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Item 8. Financial Statements and Supplementary Data

2026-04-15 compared with 2008-05-13 · 896 added, 766 removed, 70 unchanged (96% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 23 )

Financial Statements:

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2025 and 2024

Consolidated Balance Sheets as of December 31, 2025 and 2024

Consolidated Statements of Income for the years ended December 31, 2007 and 2006

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007 and 2006

Consolidated Statements of Cash Flows for the years ended December 31, 2025 and 2024

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2025 and 2024

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm on Supplementary Data

Schedule II Valuation and Qualifying Accounts

remainder of this page was intentionally left blank.)

Report of Independent Registered Public Accounting Firm

the Board of Directors and Shareholders

Nortech Systems Incorporated and Subsidiary

have audited the consolidated balance sheet of Nortech Systems Incorporated and Subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income,

shareholders' equity and cash flows for each of the years then ended.

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an

opinion on these consolidated financial statements based on our audits.

conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to

obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in

the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement

presentation.

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

the Shareholders and the Board of Directors of Nortech Systems Incorporated and Subsidiaries:

on the Financial Statements

have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and Subsidiaries (the “Company”)

as of December 31, 2025 and 2024, the related consolidated statements of operations and comprehensive income (loss), shareholders’

equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial

statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated

financial position of the Company as of December 31, 2025 and 2024, and the consolidated results of its operations and its cash flows

for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion

on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public

Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company

in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission

and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing

an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether

due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles

used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nortech Systems Incorporated and Subsidiary as

of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended, in conformity with U.S.

generally accepted accounting principles.

were not engaged to examine management's assertion about the effectiveness of Nortech Systems Incorporated and Subsidiary's internal control over financial reporting as of

December 31, 2007 included

in this Annual Report and titled Management's Report on Internal Control over Financial Reporting and, accordingly, we do not express as opinion thereon.

McGladrey & Pullen, LLP

March 14, 2008

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that

was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material

to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication

of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are

not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or

disclosures to which it relates.

of Impairment of Long-Lived Assets

Audit Matter Description

described in Note 1 to the consolidated financial statements, the Company reviews property, plant and equipment for impairment whenever

events or changes in circumstances indicate that the carrying value of an asset (asset group) may not be recoverable.

An impairment loss

is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows expected to result from the use of the

asset and its eventual disposition.

The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying

value over its fair value.

Management identified triggering events during the year ended December 31, 2025, that indicated that the property,

plant and equipment could be impaired and performed an impairment test.

the impairment test did not result in the recording of any impairment loss, the impairment test is complex and judgmental due to management’s

use of subjective assumptions when determining the asset groups to be evaluated for impairment, estimating expected future cash flows

to be provided by operating activities of the identified asset groups, and estimating fair values of the assets or asset groups when

We Addressed the Matter in Our Audit

the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated

financial statements.

Our audit procedures related to the assessment of impairment of long-lived assets included the following, among

the appropriateness of the asset groups used in performing management’s impairment analysis.

management’s assumptions used in estimating the cash flows expected to be provided by operating activities of the asset groups,

including the completeness and accuracy of the underlying data supporting the assumptions.

a sensitivity analysis over the growth rates, operating margin, and other assumptions used in management’s analysis compared

to historical performance.

previously forecasted financial information to historical results to assess the reasonableness of future forecasted financial information

used in the analysis.

audit evidence from events and transactions occurring after the measurement date.

Baker Tilly US, LLP

have served as the Company’s auditor since 2017.

SYSTEMS INCORPORATED AND SUBSIDIARIES

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

THE YEARS ENDED DECEMBER 31, 2025 AND 2024

THOUSANDS, EXCEPT SHARE DATA)

Cost of goods sold

Operating expenses

General and administrative

Research and development

Restructuring charges

Total operating expenses

Income (loss) from operations

Other expense

Interest expense

Income (loss) before income taxes

Income tax expense

Net loss per common share:

Basic (in dollars per share)

Weighted average number of common shares outstanding - basic (in shares)

Diluted (in dollars per share)

Weighted average number of common shares outstanding – diluted (in shares)

Other comprehensive income (loss)

Foreign currency translation

Comprehensive income (loss), net of tax

accompanying notes to consolidated financial statements.

SYSTEMS INCORPORATED AND SUBSIDIARIES

BALANCE SHEETS

OF DECEMBER 31, 2025 AND 2024

THOUSANDS, EXCEPT SHARE DATA)

Current assets:

Cash and Cash Equivalents

Accounts Receivable, Less Allowance for Uncollectible Accounts

Prepaid Expenses

Income Taxes Receivable

Deferred Tax Assets

Accounts receivable, less allowances of $ 161 and $ 196 , respectively

Inventories, net

Contract assets

Prepaid assets and other assets

Total current assets

PROPERTY AND EQUIPMENT

Building and Leasehold Improvements

Manufacturing Equipment

Office and Other Equipment

Construction in Progress

Total Property and Equipment

Accumulated Depreciation

Net Property and Equipment

Restricted Cash

Finite-Lived Intangible Assets, Net of Accumulated Amortization

Property and equipment, net

Operating lease assets

Deferred tax assets

Total Other Assets

accompanying Notes to Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

Other intangible assets, net

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Bank Note Payable

Current Maturities of Long-Term Debt

Line of credit

Accounts payable

Accrued payroll and commissions

Accrued Health and Dental Claims

Customer deposits

Current portion of operating leases

Current portion of finance lease obligations

Other accrued liabilities

Income Taxes Payable

Total current liabilities

Long-term liabilities:

Long-Term Debt (Net of Current Maturities)

Long-term line of credit

Long-term operating lease obligations, net of current portion

Long-term finance lease obligations, net of current portion

Other long-term liabilities

7 unchanged sentences

9,000,000 shares authorized;

2,714,888 Shares Issued and Outstanding at December 31, 2007;

2,674,729 Shares Issued and Outstanding at December 31, 2006

2,786,134 and 2,760,793 shares issued and outstanding, respectively

Additional paid-in capital

4 unchanged sentences

accompanying notes to consolidated financial statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

Cost of goods sold

Operating expenses:

Selling expenses

General and administrative expenses

Total operating expenses

Income from operations

Other income (expense)

Interest income

Miscellaneous income (expense)

Interest expense

Total other expense

Income before income taxes

Income tax expense

Net income per common share:

Weighted average number of common shares outstanding used for basic earnings per common share

Weighted average number of common share outstanding plus dilutive common stock options

accompanying Notes to Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

Comprehensive

Shareholders'

BALANCE DECEMBER 31, 2005

2006 net income

Issuance of stock upon exercise of stock options

Issuance of restricted stock

Excess tax benefits from stock-based awards

Translation loss

BALANCE DECEMBER 31, 2006

Adoption of FIN 48 (Note 6)

2007 net income

Issuance of stock upon exercise of stock options

Compensation on stock-based awards

Excess tax benefits from stock-based awards

Translation loss

BALANCE DECEMBER 31, 2007

accompanying Notes to Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

SYSTEMS INCORPORATED AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

THE YEARS ENDED DECEMBER 31, 2025 AND 2024

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net income to net

Cash provided by operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Compensation on stock-based awards

Interest on swap valuation

Deferred income taxes

Loss on disposal of assets

Changes in current operating items, net of acquisition:

Deferred taxes

Change in accounts receivable allowance

Change in inventory reserves

Gain on disposal of property and equipment

Changes in current operating items

Accounts receivable

Contract assets

Prepaid expenses and other assets

Income taxes receivable/payable

Accounts payable

Accrued payroll and commissions

Accrued health and dental claims

Customer deposits

Other accrued liabilities

Net cash provided by operating activities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of assets

Business Acquistion (See Note 12)

Restricted Cash

Purchase of property and equipment

Proceeds from sale of property and equipment

Purchases of property and equipment

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in checks written in excess of bank balance

Net change in line of credit

Proceeds from long-term debt

Payments on long-term debt

Payments of bond issue costs

Issuance of stock upon exercise of options

Excess tax benefits from stock-based awards

Net cash provided by financing activities

Proceeds from line of credit

Payments to line of credit

Proceeds from notes payable

Principal payments on financing leases

Share repurchases

Stock award exercises

Net cash (used in) provided by financing activities

Effect of exchange rate changes on cash

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Cash and cash equivalentsbeginning of year

CASH AND CASH EQUIVALENTSEND OF YEAR

Net change in cash

Cash - beginning of year

Cash - end of year

Supplemental disclosure of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental noncash investing and financing activities:

Property and equipment purchases in accounts payable

Property acquired under operating leases

Equipment acquired under finance leases

accompanying notes to consolidated financial statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

We manufacture wire harnesses, cables and electromechanical assemblies, printed circuit boards and higher-level assemblies for a wide range of commercial and

defense industries.

We provide a full "turn-key" contract manufacturing service to our customers.

All products are built to the customer's design specifications.

Products are sold to

customers both domestically and internationally.

We also provide repair service on circuit boards used in machines in the medical industry.

manufacturing facilities are located in Bemidji, Fairmont, Blue Earth, Merrifield and Baxter, Minnesota as well as Augusta, Wisconsin, Garner, Iowa and Monterrey, Mexico.

summary of our significant accounting policies follows:

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates

and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements.

