdivision or similar law.

(iv) All of the improvements located at the Leased Real Property are in good condition and repair in all material respects, ordinary wear and tear excepted, and are usable in the Ordinary Course of Business. There are no defects in such assets or other conditions relating thereto which, in the aggregate, would have a Material Adverse Effect.

(h) Personal Property Leases . Schedule 5(g)(iv) contains a description of any leases relating to each item of tangible personal property leased by Seller for use in the operation of the Business (the “ Personal Property Leases ”). True and complete copies of the Personal Property Leases have been made available to Purchaser, including all amendments thereof and exhibits or addenda thereto. All Personal Property Leases are valid, binding and enforceable against Seller and, to Seller’s knowledge, against the other parties thereto in accordance with their respective terms, and there does not exist under any such Personal Property Lease any default or any event which, with notice or the lapse of time, or both, would constitute a material default thereunder against Seller or, to Seller’s knowledge, the other parties thereto.

(i) Intellectual Property .

(i) The “ Purchased Intellectual Property ” means all Intellectual Property (as defined below) owned by Seller and used or useful in the conduct of the Business. Seller is the sole owner of and possesses all right, title and interest in and to the Purchased Intellectual Property, free and clear of any Liens, and the Seller has not granted to any Person any license or sublicense, option, consent, right of first or last offer, or negotiation or other rights in or to any such Intellectual Property.

(ii) With respect to the Purchased Intellectual Property: (A) no interference actions or other judicial or adversary proceedings, or other disputes, concerning the Purchased Intellectual Property are outstanding or pending and, to the knowledge of Seller Parties, no such action or proceeding is threatened; and (B) Seller has the right and authority to use the Purchased Intellectual Property in connection with the conduct of the Business in the manner presently conducted and, to the knowledge of Seller Parties, has not received notice that such use conflicts with, infringes upon or violates any rights of any other person, firm or corporation.

(iii) Seller has taken all actions it reasonably believes are necessary to maintain and protect each item of Purchased Intellectual Property. Seller has taken reasonable measures to safeguard the confidentiality and value of all Purchased Intellectual Property comprising trade secrets or other confidential information. As of the date hereof, each present or past employee, officer or consultant of Seller that has been involved in the development or conception of any part of any of the Purchased Intellectual Property either: (A) is a party to written agreement that, to the extent permitted by law, conveys or obligates such Person to

convey to Seller any and all right, title and interest in and to all such Purchased Intellectual Property developed by such Person in connection with such Person’s employment with or engagement by Seller; or (B) otherwise has vested in Seller any and all right, title and interest in and to all the Purchased Intellectual Property developed by such Person in connection with such Person’s employment with or engagement by Seller.

(iv) To the knowledge of Seller Parties, as of the date hereof, no Person is infringing or misappropriating any of the Purchased Intellectual Property.

(v) For all purposes of this Agreement, the definitions set forth below shall apply:

(1) “ Intellectual Property ” means as it relates to the Business all intellectual property of every kind throughout the world, both domestic and foreign, which, in each case or used or useful in connection with or related to the Business as of the date hereof, including all inventions and improvements thereon, patents (including applications, continuations and continuations in part), trademarks (including registrations and applications therefor, goodwill associated therewith), Internet domain names, trademark rights (e.g., common law trade names, logos, slogans, trade dress, and registered trade and service marks, specifically including but not limited to the Seller’s name “Devicix”), copyrights (including registrations and applications), Technology, as defined below, and trade secrets. For clarity, “Intellectual Property” will include all of Seller’s ownership and rights relating to its mHealth software application.

(2) “ Technology ” means, collectively, all designs, formulae, algorithims, procedures, methods, techniques, now-how, research and development, technical data, programs, subroutines, tools, materials, specifications, processes, inventions (whether patentable or unpatentable and whether or not reduced to practice), apparatus, creations, improvements, works of authorship and other similar materials, and all recordings, graphs, drawings, reports, analyses, and other writings, and other tangible embodiments of the foregoing, in any form whether or not specifically listed herein, and all related technology, that are used in, incorporated in, embodied in, displayed by, or are used in the design, used in the development, used in the reproduction, used in the maintenance or used in the modification of any of the Seller’s products or services.

(j) Litigation . Except as set forth on Schedule 5(j) , there are no legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations (any of the foregoing being referred to as a “ Proceeding ”) pending or, to the knowledge of any Seller Parties, threatened against Seller, or against or with respect to the Business or any of the Purchased Assets or any governor, manager or member of Seller, and neither is any Seller Party aware of any facts reasonably expected to result in or form the basis for any such Proceeding.

(k) Court Orders, Decrees and Laws . Seller has not violated or failed to comply with any statute, law, ordinance or regulation of any Governmental Body in the conduct of the Business that could reasonably be believed to, individually or in the aggregate, have a Material Adverse Effect. Seller has not received notice of any violation of any applicable law, order, regulation or requirement relating to the Purchased Assets or the Business. Seller is not in default with respect to any judgment, order or decree of any court or any Governmental Body.

(l) Labor Matters . Schedule 5(l) identifies each collective-bargaining agreement and each other material written or oral agreement providing an employee of the Business with rights to employment, severance pay, profit sharing, deferred compensation, a bonus, stock option, stock-purchase right, pension, retainer, consulting, retirement, health, vacation, sick leave, incentive pay, holiday leave, salary continuation during short absences for illness or other reasons, and any other plan, arrangement, commitment or other agreement by Seller to provide benefits to an employee of the Business to which Seller is a party, or by which it is or may be bound (other than benefits under ERISA Plans or Flexible Benefit Plans, as defined in Section 5(n)(i) below). Seller is not, and, to the knowledge of Seller Parties, no other party to any such agreement is, in default or breach with respect to any material term or condition thereof, nor has any event occurred which through the passage of time or Seller’s notice, or both, would constitute a material default thereunder by Seller or, to the knowledge of Seller Parties, any other party to such agreement, or would cause the acceleration of any material obligation of Seller or any other party to such agreement. Seller has delivered to Purchaser true and complete copies of all agreements, including all amendments thereof and exhibits or addenda thereto (or summaries of any unwritten agreements) identified in Schedule 5(l) ; and true and complete copies of any employment policy manuals distributed to any class of Seller’s employees engaged in the Business. Except as indicated in Schedule 5(l) :

(i) Seller has complied in all material respects with all applicable laws, rules and regulations relating to the employment of the employees of the Business, including but not limited to those relating to wages, hours, collective bargaining and the payment and withholding of Taxes (as defined in Section 5(x)(i) below) and other sums as required by appropriate Governmental Bodies with respect to employee compensation;

(ii) during the three-year period preceding the date hereof, no unfair labor practice charge or complaint of unfair labor practice has been brought or threatened against Seller with respect to any employees or former employees of the Business or any labor organization with respect to the Business before any federal, state or local agency; and no complaint of such unfair labor practices has been issued, no work stoppage affecting the Seller’s operation of the Business has been brought or threatened, and no grievance has been brought;

