NORTECH SYSTEMS INC Revenue Disclosure

Revenue Recognition

 

Our net sales are comprised of product, engineering services and repair services. All net sales are recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

 

Net sales are measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, net sales are recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from net sales) basis. Shipping and handling costs are included in cost of goods sold.

 

 

The majority of our net sales are derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use, and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the net sales are recognized at a point in time, generally upon shipment. Net sales under contract manufacturing agreements that was recognized over time accounted for approximately 76% and 79% of our net sales for the years ended December 31, 2024 and 2023, respectively. Net sales under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

 

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total net sales and costs. We estimate profit on these agreements as the difference between total estimated net sales and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on contractual selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of net sales recognized with a resulting impact on the timing and amount of associated profit.

 

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in net sales as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.

 

Contract Assets

 

Contract assets, recorded as such in the consolidated balance sheets, consist of unbilled amounts related to net sales recognized over time. Changes in the contract assets balance during the years ended December 31, 2024 and 2023 were as follows:

 

SCHEDULE OF CONTRACT ASSETS

Balance outstanding as of December 31, 2022		$	9,982
Increase (decrease) attributed to:
Amounts transferred over time to contract assets			110,195
Allowance for current expected credit losses			(12	)
Amounts invoiced during the period			(105,684	)
Balance outstanding as of December 31, 2023		$	14,481
Increase (decrease) attributed to:
Amounts transferred over time to contract assets			97,724
Allowance for current expected credit losses			4
Amounts invoiced during the period			(98,417	)
Balance outstanding as of December 31, 2024		$	13,792

 

We expect substantially all the remaining performance obligations for the contract assets recorded as of December 31, 2024, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

 

 

The following tables summarize our net sales by market for the years ended December 31, 2024 and 2023:

 

 SCHEDULE OF NET SALES BY MARKET

		Product/ Service Transferred Over Time				Product Transferred at Point in Time				Noncash Consideration				Total Net Sales by Market
		Year Ended December 31, 2024
		Product/ Service Transferred Over Time				Product Transferred at Point in Time				Noncash Consideration				Total Net Sales by Market
Medical Device		$	24,085			$	7,487			$	3,064			$	34,636
Medical Imaging			29,362				8,104				26				37,492
Industrial			25,652				8,620				1,245				35,517
Aerospace and Defense			18,625				1,658				205				20,488
Total net sales		$	97,724			$	25,869			$	4,540			$	128,133

 

		Product/ Service Transferred Over Time				Product Transferred at Point in Time				Noncash Consideration				Total Net Sales by Market
		Year Ended December 31, 2023
		Product/ Service Transferred Over Time				Product Transferred at Point in Time				Noncash Consideration				Total Net Sales by Market
Medical Device		$	28,359			$	8,095			$	2,304			$	38,758
Medical Imaging			32,147				7,704				57				39,908
Industrial			31,384				7,403				1,326				40,113
Aerospace and Defense			18,305				1,847				401				20,553
Total net sales		$	110,195			$	25,049			$	4,088			$	139,332

 

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