Estimates also

affect the reported amounts of revenue and expense during the reporting period.

Significant items subject to estimates and assumptions include the valuation allowance for inventories and allowance for

doubtful accounts.

SYSTEMS INCORPORATED AND SUBSIDIARIES

STATEMENTS OF SHAREHOLDERS’ EQUITY

THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Preferred Stock

Comprehensive

Shareholders’

Balance as of December 31, 2023

Foreign currency translation adjustment

Compensation on stock-based awards

Stock repurchases

Stock award exercises

Balance as of December 31, 2024

Foreign currency translation adjustment

Compensation on stock-based awards

Stock award exercises

Balance as of December 31, 2025

accompanying notes to consolidated financial statements.

SYSTEMS INCORPORATED AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

OF AND FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

of Presentation

accompanying consolidated financial statements of Nortech Systems Incorporated and Subsidiaries (“the Company”, “we”,

“our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.

GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

Company, organized in December 1990, is a provider of engineering design and manufacturing solutions for complex electromedical devices,

electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota.

maintain facilities and operations in Minnesota in the United States;

Monterrey, Mexico;

and Suzhou, China.

of Consolidation

consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing

Assembly Solutions of Monterrey, Inc.

and Nortech Systems Hong Kong Company, Limited as well as its wholly-owned subsidiary, Nortech

Systems Suzhou Company, Limited.

All significant intercompany accounts and transactions have been eliminated in consolidation.

preparation of financial statements in conformity with accounting principles generally accepted in the United States of America

requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of our consolidated financial statements.

Estimates also affect the reported amounts

of net sales and expense during the reporting period.

Significant items subject to estimates and assumptions include the valuation

allowance for inventories, the measurement of revenue recognized over time, realizability of deferred tax assets and long-lived

asset recovery.

Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, we consider cash equivalents to be short-term, highly liquid interest-bearing accounts readily convertible to

Restricted Cash

As of December 31, 2007, restricted cash of $427,500 is to be used for the purchase of equipment and facility upgrades at the Blue Earth, Minnesota

facility as required by the Industrial Revenue Bond agreement into which we entered on June 28, 2006 to purchase the Blue Earth, Minnesota facility (See Note 5).

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 uncollectible accounts.

The allowance for uncollectible accounts was $184,000 and $220,000 at December 31, 2007 and 2006, respectively.

We determine our allowance by considering a number of factors, including the

length of time trade 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

We do not accrue interest on past due accounts receivable.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net

realizable value).

Costs include material, labor, and overhead required in the warehousing and production of our products.

Inventory reserves are maintained for the estimated value of the inventory

that may have a lower value than stated or quantities in excess of future production needs.

Inventory is shown net of reserve for excess and obsolete inventory as follows:

Receivable and Allowance for Expected Losses

grant credit to customers in the normal course of business.

Accounts receivable is unsecured and presented net of an allowance for doubtful

The allowance for expected losses was $ 161 and $ 196 as of December 31, 2025 and 2024, respectively.

we record customer receivables and contract assets arising from net sales transactions, we record an allowance for credit losses for

the current expected credit losses inherent in the asset over its expected life.

The allowance for credit losses is a valuation account

deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected.

Each period, the

allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.

estimate expected credit losses based on relevant information about past events, including historical write-offs of bad debts, customer

concentrations, customer creditworthiness, current economic trends and changes in customer payment terms that affect the collectability

of the reported amount.

When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics.

Changes in the relevant information may significantly affect the estimates of expected credit losses.

are written off when we determine them to be uncollectible.

Write-offs are recognized as a deduction from the allowance for credit losses.

consist of finished goods, raw materials and work-in-process and are stated at the lower of average cost (which approximates first-in,

first-out) or net realizable value.

Costs include material, labor, and overhead required in the production of our products.

reserves are maintained for inventories that may have a lower value than stated or quantities in excess of future production needs.

regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write

down inventories to their net realizable value.

The determination of a reserve for excess and obsolete inventory involves management

exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and

current market conditions.

are as follows as of December 31,

SCHEDULE OF INVENTORIES

Raw materials

1 unchanged sentence

Finished goods

Property, Equipment and Depreciation

Property and equipment are stated at cost less accumulated depreciation.

Additions, improvements and major renewals are capitalized, while maintenance, repairs

and minor renewals are expensed as incurred.

and Equipment

and equipment are stated at cost less accumulated depreciation.

Additions, improvements and major renewals are capitalized, while maintenance

and minor repairs are expensed as incurred.

When assets are retired or disposed of, the assets and related accumulated depreciation are

removed from the accounts and the resulting gain or loss is reflected in operations.

Leasehold improvements are depreciated over the shorter of their estimated use lives or the remaining lease terms.

All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows:

Leasehold improvements are depreciated over the

shorter of their estimated useful lives or their remaining lease terms.

All other property and equipment are depreciated by the straight-line

method over their estimated useful lives, as follows:

OF ESTIMATED USEFUL LIVES

Leasehold improvements

1 unchanged sentence

Office and other equipment

Goodwill and Finite Life Intangible Assets

We account for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards Board No.

("SFAS") 142, "Goodwill and Other

Intangible Assets," which requires that goodwill and certain indefinite-lived assets not be amortized but evaluated annually for

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Finite life intangible assets are amortized on a straight-line basis over their estimated useful lives.

Finite life intangible assets at December 31, 2007 and 2006 are

December 31, 2007

Bond Issue Costs

Customer Base

Other intangibles

December 31, 2006

Bond Issue Costs

Other intangibles

expense related to these assets was as follows:

Year ended December 31, 2007

Year ended December 31, 2006

future annual amortization expense related to these assets is expected to be as follows:

Year ended December 31, 2008

Year ended December 31, 2009

Year ended December 31, 2010

and equipment are as follows as of December 31,

OF PROPERTY AND EQUIPMENT

Building and leasehold improvements

Manufacturing equipment

Office and other equipment

Accumulated depreciation and amortization

Total property and equipment, net

Asset Impairment

evaluate long-lived assets, primarily property and equipment, 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.

As of December 31, 2025, the Company’s common stock was trading at a value less than the Company’s

net equity value.

As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was

required as of December 31, 2025.

No impairment of long-lived assets was recorded during the years ended December 31, 2025 or 2024.

stock issued is non-cumulative and nonconvertible.

The holders of the preferred stock are entitled to a non-cumulative dividend of 12 %

when and if declared.

In liquidation, holders of preferred stock have preference to the extent of $ 1.00 per share plus dividends declared

No preferred stock dividends were declared or paid during the years ended December 31, 2025 and 2024.

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.

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 .

We pay sales commissions on new business generated.

Because the related

amortization period for these incremental contract acquisition costs is one year or less, the Company has elected the practical

expedient and therefore expenses these costs as incurred.

Additionally, the Company has elected the practical expedient related to

significant financing components and does not assess whether a contract includes a significant financing component when the period

between the transfer of the promised goods or services and customer payment is one year or less.

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 % our net sales for both the years ended December 31, 2025 and 2024.

Net sales under these agreements are generally recognized over

time using an input measure based upon the proportion of actual costs incurred.

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

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.

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.

net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in

the consolidated statements of operations and comprehensive income (loss).

assets, recorded as such in the consolidated balance sheets, consist of unbilled amounts related to net sales recognized over time.

in the contract assets balance during the years ended December 31, 2025 and 2024 were as follows:

OF CONTRACT ASSETS

Balance outstanding as of December 31, 2023

Increase (decrease) attributed to:

Amounts transferred over time to contract assets

Reversal of allowance for current expected credit losses

Amounts invoiced during the period

Balance outstanding as of December 31, 2024

Increase (decrease) attributed to:

Amounts transferred over time to contract assets

Allowance for current expected credit losses

Amounts invoiced during the period

Balance outstanding as of December 31, 2025

expect substantially all the remaining performance obligations for the contract assets recorded as of December 31, 2025, 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.

receivables are presented separately on the consolidated balance sheets.

liabilities, recorded as customer deposits, were $ 4,068

at January 1, 2024 and $ 5,386

at December 31, 2025 and 2024, respectively.

Contract liabilities

primarily relate to customer prepayments, generally to purchase customer-specific inventory, and billings in advance of the Company satisfying

its performance obligations.

Revenue recognized during the year ended December 31, 2025 that was included in the contract liability balance

at the beginning of the period was $ 500 .

Changes between periods represent the timing of customer deposits and the satisfaction of performance

following tables summarize our net sales by market for the years ended December 31, 2025 and 2024:

OF NET SALES BY MARKET

Year Ended December 31, 2025

Product/ Service Transferred

Product Transferred at Point in Time

Noncash Consideration

Total Net Sales by Market

Medical Device

Medical Imaging

Aerospace and Defense

Total net sales

Year Ended December 31, 2024

Impairment Analysis

We evaluate property and equipment and intangible assets with finite lives for impairment and for propriety of the related amortization periods, to determine

whether adjustments to these amounts or useful lives are required based on current events and circumstances.