(iii) no organizational, strike, representation, decertification or deauthorization proceeding has been brought or threatened, respecting the employees of the Business, and no such proceeding has been brought within the three-year period prior to the date hereof;

(iv) all accrued obligations of Seller, whether arising by operation of law, contract or past custom, for unemployment-compensation benefits, pension benefits, salaries, bonuses, sick leave, severance, vacation, worker-compensation claims and other forms of compensation payable to the employees or former employees of the Business, or to trusts or other funds or to any governmental agency, in respect of the services rendered by any such individuals prior to the date hereof, have been paid or will be paid prior to the Closing Date;

(v) no trade union, council of trade unions, affiliated bargaining agency, employee-bargaining agency or labor organization has bargaining rights for any of employees of the Business pursuant to the provisions of all applicable laws, rules or regulations relating to the employment of labor, and

(vi) during the last year there has been no “mass layoff” or “plant closing” as defined by The Worker Adjustment and Retraining Notification Act (“ WARN ”) in respect of the Seller, and the Seller has not been affected by any transactions or engaged in layoffs or

employment terminations sufficient in number to trigger application of any state, local or foreign law or regulation which is similar to WARN.

(m) Employment Matters .

(i) Schedule 5(m) contains a complete and accurate list of (A) the names of all employees of the Business; (B) their titles or positions; (C) their dates of hire; (D) their current salaries or wages and all bonuses, commissions and incentives paid at any time during the past 12 calendar months; (E) their last compensation changes and the dates on which such changes were made; (F) any non-standard bonus, commission or incentive plans or agreements for or with them; (G) any outstanding loans or advances made by or to them; and (H) any verbal or written employment agreements which impact or establish the terms of employment of those persons. Correct and completed copies of all written employment agreements, including all amendments thereof and exhibits or addenda thereto, have been delivered to Purchaser.

(ii) Schedule 5(m) contains a complete and accurate list of (A) the identities of all independent sales representatives and independent contractors currently engaged by Seller in the Business; (B) their payment arrangements; and (C) a brief description of the type of services provided by them. Correct and completed copies of all written agreements with sales representatives and independent contractors, including all amendments thereof and exhibits or addenda thereto, have been delivered to Purchaser.

(iii) Except for any limitations of general application which may be imposed under applicable labor or employment laws, and except for any employment agreements otherwise disclosed and provided to Purchaser, Seller has the right to terminate the employment of each of its employees at will, and to terminate the engagement of any of its independent contractors and sales representatives, without any payment, penalty or liability to any such Person other than for services rendered through the date of termination.

(iv) The Seller has delivered to Purchaser accurate and complete copies of all current employee manuals and handbooks, disclosure materials, policy statements and other materials prepared, disclosed or promulgated by Seller at any time during the last three years relating to the employment of the current and former employees of the Business.

(n) ERISA Plans and 125 Plans .

(i) Schedule 5(n) lists and generally describes (i) each employee benefit plan, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), including without limitation each group insurance plan, self-insured health plan, severance pay plan, non-qualified deferred compensation plan and retirement plan intended to be qualified under Code Section 401(a), that is maintained or contributed to by Seller for its employees engaged in the operation of the Business, former employees of the Business or dependents and beneficiaries of such employees or former employees (collectively, “ ERISA Plans ”); and each trust fund maintained by Seller in connection with any such ERISA Plan; and (iii) each “cafeteria plan” or transportation fringe plan governed by Code Section 125 or Code Section 132(f) that is maintained or contributed to by Seller for its employees engaged in the operation of the Business (a “ Flexible Benefit Plan ”).

(ii) None of the ERISA Plans is a “multiemployer plan,” as defined in ERISA Section 3(37), or is a defined benefit pension plan subject to Title IV of ERISA. Seller is not delinquent in any obligation to make contributions to any ERISA Plan subject to Code

Section 412 or Title IV of ERISA and has not terminated or withdrawn from participation in any such ERISA Plan. Except as disclosed in Schedule 5(n) , Seller has no “ERISA Affiliate,” which means any employer that, together with Seller, would be treated as a single employer under Section 414 of the Code.

(iii) Seller has furnished to Purchaser true, correct and complete copies of the following items: (A) each ERISA Plan and any related trust agreements or other funding vehicles; and (B) each Flexible Benefit Plan. With respect to each ERISA Plan and Flexible Benefit Plan, Seller has also furnished to Purchaser the most recent summary plan description and annual report required to be made on Treasury Form 5500.

(iv) Each ERISA Plan intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the United States Internal Revenue Service as to such plan’s qualification under Code Section 401(a); and complies in all material respects with the Code and ERISA. The trust related to each such ERISA Plan has been determined to be exempt from federal income taxation under Code Section 501(a); and a true and complete copy of the most recent determination letter with respect to each such ERISA Plan has been delivered to Purchaser.

(v) Except as described in Schedule 5(n) , Seller does not maintain any group life insurance or health benefit coverage for former employees or governors of Seller, other than group life insurance or health benefit coverage mandated by applicable law. Except as would not have a Material Adverse Effect, Seller has timely complied with all of its “COBRA” obligations under ERISA Section 602, Code Section 4980B; its obligations under the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended; its obligations under the Family and Medical Leave Act of 1993, as amended; and/or its obligations under applicable state insurance laws, in each case with respect to any group life insurance and health benefit continuation coverage to be provided by those of its ERISA Plans and any Flexible Benefit Plan that provide such benefits. Seller warrants that it will continue, after the Closing Date, to comply with such obligations with respect to any of its employees, former employees or their beneficiaries who are or become entitled to such continuation coverage, and are not hired by Purchaser as of that date or the following business day.

(o) Accounts Receivable . The Accounts Receivable are valid receivables, are not subject to valid counterclaims or setoffs.

(p) Customers and Suppliers .

(i) Schedule 5(p) sets forth a complete and accurate list of the 20 largest customers and the 20 largest suppliers (measured by dollar volume of sales or purchases, respectively) of the Business as of and for each of the last two calendar years, and the amount of such business done (by dollar volume of sales or purchases, respectively) with each such customer or supplier as of and for each such year. Seller has not received any notice from any customer or supplier identified on Schedule 5(p) that such customer or supplier has ceased or will cease to purchase or sell, as applicable, products or services to or from Seller or the Business, or will or intends to substantially reduce its purchases or sales, as applicable.

(ii) There is no customer of the Business with: (A) which Seller has an agreement or arrangement, whether formally or informally, providing such customer with credit terms that are materially more liberal than those provided under Seller’s standard customer

agreement or arrangement or (b) except as set forth on Schedule 1(a)(viii) , there is no customer of the Business with which has made deposits or prepayments constituting a liability of Seller.