The evaluation 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 would be recorded

to reduce the carrying amount to the asset's estimated fair value.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Preferred Stock

Preferred stock issued is non-cumulative and nonconvertible.

The holders of the preferred stock are entitled to a non-cumulative dividend

of 12% when and as declared.

In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid.

No preferred stock dividends were declared

or paid during the years ended December 31, 2007 and 2006.

Revenue Recognition

We recognize revenue upon shipment of products to customers, when title has passed, all contractual obligations have been satisfied and collection of the

resulting receivable is reasonably assured.

In the normal course of business we enter into a number of contracts with customers under which we provide engineering services on a per project basis.

Revenue for these services is recognized upon completion of the engineering process, usually upon initial shipment of the product.

Revenues from repair services are recognized upon shipment of related

equipment to customers.

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.

Product warranties

We provide limited warranty for the replacement or repair of defective product at no cost to our customers within a specified time period after the sale.

no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including without limitation, warranties to merchantability, fit for a particular purpose or

non-infringement of patent or the like unless agreed upon in writing.

We estimate the costs that may be incurred under our limited warranty and reserve based on actual historical warranty

claims coupled with an analysis of unfulfilled claims at the balance sheet date.

Our warranty claims costs are not material given the nature of our products and services which normally result in

repair and return in the same accounting period.

Advertising costs are charged to operations as incurred.

The total amount charged to expense was $160,343 and $168,448 for the years ended December 31,

2007 and 2006, respectively

We account for income taxes under the asset and liability method.

Deferred income tax assets and liabilities are recognized annually for differences between the

financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the

differences are expected to affect taxable income.

Product/ Service Transferred

Product Transferred at Point in Time

Noncash Consideration

Total Net Sales by Market

Medical Device

Medical Imaging

Aerospace and Defense

Total net sales

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

provide limited warranty for the replacement or repair of defective product within a specified time period after the sale at no cost

to our customers.

We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including,

without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed

upon in writing.

We estimate the costs that may be incurred under our limited warranty and provide a reserve based on actual historical

warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date.

Our warranty claim costs are not material given

the nature of our products and services.

costs are charged to operations as incurred and aggregated to $ 114 and $ 83 for the years ended December 31, 2025 and 2024, respectively.

account for income taxes under the asset and liability method.

Deferred income tax assets and liabilities are recognized annually for

differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts

in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments

The carrying amounts of all financial instruments approximate their fair values.

The carrying amounts for cash, receivables, payables, accrued liabilities and the

line of credit approximate fair value because of the short maturity of these instruments.

Based on the borrowing rates currently available to us for bank loans with similar terms and average

maturities, the carrying value of our long-term debt approximates its fair value.

Stock Based Compensation

Our 2007 and 2006 consolidated financial statements reflect the impact of SFAS No.

123R, Share-Based Payment ("SFAS 123R").

Stock-based compensation

expense recognized under SFAS 123R was $255,012 ($.07 per diluted common share) for 2007 and $188,259 ($.05 per diluted common share) for 2006.

See Note 9 for additional information.

Derivative Financial Instruments

SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities," as amended, defines derivatives and requires that they be carried at fair value on

the balance sheet.

On June 28, 2006, we entered into an interest rate swap agreement to effectively convert our industrial revenue bond debt from a variable rate to a fixed rate.

The change in

market value of an interest rate swap is recognized on the balance sheet by a charge or credit to interest expense.

Further information related to our interest rate swap is disclosed in Note 5.

Net Income Per Common Share

Basic net income per common share is computed using the weighted-average number of common shares outstanding.

Diluted net income per common share is computed

using the weighted-average number of common shares outstanding and potential common shares from the assumed exercise of stock options outstanding during the period using the treasury stock method.

Uncertain Tax Positions

Effective January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No.

48, Accounting for Uncertainty in Income

Taxesan interpretation of FASB Statement No.

109, ("FIN 48").

In accordance with FIN 48, we recognize the benefit of a tax position, if that position is more likely

than not of being sustained on audit, based on the technical merits of the position.

As a result of the implementation of FIN 48, we recognized a $32,000 liability for unrecognized income tax

benefits, which is included in income taxes payable, as an adjustment to the January 1, 2007 retained earnings balance (See Note 6).

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No.

157, Fair Value Measurements ("SFAS 157").

SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

This Statement

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant

measurement attribute.

Accordingly, this Statement does not require any new fair value measurements.

SFAS 157 is effective for fiscal years beginning after November 15, 2007.

currently assessing the impact, if any, that SFAS 157 will have on our results of operations and financial position.

February 2007, the FASB issued SFAS No.

159, The Fair Value Option For Financial Assets and Financial Liabilities

("SFAS 159").

SFAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value.

SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities,

accounts payable, and issued debt.

If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred.

The fair value election is

irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value.

adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings.

Subsequent to the adoption of

SFAS 159, changes in fair value are recognized in earnings.

is effective for fiscal years beginning after November 15, 2007.

We are currently assessing the impact, if any, that SFAS 159 will have on our results of

operations and financial position.

December 2007, the FASB issued SFAS No.

141 (revised 2007), "Business Combinations" ("SFAS 141R"), which replaces FASB Statement No.

141 and SFAS No.

"Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No.

51" ("SFAS 160").

SFAS 141R establishes principles and requirements for how an

acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.

Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination.

SFAS 160 will change the accounting and

reporting for minority interests, reporting them as equity separate from the parent entity's equity, as well as requiring expanded disclosures.

SFAS 141R and SFAS 160 are effective as of

the beginning of an entity's fiscal year beginning after December 15, 2008.

We are currently assessing the impact, if any, that SFAS 141R and SFAS 160 will have on our results of

operations and financial position.

Supplemental Cash Flow Information

We paid $615,597 and $1,090,540 in income taxes for the years ended December 31, 2007 and 2006, respectively.

We paid interest expense of $1,100,467 and

$746,519 for the years ended December 31, 2007 and 2006, respectively.

the year ended December 31, 2007, we had noncash operating activities of $32,000, representing the cumulative effect of FIN 48 adoption, and noncash investing

activities of $200,000 attributable to the earnout payment accrual for our Garner, Iowa acquisition.

For the year ended December 31, 2006 we issued common stock on a restricted basis, resulting

in noncash financing activities of $188,259.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Segment Reporting Information

Our results of operations for the years ended December 31, 2007 and 2006 represent a single segment referred to as Contract Manufacturing.

represent approximately 4% and 5% of consolidated sales for the years ended December 31, 2007 and 2006, respectively.

assets by country are as follows:

United States

Net property and equipment

Foreign Currency Translation

Local currency is considered the functional currency for our operations outside the United States.

Assets and liabilities are translated at year-end

exchange rates.

Income and expense items are translated at average rates of exchange prevailing during the year.

Translation adjustments are recorded as a component of accumulated other comprehensive

loss in shareholders' equity.

Foreign exchange transaction gains and losses attributable to exchange rate movements on intercompany receivables and payables not deemed to be of a long-term

investment nature are recorded in miscellaneous income (expense).

NOTE 2 PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of our wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.

significant intercompany accounts and transactions have been eliminated.

NOTE 3 MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable.

With regard to cash,

we maintain our excess cash balances in checking and money market accounts at three high-credit quality financial institutions.

We have not experienced any losses in any of the

short-term investment instruments we have used for excess cash balances.

We do not require collateral on our receivables.

Historically, we have not suffered significant losses with respect

to trade accounts receivable.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 3 MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Continued)

divisions of General Electric, Co.

(G.E.) combined accounted for 10% or more of our net sales during the past two years.

G.E.'s Medical and Transportation Divisions together

accounted for 17% of our net sales for the years ended December 31, 2007 and 2006.

Accounts receivable from G.E.'s Medical and Transportation Divisions at December 31, 2007 and 2006

represented 10% and 14% of our total accounts receivable, respectively.

Additionally, Northrop Grumman Corp.

accounted for 16% and 10% of our net sales for the years ended December 31, 2007 and

interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense.

recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on

examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the consolidated

financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of

being realized upon ultimate resolution.

Management must also assess whether uncertain tax positions as filed could result in the recognition

of a liability for possible interest and penalties if any.

Our estimates are based on the information available to us at the time we

prepare the income tax provisions.

Our income tax returns are subject to audit by federal, state, and local governments, generally three

years after the returns are filed.

These returns could be subject to material adjustments or differing interpretations of the tax laws.

use a Black-Scholes option-pricing model to determine the grant date fair value of our service-based incentive awards and recognize the

expense on a straight-line basis over the vesting period.

We determine the grant date fair value of our market-based incentive awards

using a lattice simulation model and recognize the expense on a straight-line basis over the vesting period.

The grant date fair value

of restricted stock units is determined based on the closing market price of the Company’s common stock on the date of grant, with

compensation expense recognized ratably over the applicable vesting period.

See Note 8 – “Incentive Plans” for additional

Loss Per Common Share

net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding.

income per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average

number of common shares outstanding using the treasury stock method, unless their effect is anti-dilutive.

Basic and diluted weighted

average shares outstanding were as follows:

OF BASIC AND DILUTED WEIGHTED

AVERAGE SHARES OUTSTANDING

Basic weighted average shares outstanding

Dilutive effect of outstanding stock options and non-vested restricted stock units 1

Diluted weighted average shares outstanding

following items were excluded from the computation of diluted weighted-average shares outstanding as their inclusion would be anti-dilutive:

the year ended December 31, 2025, restricted stock units and stock options totaling 533,846 .

the year ended December 31, 2024, restricted stock units and stock options totaling 477,541 .

Value of Financial Instruments

carrying amounts of all financial instruments approximate their fair values.

The carrying amounts for cash, accounts receivable, accounts

payable, and other assets and liabilities approximate fair value because of the short maturity of these instruments.

Based on the borrowing

rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt and

line of credit approximates its fair value.

Currency Transactions

functional currency for our Mexico subsidiary is the US dollar.

Foreign exchange transaction gains and losses attributable to exchange

rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a

long-term investment nature are recorded in general and administrative expense.

The functional currency for our China subsidiary is the

Renminbi (“RMB”).

Assets and liabilities of the China subsidiary are translated from RMB into U.S.

dollars at period-end

rates, while income and expense are translated at the weighted-average exchange rates for the period.

The related translation adjustments

are reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within shareholders’ equity.

Foreign currency translation gains (losses) increased consolidated shareholders’ equity by $ 268 for the year ended December 31,

2025 and decreased shareholder’s equity by $ 445 for the year ended December 31, 2024.

gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency

are included in the consolidated statements of operations and comprehensive income (loss).

Net foreign currency transaction gains or

losses included in the determination of net loss was a gain of $ 120 and a loss of $ 137 for the years ended December 31, 2025 and 2024,

respectively.

Accounts receivable from Northrop Grumman at December 31, 2007 and 2006 represented 21% and 15% of our total accounts receivable, respectively.

Historically,

we have not experienced significant losses on customer receivable collections in any particular industry or geographic area.

NOTE 4 ACCRUED HEALTH AND DENTAL CLAIMS

We have partially self-insured our employee health and dental plans.

We have contracted with two separate administrative service companies to

supervise and administer the programs and act as representatives.

Our health plan insures for excessive or unexpected claims and we are not liable for claims exceeding $80,000 per individual per plan

year and an estimated aggregate amount of $4,317,000 for the plan year ending August 2008.

Our dental plan pays claims based on actual amounts incurred.

Estimated unpaid claims for incurred health and

dental services of $380,000 and $325,000 are reflected as accrued liabilities on the balance sheet at December 31, 2007 and 2006, respectively.

NOTE 5 LONG-TERM DEBT

On February 2, 2007, we entered into a 7th amendment to our credit agreement with Wells Fargo Bank, N.A.

(WFB) increasing our line of credit

arrangement from $10 million to $15 million and extending the maturity date of the line of credit to April 30, 2009.

Additionally,

in connection with the acquisition of Suntron's Midwest Operations discussed in Note 12, the 7th amendment increased our real estate term note balance and

extended the maturity date to May 31, 2012.

Per the 7th amendment, both the line of credit and real estate term note are subject to variations in the LIBOR rates.

The line of credit and

other installment debt 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 ratios, 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

At December 31, 2007, we have net unused availability under our line of credit of $7,849,573.

The line is secured by substantially all of our assets.

2007 our line of credit bore interest at LIBOR + 2.75% (6.97% at December 31, 2007) per the conditions met under the 7 th Amendment.

During 2006, our line of credit bore interest at prime (8.25% at December 31, 2006).

The weighted-average interest rate on our line of credit was 8.21% and 7.77% for the years ended

December 31, 2007 and 2006, respectively.

We had borrowings of $5,635,076 and $4,694,027 outstanding as of December 31, 2007 and 2006, respectively.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 5 LONG-TERM DEBT (Continued)

summary of long-term debt balances at December 31, 2007 and 2006 is as follows:

Term notes payableWells Fargo Bank Minnesota, N.A., one note bears interest at LIBOR + 2.25% (approx.

7.125%), three notes bear interest at 6.30%, 7.31%, and 6.67%, respectively;

combined monthly principal

payments of $100,306 plus interest, maturities range from July 2008 to May 2012;

secured by substantially all assets

Industrial revenue bond payable to the City of Blue Earth, Minnesota at December 31, 2007 bears interest at 4.07% and has a maturity date of June 1, 2021, with principal of $130,000 payable annually on

Notes paid off during 2007

Total long-term debt

Current maturities of long-term debt

Long-term debtnet of current maturities

June 28, 2006, we entered into an interest rate swap agreement with a notional amount of $1,440,000 to effectively convert our industrial revenue bond debt from a variable rate

to a fixed rate of 4.07% for five years, maturing on June 28, 2011.

The fair value of the swap at December 31, 2007 was recorded as a long-term liability of $42,919, with the

change in the fair value recorded as a component of interest expense.

maturity requirements for long-term debt are as follows:

Years Ending December 31,

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 6 INCOME TAXES

The income tax expense for the years ended December 31, 2007 and 2006 consists of the following:

Current taxesFederal

Current taxesState

Current taxesForeign

Deferred taxesFederal

Deferred taxesState

Deferred taxesForeign

of New Accounting Standards

December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

The ASU enhances the transparency and decision usefulness

of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis.

Early adoption

is permitted.

The Company has adopted this ASU and the additional income tax disclosures are noted in Note 6, Income Taxes.

Issued New Accounting Standards

November 2024, the FASB issued ASU No.

2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation

Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses (“ASU No.

2024-03”), which requires disaggregated

expense information in the notes to the financial statements related to purchases of inventory, employee compensation, depreciation,

intangible asset amortization and selling expenses for each statement of earnings line item that contains those expenses.

is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods

beginning after December 15, 2027.

The guidance is to be applied on a prospective basis with the option to apply the standard retrospectively;

this ASU allows for early adoption.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements

July 2025, the FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses for Accounts

Receivable and Contract Assets (“ASU No.

2025-05”), which reduces the complexity of applying credit losses to current accounts

receivable and current contract assets arising from transactions accounted for under Topic 606 (revenue from contracts with customers).

ASU 2025-05 is effective for annual and interim reporting periods beginning after December 15, 2025.

The Company is currently evaluating

the impact of this ASU on its consolidated financial statements disclosures.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract

We maintain our excess cash balances in checking accounts primarily at two financial institutions, one in the United States and

one in China.

The account in the United States may at times exceed federally insured limits.

The Company’s $ 1,655 cash balance

as of December 31, 2025, included approximately $ 517 and $ 137 that was held at banks located in China and Mexico, respectively.

credit to customers in the normal course of business and generally do not require collateral on our accounts receivable.

have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances or contract

asset balances individually represented 10% or more of gross accounts receivable.

who represent 10% or more of net sales for years ended December 31, 2025 and 2024 are as follows:

OF NET SALES CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

who represent 10% or more of accounts receivable and contract assets as of December 31, 2025 and 2024 are as follows:

OF ACCOUNTS RECEIVABLE CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Accounts Receivable as of December 31,

OF CONTRACT ASSETS CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Contract Assets as of

sales from the U.S.

represented approximately 3 % of net sales for both the years ended December 31, 2025 and 2024.

OTHER INTANGIBLE ASSETS

life intangible assets as of December 31, 2025 and 2024 are as follows:

OF INTANGIBLE ASSETS

Relationships

Balance as of January 1, 2024

Balance as of December 31, 2024

Balance as of December 31, 2025

assets are amortized on a straight-line basis over their estimated useful lives.

The weighted average remaining amortization period of

our intangible assets is 4.1 years.

Of the patents value as of December 31, 2025, $ 71 are being amortized and $ 85 are in process as patents

have not yet been issued.

expense of finite life intangible assets was $ 18 and $ 89 for the years ended December 31, 2025 and 2024, respectively.

future annual amortization expense (except projects in process) related to these assets is approximately as follows:

SCHEDULE OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE

FINANCING ARRANGEMENTS

February 29, 2024, we closed on a $ 15,000 Senior Secured Revolving Line of Credit with Bank of America (the “BOA Revolver”).

The BOA Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also

known as “SOFR,” plus a defined margin.

If the Company prepays SOFR borrowings before their contractual maturity, the Company

has agreed to compensate the bank for lost margin, as defined in the BOA Revolver agreement.

The Company is required to quarterly pay

a 20-basis point fee on the unused portion of the BOA Revolver.

BOA Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage

ratio, both of which are defined in the BOA Revolver agreement.

These ratios are calculated based on trailing twelve-month results.

are no subjective acceleration clauses under the BOA Revolver that would accelerate the maturity of outstanding borrowings.

The BOA Revolver

contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder

dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.

The BOA Revolver is

secured by substantially all the Company’s assets and expires on February 28, 2027.

We were not in compliance with financial covenants

related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024.

We have received

a waiver of this event of default from the bank.

to the BOA Revolver

March 27, 2025, we amended (the “First Amendment”) the BOA Revolver to waive our non-compliance with the leverage ratio and

minimum fixed charge ratio as of December 31, 2024, and March 31, 2025.