(q) Consents . Except as otherwise set forth on Schedule 5(q) , there are no consents, approvals or other authorizations of, orders or notifications of, registrations, declarations or filings with, any Person pursuant to the Assumed Contracts, which are required in connection with the valid execution, delivery or performance of this Agreement by Seller and the consummation by Seller of the Contemplated Transactions.

(r) Conduct of Business . Except as set forth on Schedule 5(r) , since March 31, 2015 there has not been:

(i) any increase in Liens against any of the Purchased Assets, or change in the condition (financial or other), properties, assets or liabilities of the Business, except changes in the Ordinary Course of Business, none of which has had or will have a Material Adverse Effect;

(ii) any change in the billing or pricing methods or practices followed by Seller in the Business or any change in depreciation or amortization policies or rates theretofore adopted, except changes in the Ordinary Course of Business;

(iii) any change in the methods or terms used by Seller in the Business for collecting accounts receivable;

(iv) any sale, transfer, lease, abandonment or other disposition by Seller, other than in the Ordinary Course of the Business, of any supplies, vehicles, machinery, equipment or other operating properties or other assets included among the Purchased Assets;

(v) any change in Seller’s methods of accounting with respect to the Business;

(vi) any change in Seller’s policies for timing and recognition of allowances, rebates, concessions from vendors and similar items with respect to the Business;

(vii) any business interruption, damage, casualty, loss or other occurrence having a Material Adverse Effect, whether or not covered by insurance, as a result of any accident, fire, casualty, act of God or a public enemy, any labor dispute or disturbance, or other force majeure ;

(viii) any conduct of the Business other than in the Ordinary Course of Business or as otherwise contemplated herein;

(ix) any waiver or release of any material causes of actions, lawsuits, judgments, claims and demands,

(x) any disposition, abandonment or lapse of any material rights to the use any Intellectual Property, or the execution of any exclusive license with respect to any of the Intellectual Property;

(xi) any transaction or commitment made, or any contract or agreement entered into, that is material to the Business and other inconsistent with past practices, other than as contemplated herein;

(xii) any (A) employment, retention, bonus, deferred compensation, severance, retirement or other similar agreement entered into with any employee, consultant or manager (or any amendment to any such existing agreement); (B) grant of any severance or termination pay to any employee, consultant or manager; or (C) change in compensation or other benefits payable to any employee, consultant or manager pursuant to any severance or retirement plans or policies thereof, in each case other than in the Ordinary Course of Business;

(xiii) any terminations, changes or violations by Seller of any of the Assumed Leases, material Assumed Contracts, commitments, licenses or other arrangements of the Business, except as required hereunder or as such changes or terminations occur in the Ordinary Course of Business, none of which have had a Material Adverse Effect;

(xiv) any violations by Seller of any permits, licenses, restrictive covenants, laws or regulations binding on Seller which could have a Material Adverse Effect; or

(xv) any other occurrence, event or condition with respect to Seller, the Business or the Purchased Assets which could, to the knowledge of Seller Parties, have a Material Adverse Effect.

(s) Other Contracts . Schedule 5(s) contains a true, complete and correct list of all contracts and agreements, whether written or oral, which are used in the Business and which require a payment to or from Seller of $20,000 or more per year, including: (i) except as such document relates to an Excluded Asset, any joint venture contract, partnership agreement, limited liability company other contract (however named) involving a sharing of profits, losses, costs or liabilities by Seller with any other Person; (ii) any written warranty, guaranty or other similar undertaking with respect to contractual performance extended by Seller other than in the Ordinary Course of Business; (iii) any material license agreement or other material contract relating to Intellectual Property that is necessary or otherwise used in or held in use for the operation of the Business; (iv) any contract with “take or pay” provisions or “requirements” provisions committing a Person to provide the quantity of goods or services required by another Person; and (v) any contract with any Person who is directly or indirectly affiliated with Seller (collectively, the “ Material Contracts ”). True and complete copies of the Material Contracts, including all amendments thereof and exhibits and addenda thereto, have been provided to Purchaser. Each Material Contract is a valid and binding agreement of Seller and is in full force and effect. Seller has performed all material obligations required to be performed by it under or in connection with each Material Contract and is not in receipt of any claim of default under any Material Contract. Seller has no present expectation or intent of not fully performing any material obligation pursuant to any Material Contract, and no Seller Party has any knowledge of a breach or anticipated breach by any other party to any Material Contract.

(t) Restrictive Covenants . Except as listed on Schedule 5(t) , Seller is not a party to any written contract, license agreement or other restriction limiting the scope of the Business’ current or future operations or the sale or use of the Purchased Assets in any manner whatsoever.

(u) Inventory . Seller does not possess or own any finished goods, raw materials, goods in transit, goods at customer sites and other inventory or goods held for a sale in any form (the “ Inventory ”). The Purchased Assets do not include any Inventory.

(v) Product Liability . Except as set forth on the Schedule 5(v) , there are no presently pending, nor, to the knowledge of Seller Parties, is there basis for, any material civil, criminal or administrative actions, suits, demands, claims, hearings, notices of violation, investigations, proceedings or demand letters relating to any alleged hazard or alleged defect in design, manufacture, materials or workmanship, including any failure to warn or alleged breach of express or implied warranty or representation, relating to any product offered or sold by Seller in connection with the Business. With respect to the Business, Seller has not extended to any of its customers any written, non-standard product warranties, indemnifications or guarantees.

(w) Brokers . No finder, broker, agent or other intermediary has acted for or on behalf of Seller in connection with the negotiation of this Agreement or the Ancillary Documents or the consummation of the Contemplated Transactions.

(x) Tax Matters .

(i) For purposes of this Agreement, “ Tax ” (and with the corresponding meaning “ Taxes ” and “ Taxable ”) shall include (A) any net income, gross income, gross receipts, sales, use, ad valorem , franchise, profits, license, withholding, payroll, employment, excise, environmental, severance, stamp, occupation, premium, property or windfall profit tax, custom duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest and any penalty, addition to tax or additional amount, imposed by any Governmental Body, whether disputed or not; and (B) any liability for the payment of any amount of the type described in clause (A) as a result of being a member of a consolidated, affiliated, combined or unitary group.

(ii) Seller, any affiliated, combined or unitary group of which Seller is or was a member, and each ERISA Plan (other than a multiemployer plan, as defined in Section 3(37) of ERISA) and Flexible Benefit Plan, as the case may be (each a “ Tax Affiliate ”), has: (A) timely filed (or has had timely filed on its behalf) all returns, declarations, reports, estimates, information returns, and statements (“ Tax Returns ”) required under applicable laws to be filed or sent by it in respect of any Taxes or required under applicable laws to be filed or sent by it by any Governmental Body having competent jurisdiction over Taxes; and all such Tax Returns are true, correct, and complete in all material respects; (B) timely and properly paid (or has had paid on its behalf) all Taxes due and payable, whether or not shown on such Tax Returns; and (C) complied with all applicable laws relating to the withholding of Taxes and the payment thereof.