Provisions of the First Amendment relating to the Company’s

compliance with these ratios were replaced with provisions of the Second Amendment (described below).

Provisions of the First Amendment

relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below).

of the First Amendment requiring the Company to maintain unrestricted cash and BOA Revolver availability (collectively, “Liquidity”)

at specified levels were replaced with provisions of the Second Amendment (described below).

The First Amendment requires the Company

to provide incremental monthly reporting and increases the Company’s borrowing rate by one percent until the Company is in compliance

with the original terms of the BOA Revolver.

The First Amendment increases the borrowing rate for revolving loans by 100 basis points.

May 14, 2025, we further amended (the “Second Amendment”) the BOA Revolver, which amended the First Amendment in part, to

defer the Company’s compliance with the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which

time the Company must maintain (a) a leverage ratio of 2.5 times for the year ended December 31, 2025 and for each twelve-month quarterly

reporting period thereafter;

and (b) a minimum fixed charge coverage ratio to 1.25 times for the year ended December 31, 2025 and for

each twelve-month quarterly reporting period thereafter.

The Company must also maintain adjusted EBITDA (earnings before interest, taxes

depreciation and amortization), as defined in the BOA Revolver, as of the end of the second quarter of 2025 of at least $1,000, the third

quarter of 2025 of at least $1,300 and the fourth quarter of 2025 and each quarter thereafter of at least $1,600.

In addition, the Second

Amendment requires the Company to always maintain Liquidity of at least $2,500.

The Second Amendment shortened the duration of the BOA

Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points.

July 29, 2025, we amended the BOA Revolver (the “Third Amendment”) to extend the expiration of the BOA Revolver to August

February 27, 2026, we entered into a Waiver and Amendment No.

4 to its Credit Agreement with Bank of America, N.A.

See footnote 13, Subsequent Events.

BOA Revolver, as amended, bears interest at a weighted-average interest rate of 7.8 % and 7.7 % as of December 31, 2025 and December 31,

2024, respectively.

We had borrowings on our line of credit of $ 7,000 and $ 8,695 outstanding as of December 31, 2025 and 2024, respectively.

As of December 31, 2025, we had unused availability on the line of credit of $ 8,000 , which is subject to a month end cap based on the

previously noted minimum Liquidity.

The decrease in the line of credit balance between the years is the result of timing of accounts

payable payments.

We have recorded the outstanding BOA Revolver amount of $ 7,000 at December 31, 2025 as a current liability on the condensed

consolidated balance sheets.

Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when

the equipment was received and operational.

The equipment was received, and the lease agreements were finalized during the second quarter

As of December 31, 2025, we have no amounts outstanding on the interim funding agreement for equipment.

March 20, 2026, the Company repaid the BOA Revolver and entered into a new asset-backed line of credit.

See footnote 13, Subsequent Events.

have operating leases for certain manufacturing sites, office space, and equipment.

Most leases include the option to renew, with renewal

terms that can extend the lease term from one 1

years or more.

Right-of-use lease assets and lease liabilities

are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes

renewal periods we are reasonably certain to exercise.

Our leases do not contain any material residual value guarantees or material restrictive

As of December 31, 2025, we do not have material lease commitments that have not commenced.

We have financing leases for certain

property and equipment used in the normal course of business.

components of lease expense were as follows for the years ended December 31:

SCHEDULE OF COMPONENTS OF LEASE EXPENSE

Operating lease cost

Finance lease interest cost

Finance lease amortization expense

Total lease cost

balance sheets information related to leases was as follows as of December 31:

SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS INFORMATION RELATED TO LEASES

Balance Sheets Location

Operating lease assets

Finance lease assets

Property, plant and equipment

Total leased assets

Current operating lease liabilities

Current portion of operating lease obligations

Current finance lease liabilities

Current portion of finance lease obligations

Long-term operating lease liabilities

Long-term operating lease liabilities, net

Long-term finance lease liabilities

Long-term finance lease obligations, net

Total lease liabilities

cash flow information related to leases was as follows for the years ended December 31:

SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION

Operating Leases

Cash paid for amounts included in the measurement of lease liabilities

Operating lease assets obtained in exchange for lease obligations

operating lease assets obtained in exchange for lease obligations in the year ended December 31, 2024 was largely due to the renewal

of our lease in Maple Grove and Milaca, Minnesota, as well as leasing of additional space in our Suzhou, China facility.

maturities of lease liabilities were as follows:

SCHEDULE OF FUTURE PAYMENTS OF LEASE LIABILITIES

Operating Leases

Finance Leases

Total lease payments

Present value of lease liabilities

lease term and discount rate as of December 31, 2025 were as follows:

SCHEDULE OF LEASE TERM AND DISCOUNT RATE

Weighted-average remaining lease term (years)

Operating leases

Finance leases

Weighted-average discount rate

Operating leases

Finance leases

income tax expense consists of the following for the years ended December 31:

SCHEDULE OF INCOME TAX EXPENSE

Income tax expense

statutory rate reconciliation for the years ended December 31, 2007 and 2006 is as follows:

Statutory federal tax provision

State income taxes, net of federal benefit

statutory rate reconciliation is as follows for the years ended December 31:

SCHEDULE OF INCOME TAX STATUTORY RATE RECONCILIATION

Statutory rate

State income tax

Effect of foreign operations

Income tax credits

Other, including benefit of income taxed at lower rates

Income tax expense

from operations before income taxes was derived from the following sources:

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 6 INCOME TAXES (Continued)

tax assets (liabilities) at December 31, 2007 and 2006, consist of the following:

Allowance for doubtful accounts

Inventory reserves

Accrued vacation

Health insurance reserve

Non-compete amortization

Stock-based compensation

Maquiladora tax

Cross-border tax laws

Research and development

Nontaxble and nondeductable items

US permanent differences

Income tax expense (benefit)

July 4, 2025, H.R.

1, the One Big Beautiful Bill Act (the “OBBB Act”), was enacted in the United States.

The OBBB Act introduced

several tax law changes relevant to the manufacturing industry.

Key provisions include the restoration of 100% bonus depreciation for

qualified property, expanded interest deductibility under Internal Revenue Code Section 163(j) and other international tax reforms affecting

global supply chains and cross-border operations.

The OBBB Act also reinstates immediate expensing for domestic research and development

expenditures for tax years beginning after December 31, 2024, reversing prior rules that required capitalization and amortization of

Due to the impact on GILTI provisions, the Company does not intend to take 100% bonus depreciation.

It also does not intend

to immediately expense R&D expenditures for 2025 or accelerate the deduction of previously capitalized R&D expenditures.

and loss from operations before income taxes was derived from the following jurisdictions for the years ended December 31:

SCHEDULE OF INCOME AND LOSS FROM OPERATIONS BEFORE INCOME TAX

United States

tax assets (liabilities) consist of the following as of December 31:

OF DEFERRED TAX ASSETS (LIABILITIES)

Deferred tax assets

Net operating losses

Stock-based compensation

Other accruals

Lease accounting lease liability

Capitalized research expenses

Tax credit carryforwards

Total deferred tax assets

Deferred tax liabilities

Lease accounting lease asset

Withholding tax

Prepaid expenses

Property and equipment

Deferred tax liabilities

Net deferred tax assets

Net current deferred tax assets

Net non-current deferred tax assets

Total deferred tax liabilities

Net deferred tax assets

have determined that it is more likely than not that our deferred tax assets will be realized, principally through anticipated taxable income in future tax years.

As a result, we have

determined that establishing a valuation allowance on our deferred tax assets is not necessary.

In July 2006, the FASB issued Interpretation No.

48 (FIN 48), "Accounting for Uncertainty

in Income Taxesan Interpretation of FASB Statement 109", which clarifies the accounting for uncertainty in tax positions.

FIN 48 provides that the tax effects from an uncertain tax

position can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position.

FIN 48 on January 1, 2007.

As required by FIN 48, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more

likely than not sustain the position following an audit.

For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial

statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

At the adoption date, we applied

FIN 48 to all tax positions for which the statute of limitations remained open.

As a result of the implementation of FIN 48, we recognized a $32,000 income taxes payable liability for

unrecognized income tax benefits, as an adjustment to the January 1, 2007 retained earnings balance.

also recorded an additional $8,000 of income taxes payable and expense for unrecognized 2007 income tax benefits.

The $32,000 of unrecognized tax benefits as of January 1, 2007

and the additional $8,000 as of December 31, 2007, includes unrecognized tax benefits which, if ultimately recognized, will reduce our annual effective tax rate.

policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes.

The liability for accrued interest as of December 31,

2007 and as of the

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 6 INCOME TAXES (Continued)

of FIN 48 was not significant.

Interest is computed on the difference between our uncertain tax benefit positions under FIN 48 and the amount deducted or expected to be deducted

in our tax returns.

to statute expiration, an approximate $12,000 decrease could occur with respect to our FIN 48 reserve in the next twelve months.

This reserve, including associated interest,

relates to federal research tax credits.