(iii) No deficiency for any Taxes has been proposed, asserted or assessed against Seller or any Tax Affiliate that has not been resolved and paid in full.

(iv) To the knowledge of Seller Parties, no claim has ever been made by an authority in a jurisdiction where Seller or any Tax Affiliate do not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

(v) Seller (A) has not been part of a consolidated group for Tax purposes with any Person, other than a group the common parent of which is or was the Seller; or (B) has any liability for the Taxes of any Person (other than the Seller) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise.

(vi) Seller is not a party to any Tax allocation or sharing agreement.

(vii) Neither the Business nor the Purchased Assets are subject to any Lien resulting from unpaid Taxes; and to the knowledge of Seller Parties, no Governmental Body has any present right to file any such Lien against the Business or the Purchased Assets.

(viii) Purchaser shall not become responsible for any obligation of Seller to provide any “parachute payment,” as defined in the United States Internal Revenue Code of 1986 (as amended, the “ Code ”) Section 280G; or provide any severance, termination allowance or similar payments as a direct result of the Contemplated Transactions.

(y) Disclosure . No representation or warranty of Seller contained in this Agreement, any Schedules, any exhibit hereto or in any statement (including but not limited to the Financial Statements), certificate, instrument of transfer or conveyance or other document furnished to Purchaser pursuant to this Agreement, or otherwise in connection with the Contemplated Transactions, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to make the statements herein or therein not misleading.

(z) No Other Representations and Warranties . Except for the representations and warranties contained in this Section 5 (including the related portions of the Disclosure Schedules), neither Seller nor any other Person has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller, including any representation or warranty as to the accuracy or completeness of any information regarding the Business and the Purchased Assets furnished or made available to Purchaser and its representatives (including any information, documents or material delivered to Purchaser or made available to Purchaser in the data room, management presentations or in any other form in expectation of the transactions contemplated hereby) or as to the future revenue, profitability or success of the Business, or any representation or warranty arising from statute or otherwise in law.

6. Purchaser’s Representations & Warranties . Purchaser hereby represents and warrants to Seller as follows:

(a) Organization and Good Standing . Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and perform its obligations hereunder.

(b) Authority; Binding Obligation . Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Documents to which it is a party, and perform its obligations hereunder and thereunder. Purchaser’s execution and delivery of this Agreement and such Ancillary Documents, and performance of its covenants and agreements hereunder and thereunder, have been duly authorized by all necessary company action of Purchaser. This Agreement and the Ancillary Documents to which Purchaser is a party have been duly executed and delivered by Purchaser and constitute valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms, subject to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

(c) No Conflict . Neither the execution and delivery of this Agreement or any of the Ancillary Documents to which Purchaser is a party, nor the consummation or performance of any of Contemplated Transactions , will directly or indirectly, with or without notice or lapse of time: (i) contravene, conflict with or result in a violation of or default under any provision of Purchaser’s articles of incorporation or bylaws or resolution adopted by the directors or shareholders of Purchaser; (ii) contravene, conflict with or result in a violation of or default under, or give any Governmental Body or

other Person the right to challenge any of the Contemplated Transactions or exercise any remedy or obtain any relief under, any federal, state or local law, regulation, ordinance or administrative order or any judgment or decree to which Purchaser is subject; or (iii) contravene, conflict with or result in a violation or breach of or default under any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate or modify any contract or other arrangement to which Purchaser is a party or by which Purchaser is bound.

(d) Sufficiency of Funds . Purchaser has sufficient cash on hand or other sources of immediately available funds to enable it to make payment of the Purchase Price and consummate the Contemplated Transactions.

(e) Legal Proceedings . There are no actions, suits, claims, investigations or other legal proceedings pending or, to Purchaser’s knowledge, threatened against or by Purchaser or any affiliate of Purchaser that challenge or seek to prevent, enjoin or otherwise delay the Contemplated Transactions.

(f) Independent Investigation . Purchaser has conducted its own independent investigation, review and analysis of the Business and the Purchased Assets, and acknowledges that it has been provided access to the personnel, properties, assets, premises, books and records, and other documents and data of Seller for such purpose. Without affecting the allocation of risk among the parties, as evidenced by the representations and warranties of Seller Parties in Section 5, Purchaser acknowledges and agrees that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, Purchaser has relied solely upon its own investigation, the express representations and warranties of Seller set forth in Section 5 of this Agreement (including related portions of the Disclosure Schedules), specifically including the representation and warranty of Seller Parties set forth in Section 5(y), and the other covenants, terms and conditions contained in this Agreement. Furthermore, Purchaser acknowledges and agrees that neither Seller nor any other Person has made any representation or warranty as to Seller, the Business, the Purchased Assets or this Agreement, except as expressly set forth in Section 5 of this Agreement (including the related portions of the Disclosure Schedules).

7. Covenants . Seller covenants and agrees with Purchaser, and Purchaser covenants and agrees with Seller, as follows:

(a) Between the date hereof and the Closing, Seller shall not, except as otherwise specifically consented to in writing by Purchaser, take any action that would cause any of the changes, events or conditions described in Section 5(r).

(b) Seller shall permit Purchaser and Purchaser’s counsel, bankers, accountants and other representatives full access, upon reasonable notice during normal business hours under the supervision of Seller’s personnel, to all the properties, assets, books, records, agreements, commitments and other documents of Seller concerning the Business or the Purchased Assets; provided, however, that such access shall not interfere with the operation of the Business. Seller shall furnish to Purchaser and its representatives all available information with respect to the Purchased Assets as Purchaser may reasonably request. Seller shall permit Purchaser to review Seller’s personnel and pay records on or before the Closing and interview any employee of the Business that Purchaser elects to interview prior to the Closing. Prior to the Closing, without the prior written consent of Seller, which may be withheld for any reason, Purchaser shall not contact any suppliers to, or customers of, the Business. Purchaser shall, and shall cause its Representatives to, abide by the terms of the Confidentiality Agreement with respect to any access or information provided pursuant to this Agreement.

8. No Requirement to Hire or Retain Employees . Purchaser shall not be required to assume any ERISA Plan, Flexible Benefit Plan, or any other compensation, employee benefit, fringe benefit, severance or retirement plan heretofore provided by Seller for its employees, or retain (for any certain period of time) any employees of Seller who may be hired by Purchaser on or after the Closing Date, except as expressly set forth in this Section.