Company regularly assesses the need for a valuation allowance related to our deferred income tax assets to determine, based on the weight

of the available positive and negative evidence, whether it is more likely than not that some or all of such deferred assets will not

In our assessments, the Company considers recent financial operating results, potential sources of taxable income, the reversal

of existing taxable differences, taxable income in prior carryback years, if permitted under tax law, and tax planning strategies.

on our most recent assessment, for the year ended December 31, 2025, we have concluded that our deferred income tax assets are more likely

than not to be realized.

Our consolidated balance sheets as of December 31, 2025 and 2024 have a deferred tax asset of $ 3,394 and $ 2,575 ,

respectively, related to our US taxable operations and a $ 360 and $ 219 , respectively, deferred tax liability included other long-term

liabilities related to our Chinese taxes, for a net deferred tax asset of $ 3,034 and $ 2,356 , respectively.

of December 31, 2025, we have no US Federal net operating loss carryforward and a Minnesota net operating loss carryforward (pre-tax,

post-apportionment) of approximately $ 2,100 .

of December 31, 2025, the Company has US Federal and Minnesota R&D tax credits of approximately $ 100 and $ 100 , respectively.

balances are recorded net of any uncertain tax position.

The R&D credits have a 20-year carryforward for Federal purposes (begin

to expire in 2044) and 15-year carryforward for Minnesota purposes (begin to expire in 2029) .

tax effects from uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely

than not to be sustained on audit, based on the technical merits of the position.

We recognize the financial statement benefit of a tax

position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has

a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following tables

set forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31,

2025 and 2024:

SCHEDULE OF UNRECOGNIZED TAX BENEFIT LIABILITIES

Balance as of January 1, 2024

Tax positions - additions

Tax positions - reductions

Balance as of December 31, 2024

Tax positions - additions

Tax positions - reductions

Balance as of December 31, 2025

policy is to accrue interest related to potential underpayment of income taxes with a corresponding increase in income tax expense.

liability for accrued interest as of December 31, 2025 and 2024 was not significant.

Interest is computed on the difference between our

uncertain tax benefit positions and the amount deducted or expected to be deducted in our filed tax returns.

are subject to income taxes in the U.S.

federal jurisdiction and various state jurisdictions.

Tax regulations within each jurisdiction are subject to the interpretation of the related

tax laws and regulations and require significant judgment to apply.

With few exceptions, we are no longer subject to U.S.

federal, state or local income tax examinations by tax authorities for the

years before 2004.

We are not currently under examination by any taxing jurisdiction.

NOTE 7 COMPREHENSIVE INCOME

Comprehensive income is comprised of net income and other comprehensive income (loss).

Other comprehensive income (loss) includes income (loss) resulting from

foreign currency translations.

The details of comprehensive income are as follows:

Net income, as reported

Other comprehensive loss:

Comprehensive income

NOTE 8 401(K) RETIREMENT PLAN

We have a 401(k) profit sharing plan (the "Plan") for our employees.

The Plan is a defined contribution plan covering all of our employees except for employees

covered by a collective bargaining agreement and non-resident aliens earning non-U.S.

source income.

Employees are eligible to participate in the Plan after completing six

months of service and attaining the age of 21.

Employees are allowed to contribute up to 60% of their wages to the Plan.

We match 25% of the employees' contribution up to 6% of covered compensation.

We made contributions of $218,393 and $167,031 during the years ended December 31, 2007 and 2006, respectively.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 9 GAINSHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS

Employee Gainsharing

During 1993, we adopted an employee gainsharing plan (the "Plan").

The purpose of the Plan is to provide a bonus for increased output, improved quality and

productivity and reduced costs.

We have authorized 50,000 common shares to be available under this Plan.

In accordance with the terms of the Plan, employees can acquire newly issued shares of common

stock for 90% of the current market value.

During 2007 and 2006, 159 and 32 common shares, respectively, were issued in connection with this plan.

Through December 31, 2007, 22,014 common

shares have been issued under this Plan.

Stock Options and Restricted Stock

In 1992, we approved the adoption of a fixed stock based compensation plan.

The purpose of the Plan is to promote our interests and our shareholders interests by

providing officers, directors and other key employees with additional incentive and the opportunity, through common stock ownership, to increase their proprietary interest in us and their personal

interest in our continued success.

In February 2003, we reached the maximum options allowed to be granted under the plan.

2003, our shareholders approved the adoption of the Nortech Systems Incorporated 2003 Stock Option Plan (the "2003 Plan").

The total number of shares of common stock that could

have been granted under the 2003 Plan was 300,000.

On May 3, 2005, the shareholders approved the 2005 Incentive Compensation Plan (the "2005 Plan") and eliminated the remaining 172,500 option

shares available for grant under the 2003 Plan effective February 23, 2005.

The total number of shares of common stock that may be granted under the 2005 Plan is 200,000, of which 39,500 remain

available for grant at December 31, 2007.

The 2005 Plan provides that option shares granted come from our authorized but unissued common stock.

The price of the option shares granted under the

plan will not be less than 100% of the fair market value of the common shares on the date of grant.

Options are generally exercisable after one or more years and expire no later than 10 years

from the date of grant.

2007, the Board of Directors approved the adoption of the FOCUS Incentive Plan (the "2007 Plan").

The purpose of the 2007 Plan is to provide incentives to our employees to

increase our return on Sales "ROS" performance measurement.

The total number of shares of common stock that may be granted under the 2007 Plan is 490,000, of which 30,000 remain available for grant at

December 31, 2007.

The 2007 Plan provides that option shares granted come from our authorized but unissued common stock.

The price of the option shares granted under the plan will not be less

than 100% of the fair market value of the common shares on the date of grant.

Options expire no later than 10 years from the date of grant.

However, the FOCUS plan is unique from the preceding

Plans in that vesting of options is conditional upon our achievement of established performance measurements as follows:

we achieve 1.95% ROS for any of the three years ending 2007, 2008, or 2009, one-third of the options will vest.

we achieve 3% ROS for either of the two calendar years 2008 or 2009, one-third of the options will vest.

we achieve 4% ROS for the calendar year 2009, the remaining one-third of the options will vest.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 9 GAINSHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS (Continued)

following table summarizes information about stock options outstanding at December 31, 2007:

Exercise Prices

Outstanding 12/31/2007

Exercisable 12/31/2007

Remaining Contractual Life

is a summary of the stock option plan activity during 2007 and 2006.

Options outstanding, beginning of year

Options exercised

Options cancelled

Options granted

Options outstanding, end of year

Option price range of exercised options

requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model.

The value of the portion of the award that is

ultimately expected to vest is recognized as expense in the consolidated statement of operations over the requisite service periods.

Share-based compensation expense for share-based awards granted

prior to, but not yet vested as of December 31, 2005, is based on the grant date fair value estimated in accordance with the provisions of SFAS 123.

For options granted subsequent to

December 31, 2005, compensation expense is based on the grant date fair value estimated in accordance with SFAS 123R.

Because share-based compensation expense is based on awards that are

ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures.

SFAS 123R requires

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 9 GAINSHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS (Continued)

to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

July 2007, a total of 460,000 options were granted under the Focus Incentive Plan to our management and directors with the exercise price equaling the closing price of the common

shares on the date of the grant.

To calculate the option-based compensation under SFAS 123R, we used the Black-Scholes option-pricing model.

With few exceptions, we are no longer subject

to federal and state and local income tax examinations for years before 2021.

401(K) RETIREMENT PLAN

have a 401(k) profit sharing plan (the “401(k) Plan”), a defined contribution plan, covering substantially all of our U.S.

Employees are eligible to participate in the Plan after completing three months of service and attaining the age of 18 .

are allowed to contribute up to 60 % of their wages to the 401(k) Plan.

We match 50 % of the employees’ contributions up to 6 % of

covered compensation.

We made contributions, net of forfeitures, of approximately $ 640 and $ 725 during the years ended December 31, 2025

and 2024, respectively.

INCENTIVE PLANS

May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares.

An additional 50,000 ,

175,000 , 100,000 and 100,000 shares were authorized by the shareholders in March 2020, May 2022, May 2023 and May 2024, respectively.

estimate the fair value of share-based awards on the date of grant using an option-pricing model.

The value of the portion of the award

that is ultimately expected to vest is recognized as expense in the consolidated statements of operations and comprehensive (loss) income

over the requisite service periods.

Because share-based compensation expense is based on awards that are ultimately expected to vest,

share-based compensation expense will be reduced to account for estimated forfeitures.

We estimate forfeitures at the time of grant and

revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

used the Black-Scholes option-pricing model to calculate the fair value of option-based awards.

Our determination of fair value of option-based

awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of subjective variables as noted in the following table.

variables include, but are not limited to, our expected stock price volatility over the term of the awards, risk-free interest rate, and the expected life of the options.

risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options.

The expected volatility, holding period, and forfeitures of

options are based on our historical experience.

Expected volatility

awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding several subjective

These variables include, but are not limited to, our expected stock price, volatility over the term of the awards, risk-free

interest rate, and the expected life of the options.

The risk-free interest rate is based on a treasury instrument whose term is consistent

with the expected life of our stock options.