Purchaser shall offer employment effective on the Closing Date, to all employees of Seller (“ Employees ”). Employees who accept such offer of employment and commence employment on the Closing Date, shall be referred to as the “ Transferred Employees .” During the period commencing on the Closing Date, Purchaser shall provide each Transferred Employee with (i) base salary or hourly wages which are comparable to their base wage immediately prior to the Closing; and (ii) 401(k) and welfare benefits that are no less favorable in the aggregate than those historically provided by Purchaser. Seller and Purchaser shall jointly prepare a schedule setting forth, for each employee of Seller who accepts employment by Purchaser, (i) the number of days of vacation earned by such employee for his or her employment by Seller but unused as of the Closing Date and (ii) the value of such earned and accrued vacation, based upon the level of compensation paid by Purchaser to such employee. Purchaser shall recognize such earned and accrued vacation of the employees of Seller who accept employment with Purchaser (the value of which shall be deemed to be an Assumed Liability under this Agreement) and shall provide such earned or accrued vacation to the employees while employed by Purchaser. Purchaser’s offer of employment to each employee of Seller shall include a written statement that, by accepting employment with Purchaser, the Employee of Seller consents to receive credit from Purchaser for accrued paid time off (“ PTO ”) under the Seller’s PTO policy in lieu of payment for accrued PTO from Seller. Nothing contained herein, express or implied, shall be construed to establish, amend or modify any benefit plan, program, agreement or arrangement of Purchaser. The parties hereto acknowledge and agree that the terms set forth in this Section 8 shall not create any right in any Transferred Employee or any other Person to any continued employment with Purchaser or compensation or benefits of any nature or kind whatsoever.

9. Conditions Precedent to Purchaser’s Obligations . Purchaser’s obligations to consummate the Contemplated Transactions are subject to the satisfaction of each of the following conditions prior to or at the Closing, unless specifically waived in writing by Purchaser in advance.

(a) Due Diligence . Purchaser shall complete a full legal and business due-diligence examination of Seller, the result of which shall be satisfactory to Purchaser in its sole discretion.

(b) Board Approval . Purchaser shall have received approval from its Board of Directors to enter into this Agreement and consummate the Contemplated Transactions.

(c) Representations and Warranties . The representations and warranties of Seller contained in this Agreement shall be true and correct as of the date hereof, and as of the Closing Date as though the Closing Date had been substituted for the date of this Agreement throughout such representations and warranties (except that any representation or warranty made as of a specified date other than the date hereof need only be true as of such date), and Seller shall have delivered to Purchaser a certificate of an officer/manager of Seller to such effect. Seller shall have duly performed and complied with all covenants and agreements and satisfied all conditions required by this Agreement to be performed, complied with or satisfied by Seller prior to or at the Closing and Seller shall have delivered to Purchaser a certificate of an officer/manager of Seller to such effect.

(d) Absence of Litigation . There shall not be in effect any order, writ, injunction or decree prohibiting Purchaser or Seller from consummating the Contemplated Transactions. No claim, action, suit or proceeding shall be pending or threatened against Purchaser, Seller or the Business which, if adversely determined, would prevent the consummation of the Contemplated Transactions or result in

the payment of damages as a result of such action and for which the other party is not willing to provide indemnification.

(e) Consents and Approvals . All approvals of Governmental Bodies and all consents of other Persons required for the consummation of the Contemplated Transactions shall have been obtained (or all applicable waiting periods shall have expired), and such consents or approvals shall remain in full force and effect.

(f) Assumed Leases . To the satisfaction of Purchaser in its sole discretion, each landlord under any real estate lease comprising an Assumed Lease shall have either (i) consented in writing to the assignment by Seller of the applicable lease or leases to Purchaser; or (ii) entered into a new lease agreement for the subject real property, which new lease must be acceptable to Purchaser in its sole discretion. Any consent delivered under clause (i) above must be accompanied by an estoppel certificate in customary form and reasonably acceptable to Purchaser.

(g) Retention Agreements . Each employee of Seller identified on Schedule 9(g) shall have executed and delivered to Purchaser a written agreement, however styled and in form and substance reasonably satisfactory to Purchaser, pursuant to which such employee will agree to remain in the employ of Purchaser after the Closing Date for a minimum of 18 months after the Closing Date (the “ Retention Agreements ”).

(h) Non-Competition Agreement . Each party identified on Schedule 9(h) shall have executed and delivered to Purchaser a Non-Competition and Non-Solicitation Agreement substantially in the form attached hereto as Exhibit C (collectively, the “ Non-Competition Agreements ”).

(i) Name Change . Seller shall have filed a change of name so that its name is not “Devicix” or any derivative thereof or other name that is confusingly similar thereto.

(j) Closing Statement . The Closing Statement delivered to Purchase by Seller shall be acceptable in form and substance to the Purchaser in its reasonable discretion.

(k) Employees . The employees of the Business listed in Schedule 9(k) (as the same may be updated by Purchaser from time to time pursuant to a writing delivered to Seller prior to the Closing) shall have accepted offers of employment from Purchaser on terms and conditions satisfactory to Purchaser in its sole discretion.

10. Conditions Precedent to Seller’s Obligations . Seller’s obligations to consummate the Contemplated Transactions are subject to the satisfaction prior to or at the Closing of each of the following conditions, unless specifically waived in writing by Seller in advance:

(a) Representations and Warranties . The representations and warranties of Purchaser contained in this Agreement shall be true and complete in all material respects as of the date of this Agreement and as of the Closing Date as though the Closing Date had been substituted for the date hereof throughout such representations and warranties (except that any such representation or warranty made as of a specified date other than the date hereof need only be true as of such date), and Purchaser shall have delivered to Seller a certificate of an officer of Purchaser to such effect. Purchaser shall have duly performed and complied in all material respects with all covenants, agreements and satisfied all conditions required by this Agreement to be performed and complied with or satisfied by it prior to or at the Closing, and Purchaser shall have delivered to Seller a certificate of an officer of Purchaser to such effect.

(b) Absence of Litigation . There shall not be in effect any order, writ, injunction or decree prohibiting Purchaser or Seller from consummating the Contemplated Transactions. No claim, action, suit or proceeding shall be pending or threatened against Purchaser, Seller or the Business which, if adversely determined, would prevent the consummation of the Contemplated Transactions or result in the payment of damages as a result of such action and for which the other party is not willing to provide indemnification.

(c) Consents and Approvals . All approvals of Governmental Bodies and all consents of other Persons required for the consummation of the Contemplated Transactions shall have been obtained (or all applicable waiting periods shall have expired), and such consents or approvals shall remain in full force and effect.

11. Termination Before Closing . This Agreement may be terminated at any time prior to the Closing: (a) by the mutual written agreement of the parties; or (b) by either Seller or Purchaser, respectively, if, prior to the Closing, any condition set forth herein for the benefit of Seller or Purchaser, respectively, shall not have been timely met or waived by the party that it benefits and cannot be cured; or (c) by either Seller or Purchaser, if the Closing has not occurred on or prior to July 15, 2015, for any reason other than delay or nonperformance of the party seeking such termination. Termination of this Agreement pursuant to this Section shall terminate all obligations of the parties hereunder, except for the obligations under Section 12, and such termination shall not constitute a waiver of any rights any party may have by reason of a breach by another party of any covenant in this Agreement occurring prior to such termination.

12. Indemnification .

(a) Indemnification by Seller Parties . Seller Parties will indemnify and hold Purchaser and each officer, director, employee, agent, attorney and representative of Purchaser (each a “ Purchaser Indemnified Party ”) harmless from, against and in respect of any and all loss, liability, expense (including without limitation reasonable expenses of investigation and reasonable attorneys’ fees and expenses in connection with any action, suit or proceeding brought against a Purchaser Indemnified Party) or damages of any kind suffered or incurred by a Purchaser Indemnified Party (“ Purchaser Losses ”) by reason of:

(i) any breach of a representation or warranty of Seller Parties contained herein or in any Ancillary Document;

(ii) the failure of Seller Parties to fulfill or perform any covenant, agreement or obligation of Seller Parties contained herein or in any Ancillary Document;

(iii) any Excluded Liability; or

(iv) except as a claim relates to an Assumed Liability, Seller’s operation of the Business or ownership of the Purchased Assets on or prior to the Closing Date.

(b) Indemnification by Purchaser . Purchaser shall indemnify and hold Seller and each manager, governor, member, employee, agent, attorney and representative of Seller (each a “ Seller Indemnified Party ”) harmless from, against and in respect of any and all loss, liability, expense (including without limitation reasonable expenses of investigation and reasonable attorneys’ fees and expenses in connection with any action, suit or proceeding brought against a Seller Indemnified Party) or damage of any kind suffered or incurred by a Seller Indemnified Party (“ Seller Losses ”) by reason of:

(i) any breach of a representation or warranty by Purchaser contained herein or in any Ancillary Document;

(ii) failure of Purchaser to fulfill or perform any covenant, agreement or obligation of Purchaser contained herein or in any Ancillary Document;

(iii) any Assumed Liability; or

(iv) Purchaser’s operation of the Business after the Closing Date.

(i) In order for any Purchaser Indemnified Party or Seller Indemnified Party to be entitled to any indemnification provided for under this Section in respect of, arising out of or involving a claim made by any unaffiliated Person other than Seller Parties or Purchaser or their respective successors, assigns or affiliates (a “ Third-Party Claim ”) against such indemnified party, such indemnified party must notify the indemnifying party in writing of the Third-Party Claim reasonably promptly after receipt by such indemnified party of written notice of the Third-Party Claim; provided, however, that failure of any indemnified party to give notice as provided in this Section shall not relieve an indemnifying party of its obligations hereunder except to the extent that the indemnifying party actually has been prejudiced by such failure to give notice. Thereafter, the indemnified party shall deliver to the indemnifying party, as promptly as practicable and, in any event, within ten days after such indemnified party’s receipt thereof, copies of all notices and other documents relating to the Third-Party Claim.

(ii) If a Third-Party Claim is made against an indemnified party, the indemnifying party shall be entitled to participate in the defense thereof and, if it so chooses within 30 days after receipt of notice of the Third-Party Claim, to assume or cause the assumption of the defense thereof with counsel selected by the indemnifying party (provided such counsel is not reasonably objected to by the indemnified party). Should the indemnifying party elect to assume or cause the assumption of the defense of a Third-Party Claim, the indemnifying party will not be liable to the indemnified party for any legal expenses subsequently incurred by the indemnified party in connection with the defense thereof unless the indemnifying party has agreed in writing to pay such fees and expenses or, in the reasonable judgment of the indemnified party, a conflict of interest between the indemnified party and the indemnifying party exists with respect to such claim. If the indemnifying party elects so to participate in or assume the defense of a Third-Party Claim, the indemnified party will fully cooperate with the indemnifying party in connection with such defense.

(iii) If the indemnifying party assumes the defense of a Third-Party Claim, then, as long as the indemnifying party is reasonably contesting such claim in good faith, the indemnified party shall not admit any liability with respect to, or settle, compromise or discharge, any Third-Party Claim without the indemnifying party’s prior written consent, and the indemnified party will agree to any settlement, compromise or discharge of the Third-Party Claim the indemnifying party may recommend which releases the indemnified party unconditionally and completely in connection with such Third-Party Claim and does not materially and adversely affect the indemnified party. Notwithstanding the foregoing, the indemnified party shall have the right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefor by the indemnifying party. If the indemnifying party assumes the defense of a Third-Party Claim, then the indemnifying party shall not, without the indemnified party’s prior written consent, settle or compromise any Third-Party Claim or consent to the entry of any

judgment which does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such Third-Party Claim.

(iv) If the indemnifying party does not assume the defense of any such Third-Party Claim, the indemnified party may defend the same in such manner as it may reasonably deem appropriate, including but not limited to settling such claim or litigation.

(v) The indemnifying party shall in no case settle or compromise any Third-Party Claim or consent to the entry of any judgment without the consent of the indemnified party if such settlement, compromise or judgment would materially and adversely affect the rights of the indemnified party in any continuing manner.

(d) Claims Period . For purposes of this Agreement, a “ Claims Period ” shall be the period during which a claim for indemnification may be asserted under this Agreement by an indemnified party, which period shall begin on the Closing Date and terminate as follows:

(i) with respect to Purchaser Losses arising under Section 12(a)(i) for a breach of the representations and warranties under Sections 5(a) (Organization and Good Standing), 5(b) (Authority; Binding Obligation), 5(d) (Undisclosed Liabilities), 5(e) (No Conflict), 5(f) (Title, Sufficiency and Condition of Assets), 5(j) (Litigation) and 5(x) (Tax Matters), the Claims Period shall remain open for the duration of the applicable statute of limitations in Minnesota;

(ii) with respect to Purchaser Losses arising under Section 12(a)(i) for a breach of the representations and warranties of any other sub-section of Section 5, the Claims Period shall terminate upon the 12-month anniversary of the Closing Date;

(iii) with respect to Purchaser Losses arising under Sections 12(a)(ii), 12(a)(iii) or (a)(iv), the Claims Period shall remain open for the duration of the applicable statute of limitations in Minnesota; and

(iv) with respect to Seller Losses, (A) the Claims Period for Seller Losses arising under 12(b)(i) shall terminate 12 months after the Closing Date; and (B) the Claims Period for Seller Losses arising under Section 12(b)(ii), 12(b)(iii) and (b)(iv) shall remain open for the duration of the applicable statute of limitations in Minnesota.