The expected volatility and holding period are based on our historical experience.

grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical

Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were

OF WEIGHTED AVERAGE GRANT DATE FAIR VALUE OF STOCK OPTIONS GRANTED

Stock option fair value assumptions:

Risk-free interest rate

3.80 - 4.14 %

Expected dividends

Expected term (in years)

Risk-free rate

Stock Options with Time-Based Vesting

Total compensation expense related to stock options with time-based vesting for the years ended December 31, 2007 and 2006 was $185,112 and

$118,356, respectively.

As of December 31, 2007 there was approximately $292,000 of unrecognized compensation expense related to unvested option awards that we expect to recognize over a

weighted-average period of 1.48 years.

Stock Options with Performance-Based Vesting

As mentioned previously, the vesting of options granted in July 2007 is conditional upon our achievement of established performance measurements.

December 31, 2007, management has estimated the probability of achieving any of the performance goals is less than 50%, thus in accordance with provisions of SFAS 123R, no compensation

expense has been recorded for the year ended December 31, 2007.

As of December 31, 2007 there was approximately $1,990,000 of unrecognized compensation expense relating to the

performance-based stock options.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 9 GAINSHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS (Continued)

summary of option activity under the Plan as of December 31, 2007, and changes during the year then ended is presented below

3.83 - 4.40 %

Expected life (years)

Dividend yield

Expected volatility

Weighted average grant date fair value of stock options granted

compensation expense related to stock options was $ 290 and $ 243 for the years ended December 31, 2025 and 2024, respectively.

As of December

31, 2025, there was $ 618 of unrecognized compensation which will vest and expense over the next 2.3 years.

is the status of option activity as of and for the years ended December 31, 2025 and 2024 as follows:

OF OPTION ACTIVITY

Exercise Price

Intrinsic Value

Outstanding – January 1, 2024

Outstanding – December 31, 2024

Exercisable on December 31, 2007

weighted-average grant-date fair values of options granted during 2007 and 2006 were $4.40 and $4.29, respectively.

The total intrinsic value of options exercised during

the years ended December 31, 2007 and 2006 were $105,720 and $78,490, respectively.

At December 31, 2006, 275,500 shares were exercisable.

summary of the status of our nonvested shares as of December 31, 2007, and changes during the year ended December 31, 2007, is presented below:

Nonvested Shares

Weigted-Average

Nonvested at January 1, 2007

Nonvested at December 31, 2007

received from option exercise under all share-based payment arrangements for the year ended December 31, 2007 and 2006 was $201,100 and $126,978, respectively.

SFAS 123R also requires that the tax benefit from the exercise of options be reflected in the statement of cash flows as a cash inflow from financing activities.

The actual tax benefit realized

for the tax deductions from option exercise of the share-based payment arrangements totaled $38,000 and $88,000 for the year ended December 31, 2007 and 2006, respectively.

Restricted Stock

In March 2006, 28,500 shares of restricted common stock were granted to our management and directors.

This benefit was valued at the market price of the stock on

the date of grant.

These awards vest over a three-year term and are expensed ratably over the same period.

The arrangements contained an acceleration condition whereby if we attain certain

financial measurements, the awards

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 9 GAINSHARING INCENTIVE, STOCK OPTION AND RESTRICTED STOCK PLANS (Continued)

vest in their entirety.

The acceleration conditions were not met, thus the awards will continue to vest ratably over the full vesting period as stated in the agreement.

Total compensation

expense related to restricted stock included in the statements of income for the year ended December 31, 2007 and 2006 was $69,900 for each year.

The following is the status of our restricted

shares as of December 31, 2007, including changes during the year ended December 31, 2007:

Weighted-Average

OutstandingJanuary 1, 2007 through December 31, 2007

Outstanding – December 31, 2025

Exercisable on December 31, 2025

of December 31, 2007 and 2006, there was approximately $70,000 and $140,000, respectively, of unrecognized compensation expense related to unvested restricted stock awards.

remaining unrecognized compensation of $70,000 at December 31, 2007 is expected to be recognized in 2008.

NOTE 10 COMMITMENTS AND CONTINGENCIES

Operating Leases

The company has various operating leases for production and office equipment, office space, and buildings under non-cancelable lease agreements

expiring on various dates through 2011.

expense, which includes amounts for other short-term leases, for the years ended December 31, 2007 and 2006 amounted to approximately $1,015,000 and $863,000

respectively.

future minimum lease payments are as follows:

Years Ending December 31,

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

In our opinion, the amount of any ultimate liability with

respect to these actions will not materially affect our consolidated financial statements or results of operations.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 10 COMMITMENTS AND CONTINGENCIES (Continued)

Executive Life Insurance Plan

During 2002, we set up an Executive Bonus Life Insurance Plan (the "Plan") for our key employees ("participants").

Pursuant to the Plan, we will pay a bonus to

officer participants of 15% and a bonus to all other participants of 10% of the participants' base annual salary, as well as an additional bonus to cover federal and state taxes incurred by the

participants.

The participants are required to purchase life insurance and retain ownership of the life insurance policy once it is purchased.

The Plan provides a five-year graded vesting

schedule in which the participants vest at a rate of 20% each year.

Should a participant terminate employment prior to the fifth year of vesting, that participant may be required to reimburse us for

any unvested amounts, under certain circumstances.

Expenses under the Plan were $304,000 and $290,000 for the years ended December 31, 2007 and 2006, respectively.

Change of Control Agreements

During 2002, we entered into Change of Control Agreements (the "Agreement(s)") with certain key executives ("the Executive(s)").

The Agreements provide an

inducement for each Executive to remain as an employee in the event of any proposed or anticipated change of control in the organization, including facilitating an orderly transition, and to provide

economic security for the Executive after a change in control has occurred.

the event of an involuntarily termination, each Executive would receive their base salary, annual bonus at time of termination, and continued participation in health, disability and

life insurance plans for a period of three years for officers and two years for all other participants.

Participants would also receive professional outplacement services up to $10,000 if applicable.

Each Agreement remains in full force until the Executive terminates employment or we terminate the employment of the Executive.

NOTE 11 EARNINGS PER COMMON SHARE

The following is a reconciliation of the numerators and the denominators of the diluted per common share computations.

Diluted Earnings Per Common Share

Weighted average common shares outstanding

Stock options

Restricted Stock

Weighted average common shares for diluted earnings per common share

Diluted earnings per common share*

2007 and 2006, there were approximately 267,609 and 42,962 shares, respectively, which were not "in the money" and therefore were excluded from the computation of diluted earnings

per share because to include them would be antidilutive.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007 AND 2006

NOTE 12 BUSINESS ACQUISITION

Acquisition of Suntron's Midwest Operations

On February 4, 2007, we purchased substantially all of the assets and assumed certain liabilities of Suntron's Midwest Operations located in Garner, Iowa.

This operation is an Electronics Manufacturer Service (EMS) provider of printed circuit board assemblies, box build assemblies and repair services.

This acquisition will strengthen our capabilities in

printed circuit board assemblies and high level complete box build assemblies while opening new market segments in the agriculture and oil and gas industries.

accounted for the acquisition under the purchase method of accounting in accordance with SFAS 141, "Business Combinations".

Accordingly, the purchase price has been allocated

to the tangible and identified intangible assets acquired and liabilities assumed based on our estimates of fair value at the acquisition date.

purchase agreement called for a contingent earn-out of up to $600,000 if certain revenue levels are achieved.

Based on our review of actual revenue levels of the acquired

business, we have performed a final assessment of the earn-out payment calculation and calculated it

to be $200,000.

As such, we have included this amount in our other accrued liabilities as of December 31, 2007.

following table presents further information on the aforementioned business acquisition and the allocation of the purchase price:

Accounts receivable

Other current assets

Property, plant and equipment

Finite lived Intangibles

Accounts payable assumed

Accrued compensation and other liabilities assumed

Net assets acquired and liabilities assumed

Cash consideration Paid

Accrual for earnout payment

Total purchase price

finite life intangibles of $734,000 include a customer base of approximately $676,000, being amortized over an estimated life of five years, a non-competition agreement

of approximately $29,000 being amortized over an estimated life of three years, and a customer backlog of approximately $29,000 being amortized over six months.

For tax purposes, these assets are

deductible over a 15-year period.

This difference gives rise to deferred income taxes.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Units (“RSUs”)

compensation expense related to the RSUs were $ 213 and $ 218 for the years ended December 31, 2025 and 2024, respectively.

Total unrecognized

compensation expense related to the RSUs was $ 256 , which will vest over the next 1.3 years.

is the status of restricted stock activity as of and for the years ended December 31, 2025 and 2024 as follows:

SCHEDULE OF RESTRICTED STOCK ACTIVITY

Intrinsic Value

Outstanding – January 1, 2024

Outstanding – December 31, 2024

Outstanding – December 31, 2025

SEGMENT INFORMATION

results of operations for the years ended December 31, 2025 and 2024 represent a single operating and reporting segment referred to as

Contract Manufacturing within the EMS industry.

The Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and

Industrial markets with over 50% of its net sales coming from the medical-related markets.

We strategically direct production between

our various manufacturing facilities based on a number of considerations to best meet our customers’ needs.