Any claim for indemnification pursuant to this Section 12 must be made in writing by the indemnified party to the indemnifying party on or prior to the expiration of the applicable Claims Period. All claims for indemnification for which proper notification of the indemnifying party shall have been made by the indemnified party prior to the close of business on the last day of the applicable Claims Period shall continue to survive and shall remain a basis for indemnity hereunder until such claim is finally resolved or disposed of in accordance with the terms hereof.

(e) Deductible . The indemnifying party shall not be liable to the indemnified party for indemnification under Section 12(a) or Section 12(b), as the case may be, until the aggregate amount of all fees in respect of indemnification under Section 12(a) or Section 12(b) exceeds $60,000 (the “ Deductible ”), in which event the indemnifying party shall only be required to pay or be liable for Losses in excess of the Deductible; provided, however, that the Deductible shall not apply to the following (all of which are referred to as “ Excepted Claims ”): (i) claims by Seller relating to Purchaser’s failure to pay the Purchase Price or any portion thereof, or (ii) claims by Purchaser for Purchaser Losses

arising from fraud or intentional misrepresentation, or (iii) claims by Purchaser for Purchaser Losses arising under Sections 12(a)(iii) or 12(a)(iv), or (iv) claims by Purchaser for Purchaser Losses arising under Sections 12(a)(i) and resulting from a breach of the representations set forth in Sections 5(b) or 5(j), or (v) claims by Purchaser for Purchaser Losses, if any, arising from the pending lawsuit of Seller with OrthoAccel Technologies (including any future asserted claims or counter-claims made by such litigants).

(f) Limitation of Liability . In no event shall any indemnifying party be liable to any indemnified party for any punitive, incidental, consequential, special or indirect damages, including loss of future revenue or income, loss of business reputation or opportunity relating to the breach or alleged breach of this Agreement, or diminution of value or any damages based on any type of multiple. Except for the Excepted Claims, as defined in Section 12(e) above, the aggregate amount of all Losses for which an indemnifying party shall be liable pursuant to Section 12(a) or 12(b), as the case may be, shall initially not exceed $795,000 (the “ Indemnity Cap ”). In the event, however, that Seller shall become entitled to receive (or shall have received) Earnout payments under Section 3(c) of this Agreement, 15% of such Earnout consideration shall be added to the Indemnity Cap; provided, however, that in no event shall the Indemnity Cap of the Seller exceed $1,000,000. Payments by an indemnifying party pursuant to Section 12(a) or 12(b) in respect of any Loss shall be limited to the amount of any liability or damage that remains after deducting therefrom any insurance proceeds and any indemnity, contribution or other similar payment received by the indemnified party in respect of any such claim (other than from the indemnifying party or parties under this Agreement).

(g) Payment of Indemnification Claim . With respect to Purchaser Losses payable hereunder, Purchaser Indemnified Parties shall be obligated first to assert their right to payment against amounts due and owing under the Seller Note (Offset).

(h) Exclusive Remedy . Except for causes of action in favor of a party arising under a different agreement or instrument (including an Ancillary Document), and except for cases of fraud or intentional misrepresentation, each of the parties acknowledges and agrees that its sole and exclusive remedy with respect to any and all of its respective claims arising under this Agreement shall be pursuant to the indemnification provisions set forth in this Section 12. In furtherance of the foregoing, each waives, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action that it may have against the other party under this Agreement arising under or based upon any federal, state or local statute, law, ordinance, rule or regulation, or arising under or based upon common law or otherwise, except to the extent provided in this Section 12.

(i) Duty to Mitigate . Each indemnified party shall take, and cause its affiliates to take, all reasonable steps to mitigate any Loss upon becoming aware of any event or circumstance that would be reasonably expected to, or does, give rise thereto, including incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Loss.

13. Dispute Resolution .

(a) To the greatest extent possible, the parties will endeavor to resolve any disputes relating to the Agreement through amicable negotiations. Failing an amicable settlement, any controversy, claim or dispute arising under or relating to this Agreement, including the existence, validity, interpretation, performance, termination or breach of this Agreement (or any portion thereof), will finally be settled by binding arbitration before a single arbitrator jointly appointed by the parties. The arbitrator shall self-administer the arbitration proceedings utilizing the Commercial Rules of the American Arbitration Association (“ AAA ”); provided, however, the AAA shall not be involved in administration of the arbitration. The arbitrator must be a retired judge of a state or federal court of the United States or a licensed lawyer with at least 15 years of corporate or commercial law experience from a law firm with at

least ten attorneys and at least an AV rating by Martindale Hubbell. If the parties cannot agree on an arbitrator, either party may request the AAA to appoint an arbitrator which appointment will be final.

(b) The arbitration will be held in Minneapolis, Minnesota. Each party will have discovery rights as provided by the Federal Rules of Civil Procedure within the limits imposed by the arbitrator; provided, however, that all such discovery will be commenced and concluded within 60 days of the selection of the arbitrator. The parties intend that any arbitration will be concluded as quickly as reasonably practicable. The arbitrator will use all reasonable efforts to issue the final written report containing award or awards within a period of five business days after closure of the proceedings, but failure of the arbitrator to meet such time limits will not be a basis for challenging the award. The arbitrator will not have the authority to award punitive damages to either party. Each party will bear its own expenses, but the parties will share equally the expenses of the arbitrator. The arbitrator will award attorneys’ fees and other related costs payable by the losing party to the successful party as it deems equitable. This Agreement will be enforceable, and any arbitration award will be final and non-appealable, and judgment thereon may be entered in any court of competent jurisdiction.

14. General Provisions .

(a) Publicity . Seller and Purchaser agree that they will not make any press releases or other announcements prior to or at the time of Closing with respect to the Contemplated Transactions, except as required by applicable law, without the prior approval of the other party, which approval will not be unreasonably withheld.

(b) Knowledge Convention . Whenever any statement herein or in any Schedule, Exhibit, certificate or other document delivered to any party pursuant to this Agreement is made to the “knowledge,” or words of similar intent or effect, of any party or its representative, such statement shall be deemed to be made to the best knowledge of the party and, to the extent applicable, its senior management, which in the case of the Seller shall be exclusively the Shareholder, and shall in all cases be deemed to include a representation that a reasonable investigation of the subject matter thereof has been conducted.

(c) Reservation of Rights . Neither a party’s representations and warranties contained in this Agreement nor the party’s indemnification obligations set forth in this Agreement shall be affected by (i) any due-diligence or other investigation conducted by another party; or (ii) any knowledge on the part of another party or its agents or representatives of any circumstances resulting from such investigation or otherwise, including without limitation knowledge that one or more of such party’s representations or warranties are or might be untrue when made or will or might become untrue on or prior to the Closing.

(d) Further Acts and Assurances . Seller shall, at any time and from time to time at and after the Closing, upon request of Purchaser and without additional consideration, take any and all steps reasonably necessary to place Purchaser in possession and operating control of the Purchased Assets, and Seller will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances and assurances as may be reasonably required for the more effective transfer and confirmation to Purchaser of title and possession of any or all of the Purchased Assets.

(e) Notices . Any notice or other document to be given hereunder by any party to any other party shall be in writing and delivered by courier or by facsimile transmission, receipt confirmed, or sent by any next-day express mail service, postage or fees prepaid, as follows:

If to Purchaser :

Nortech Systems Incorporated
1120 Wayzata Boulevard East, Suite 201
Wayzata, Minnesota 55391
Attention: Mr. Richard G. Wasielewski, President & CEO
Facsimile: (952) 449-0442

With a copy to :

Maslon LLP
3300 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Martin Rosenbaum
Facsimile No: (612) 642-8326

If to Seller :

Devicix, LLC
7680 Executive Drive
Eden Prairie, Minnesota 55344
Attention: Peter DeLange
Facsimile No: (952) 368-0083

With a copy to :

Insitu Law, PLC
1500 ATT Tower
901 Marquette Avenue
Minneapolis, Minnesota 55402
Attention: Mark Hooley
Facsimile No: (651) 305-5119

or at such other address or number for a party as shall be specified by like notice. Any notice that is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party or its agent, in the event of notice given by courier or confirmed facsimile, or, if sent by express mail, then on the day after deposit with a nationally recognized express mail service (USPS or Federal Express).

(f) Governing Law and Venue . This Agreement shall be construed in accordance with and governed by the laws of the State of Minnesota without regard to its conflicts-of-law provisions. Exclusive jurisdiction and venue for any claims made by either party against the other will be the courts of the State of Minnesota located in Hennepin County and the United States District Court for the District of Minnesota, and the parties irrevocably consent and agree to the exclusive jurisdiction and venue of such courts. The prevailing party in any suit or action to enforce its rights or settle any disputes under this Agreement shall be reimbursed by the non-prevailing party all of its costs and expenses paid or incurred in connection with such suit or action, including, without limitation, its reasonable attorneys’ fees, costs and expenses.

(g) Construction . No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by reason of such party or its counsel having or being deemed to have drafted such provision. All references in this Agreement to Section(s), Schedule(s) or Exhibit(s) shall refer to Section(s), Schedule(s) or Exhibit(s) of this Agreement. The headings of the Articles and Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof.

(h) No Reliance . Except for the parties and their assignees permitted under Section 13(j) below: (i) no third party is entitled to rely on any of the representations, warranties and agreements of a party contained in this Agreement; (ii) the parties to this Agreement assume no liability to any third party because of any reliance on the representations, warranties and agreements of any of the parties contained herein; and (iii) no Person other than the parties to this Agreement shall have any legal or equitable rights or remedies under this Agreement.

(i) Counting Time . Whenever this Agreement requires an act or notice or payment to occur within a specified number of “days” (other than “business days”), such term shall be understood to mean calendar days, each consisting of a 24-hour period; provided, however, that if the time period by which any acts or payments required hereunder must be performed or paid expires on a Saturday, Sunday or legal holiday, then such time period shall be automatically extended to the close of business on the next regularly scheduled business day.

(j) Binding Agreement . The terms, conditions and obligations of this Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and assigns. Except as provided herein, without the prior written consent of the each other party, no party may assign such party’s rights, duties or obligations hereunder or any part thereof to any other Person prior to Closing; provided, however, that Purchaser may assign its rights under this Agreement (but not its obligations) to any affiliate of Purchaser.

(k) Modification and Waiver . Any term or condition of this Agreement may be waived at any time by the party entitled to the benefit thereof, and to be effective any such waiver must be written and signed by the party entitled to such benefits. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof. No delay or failure on the part of any party hereto to exercise any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder; nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

(l) Severability . Any provision hereof which is prohibited or unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction will not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by law, the parties hereto waive any provision of law rendering any such provision prohibited or unenforceable in any respect.

(m) Discretion . Whenever a party may take action under this Agreement in his, her or its “sole discretion,” “sole and absolute discretion” or “discretion,” or under a grant of similar authority or latitude, such Person shall be entitled to consider any factors and interests as it desires, including its own interests.

(n) Counterparts; Electronic Signatures . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed an original and all of which shall constitute the same instrument. The parties acknowledge and agree that for purposes of this Agreement and the Ancillary Documents, and all certificates, documents and other items to be delivered pursuant to the terms thereof, that facsimile signatures and other electronically delivered signatures shall be deemed acceptable to and binding upon each party hereto, and that reproductions thereof shall constitute “originals” for all purposes.

(o) Entire Agreement . This Agreement and the Schedules and Exhibits hereto, together with the documents and instruments delivered pursuant hereto and the binding provisions of that certain letter of intent by and between the parties dated as of December 19, 2014 (with respect to which the parties hereby agree that the provisions of Section 5 of such letter (Exclusivity) shall apply from and after the date hereof until June 30, 2015), constitute the entire agreement among the parties pertaining to the subject matter hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether written or oral, of the parties hereto.

(p) Transfer Taxes . All transfer, documentary, sales, use, stamp, registration, value added and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the Ancillary Documents (other than income tax obligations of Seller or the Shareholder) shall be borne and paid by Purchaser when due. Purchaser shall, at its own expense, timely file any Tax Return or other document with respect to such Taxes or fees (and Seller shall cooperate with respect thereto as necessary).

* * * * * * *

IN WITNESS WHEREOF, the parties hereto have caused this Asset Purchase Agreement to be duly executed and delivered, to be effective as of the date first written above.


PURCHASER:		SELLER:


NORTECH SYSTEMS INCORPORATED		DEVICIX, LLC
a Minnesota corporation		a Minnesota limited liability company


By:	/s/ Richard G. Wasielewski	By:	/s/ Peter M. DeLange
Name:	Richard G. Wasielewski	Name:	Peter M. DeLange
Title:	President & Chief Executive Officer	Title:	Chief Executive Officer


		SHAREHOLDER:


		/s/ Peter M. DeLange
		Peter M. DeLange

Signature Page —

Nortech/Devicix Asset Purchase Agreement

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: August 5, 2015	By:	/s/ Richard G. Wasielewski

		Richard G. Wasielewski
		Chief Executive Officer and President
		Nortech Systems Incorporated

Exhibit 31.2

Certification of Chief Financial Officer

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

I, Paula M. Graff, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

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

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

Date: August 5, 2015	By:	/s/ Paula M. Graff

		Paula M. Graff
		Vice President and Chief Financial Officer
		Nortech Systems Incorporated

Exhibit 32

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 June 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: August 5, 2015

By:	/s/ Paula M. Graff

	Paula M. Graff
	Vice President and Chief Financial Officer
	Nortech Systems Incorporated

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 June 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: August 5, 2015

By:	/s/ Richard G. Wasielewski

	Richard G. Wasielewski
	Chief Executive Officer and President
	Nortech Systems Incorporated