Our plants generate

net sales over several of the markets the Company serves.

We share resources for sales, marketing, engineering, supply chain, information

services, human resources, payroll, and all corporate accounting functions.

Our chief operating decision maker (the “CODM”)

is the Company’s President and Chief Executive Officer.

The CODM regularly evaluates financial information on a consolidated basis

to assess performance and allocate resources.

following table presents selected financial information with respect to the Company’s single operating segment for the years ended

December 31, 2025 and 2024:

NOTE 12 BUSINESS ACQUISITION (Continued)

table below reflects our unaudited pro forma combined results of operations as if the acquisition had taken place as of January 1, 2006:

Pro Forma Year Ended

Basic earnings per common share

Diluted earnings per common share

pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest

period presented.

Report of Independent Registered Public Accounting Firm on Supplementary Information

the Board of Directors

Nortech Systems Incorporated and Subsidiary

audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and were made for the purpose of forming an opinion on the

basic consolidated financial statements taken as a whole.

The consolidated supplemental Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules

and is not a part of the basic consolidated financial statements.

This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements for

the years ended December 31, 2007 and 2006 and, in our opinion, is fairly stated in all material respects in relation to such basic consolidated financial statements taken as a whole.

McGLADREY & PULLEN, LLP

March 14, 2008

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

SCHEDULE IIValuation and Qualifying Accounts

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

Classification

Year Ended December 31, 2007:

Allowance for Uncollectible Accounts

Inventory Reserve

Self-insurance Accrual

Year Ended December 31, 2006:

Allowance for Uncollectible Accounts

Inventory Reserve

Self-insurance Accrual

OF SEGMENT INFORMATION

Cost of goods sold

Operating expenses:

General and administrative

Research and development

Restructuring charges

Total operating expenses

Income (loss) from operations

Other expense:

Interest expense

Income (loss) before income taxes

Income tax expense

Company’s long-lived tangible assets, including the Company’s operating lease assets recognized on the consolidated balance

sheets were geographically located as follows as of December 31:

OF LONG LIVED TANGIBLE ASSETS

United States

Total long-lived tangible assets

net from our U.S.

domestic operations represent approximately 3.3 % and 3.4 % of consolidated net sales for the years ended December 31,

2025 and 2024, respectively.

Net sales by our major EMS industry markets are as follows for the years ended December 31:

SCHEDULE OF NET SALES BY EMS INDUSTRY MARKETS

Medical Device

Medical Imaging

Aerospace and Defense

Total net sales

COMMITMENTS AND CONTINGENCIES

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

In our opinion, the amount of any

ultimate liability with respect to these actions will not materially affect our consolidated financial statements or results of operations.

of Control Agreements

2002, we entered into Change of Control Agreements (the Agreement(s)) with certain key executives (the Executive(s)).

The Agreements

provide an inducement for each Executive to remain as an employee in the event of any proposed or anticipated change of control in the

organization, including facilitating an orderly transition, and to provide economic security for the Executive after a change in control

has occurred.

the event of an involuntary termination in connection with a change of control as defined in the agreements, each Executive would receive

their base salary, annual bonus at time of termination, and continued participation in health, disability and life insurance plans for

a period of three years for officers and two years for all other participants.

RESTUCTURING CHARGES

the year ended December 31, 2024, we incurred restructuring charges of $ 571 related to the closure and consolidation of our Blue Earth,

Minnesota production facility, which was substantially completed in the fourth quarter of 2024.

During the year ended December 31, 2025,

the Company incurred $ 266 of restructuring charges, in connection with activities related to the Blue Earth facility and additional staff

reductions in the first quarter of 2025.

following table summarizes the related activity for the twelve months ended December 31, 2025 and 2024:

SCHEDULE OF RESTRUCTURING CHARGES

Facility Consolidation

Workforce Reductions

January 1, 2024

Cash payments

December 31, 2024

Cash payments

December 31, 2025

RELATED PARTY TRANSACTIONS

Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc.

We had accounts receivable related to Abilitech of $ 226 as of December

Payments of $ 33 were received during the year ended December 31, 2024 and we wrote off the remaining receivables during 2024.

Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable.

The Company believes that transactions with Abilitech were on terms comparable to those that the Company could reasonably expect in an

arm’s length transaction with an unrelated third party.

Kunin, our Chairman, is a minority owner (less than 10 %) of Marpe Technologies, LTD an early-stage medical device company dedicated to

the early detection of skin cancer through full body scanners.

Kunin is also a member of the Board of Directors of Marpe Technologies.

The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development

Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States

of America (“BIRD Foundation”).

The parties were successful in receiving approval for a $ 1,000 conditional grant.

and Marpe Technologies will each receive $ 500 from the BIRD Foundation and, among other obligations under the grant, each is required

to contribute $ 500 to match grant funds from the BIRD Foundation.

The Company met its obligation by providing certain services at cost

or with respect to administrative services at no cost to Marpe Technologies.

The total value of the Company’s contribution will

not exceed $ 500 .

Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s services

beyond its contribution.

The Company will receive a 10 -year exclusive right to manufacture the products of Marpe Technologies.

can be no assurances that Marpe Technologies’ medical device operations will be commercially successful, that Marpe Technologies

will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recover the

value of services provided to Marpe if not paid when the services are provided.

The transactions between the Company and Marpe Technologies

have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy.

During the twelve months ended December

31, 2025, we recognized no net sales to Marpe Technologies.

During the twelve ended December 31, 2024, we recognized net sales to Marpe

Technologies of $ 8 .

As of December 31, 2025, we have no outstanding accounts receivable.

The Company believes that transactions with

Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated

SUBSEQUENT EVENTS

Arrangement Waiver and Amendment

February 27, 2026, the Company entered into a Waiver and Amendment.

Under the Waiver and Amendment, Bank of America waived certain financial

covenant defaults related to the Company’s Consolidated Leverage Ratio, Fixed Charge Coverage Ratio, and Consolidated EBITDA for

the quarter ended December 31, 2025.

The Waiver and Amendment also modified multiple provisions of the Credit Agreement, including revised

definitions, updated borrowing base mechanics, revised financial covenants (including new EBITDA thresholds), adjustments to the revolving

commitment levels, an increase in applicable borrowing rate, and updates limitations on foreign subsidiary investments and transfers.

Financing Arrangement

March 20, 2026, we entered into a new Credit and Security Agreement with Associated Bank, National Association, which provides for a

revolving credit facility of up to $ 15,000 ,

subject to a borrowing base based on eligible accounts receivable and inventory, and a $ 2,200

term loan (the “Associated Facility”).

The Associated Facility includes a sublimit of $ 1,500

for letters of credit and is secured by substantially all of our assets in the United States of America, and the facility and term

loan each mature in March

under the Associated Facility bear interest, at our option, at a defined base rate, or at one-month or three-month Term Secured

Overnight Financing Rate, plus 2.00% in the case of revolving credit borrowings and plus 2.25% in the case of the term

Associated Facility contains customary affirmative and negative covenants that restrict or limit our ability to incur additional indebtedness,

create liens, make investments, sell assets, pay dividends or engage in certain transactions without lender consent.

This agreement also

requires us to comply with financial covenants, including maintaining a Fixed Charge Coverage Ratio of 1.10 to 1.00, which measures the

ratio of EBITDA, as defined to exclude certain other non-cash items, and less unfunded capital expenditures, to fixed charges such as

interest as well as debt and capital lease principal payments.

The Associated Facility agreement

includes broad and customary events of default such as non-payment of obligations, breaches of representations or covenants, unauthorized

liens, insolvency events, material adverse changes, cross-defaults to other significant indebtedness, and change-of-control triggers.

Additional events include unsatisfied judgments, loss of lender lien priority, defaults under material business agreements, impairment

of key intellectual property, destruction of collateral, and certain ERISA, hedging, or legal compliance violations.

Upon an event of

default, including the lender’s determination that a material adverse event has occurred, as defined by the agreement, the lender

may accelerate all obligations, terminate the commitments, and exercise its full rights and remedies against the collateral.

Incentive Plan

In March 2026, the Company’s Board

of Directors approved the 2026 Equity Incentive Plan (the “2026 Plan”), subject to shareholder approval at the upcoming annual

meeting in May 2026.

The 2026 Plan would succeed the Company’s 2017 Stock Incentive Plan and authorize 250,000 shares for

various equity- and cash-based awards.

No awards have been granted under the Plan, and shareholder approval is pending.

February 2026, the U.S.

Supreme Court ruled that the International Emergency Economic Powers Act (“IEEPA”) does not authorize

the President to impose tariffs, resulting in the termination of all IEEPA-based tariffs effective February 24, 2026.

Following this

ruling, the Administration imposed a temporary 10% global tariff on most imported products under Section 122 of the Trade Expansion Act

of 1962, effective February 24, 2026, for a 150-day period.

new tariffs apply broadly to manufactured goods and component parts.

Because the legislation was enacted after December 31, 2025, its

effects are not reflected in our consolidated financial statements.

The Company is evaluating the potential impact of these tariff actions

on future material costs and sourcing decisions.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K/A

Item 8. Financial Statements and Supplementary Data