NORTECH SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) THREE MONTHS ENDED MARCH 31, 2026 2025 Net sales $ 30,316 $ 26,895 Cost of goods sold 25,614 23,817 Gross profit 4,702 3,078 Operating expenses: Selling 1,331 1,184 General and administrative 3,014 2,915 Research and development 310 326 Restructuring charges - 266 Total operating expenses 4,655 4,691 Income (loss) from operations 47 ( 1,613 ) Other expense: Interest expense, net ( 256 ) ( 214 ) Loss before income taxes ( 209 ) ( 1,827 ) Income tax benefit ( 175 ) ( 511 ) Net loss $ ( 34 ) $ ( 1,316 ) Net loss per common share: Basic (in dollars per share) $ ( 0.01 ) $ ( 0.48 ) Weighted average number of common shares outstanding - basic (in shares) 2,786,134 2,760,929 Diluted (in dollars per share) $ ( 0.01 ) $ ( 0.48 ) Weighted average number of common shares outstanding - diluted (in shares) 2,786,134 2,760,929 Other comprehensive income (loss) Foreign currency translation 69 6 Comprehensive income (loss), net of tax $ 35 $ ( 1,310 ) See Accompanying Notes to Condensed Consolidated Financial Statements. 3 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2026 AND DECEMBER 31, 2025 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) MARCH 31, 2026 DECEMBER 31, 2025 ASSETS Current assets: Cash $ 1,964 $ 1,655 Restricted cash 244 - Accounts receivable, less allowance for credit losses of $ 205 and $ 161 , respectively 17,823 16,998 Inventories, net 23,561 20,695 Contract assets 16,010 15,184 Prepaid assets and other assets 1,071 1,618 Total current assets 60,673 56,150 Property and equipment, net 5,077 5,203 Operating lease assets, net 6,720 7,016 Deferred tax assets 3,753 3,394 Other intangible assets, net 151 156 Deferred line of credit issuance costs 266 - Total assets $ 76,640 $ 71,919 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Lines of credit $ 7,485 $ 7,000 Current portion of term loan 433 - Accounts payable 14,645 12,809 Accrued payroll and commissions 2,708 1,822 Customer deposits 4,672 5,386 Current portion of operating leases 1,309 1,332 Current portion of finance lease obligations 259 274 Other accrued liabilities 1,487 1,221 Total current liabilities 32,998 29,844 Long-term liabilities: Term loan 1,743 - Long-term operating lease obligations 6,186 6,476 Long-term finance lease obligations 577 626 Other long-term liabilities 428 426 Total long-term liabilities 8,934 7,528 Total liabilities 41,932 37,372 Shareholders’ equity: Preferred stock, $ 1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding 250 250 Common stock - $ 0.01 par value; 9,000,000 shares authorized; 2,786,134 and 2,786,134 shares issued and outstanding, respectively 28 28 Additional paid-in capital 17,981 17,855 Accumulated other comprehensive loss ( 640 ) ( 709 ) Retained earnings 17,089 17,123 Total shareholders’ equity 34,708 34,547 Total liabilities and shareholders’ equity $ 76,640 $ 71,919 See Accompanying Notes to Condensed Consolidated Financial Statements . 4 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2026 2025 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 34 ) $ ( 1,316 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 303 347 Compensation on stock-based awards 126 118 Change in allowance for credit losses 44 35 Change in inventory reserves ( 257 ) 231 Deferred taxes ( 359 ) - Changes in current operating items: Accounts receivable ( 822 ) ( 814 ) Inventories ( 2,610 ) 487 Contract assets ( 826 ) 388 Prepaid expenses and other assets 460 ( 1,588 ) Accounts payable 1,917 ( 1,441 ) Accrued payroll and commissions 883 674 Customer deposits ( 713 ) ( 112 ) Other accrued liabilities 327 61 Net cash used in operating activities ( 1,561 ) ( 2,930 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 228 ) ( 268 ) Net cash used in investing activities ( 228 ) ( 268 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from lines of credit 9,960 25,970 Payments to line of credit ( 9,472 ) ( 22,710 ) Proceeds from term loan 2,200 - Payments of debt issuance costs ( 290 ) - Proceeds from notes payable - 219 Principal payments on financing leases ( 62 ) ( 52 ) Stock award exercises - 19 Net cash provided by financing activities 2,336 3,446 Effect of exchange rate changes on cash and restricted cash 6 ( 2 ) Net change in cash and restricted cash 553 246 Cash and restricted cash - beginning of period 1,655 916 Cash and restricted cash - end of period $ 2,208 $ 1,162 Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets: Cash $ 1,964 $ 1,162 Restricted cash 244 - Total cash and restricted cash reported in the condensed consolidated statements of cash flows $ 2,208 $ 1,162 5 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2026 2025 Supplemental disclosure of cash flow information: Cash paid for interest $ 167 $ 203 Cash (received) paid for income taxes $ ( 325 ) $ 179 Supplemental noncash investing and financing activities: Property and equipment purchases in accounts payable $ 16 $ 42 See Accompanying Notes to Condensed Consolidated Financial Statements. 6 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) (IN THOUSANDS) Accumulated Additional Other Total Preferred Stock Common Stock Paid-In Comprehensive Retained Shareholders’ Shares Amount Shares Amount Capital Loss Earnings Equity Balance as of December 31, 2024 250 $ 250 2,761 $ 28 $ 17,329 $ ( 977 ) $ 17,375 $ 34,005 Net loss - - - - - - ( 1,316 ) ( 1,316 ) Foreign currency translation adjustment - - - - - 6 - 6 Stock option exercises - - - - 19 - - 19 Compensation on stock-based awards - - - - 118 - - 118 Balance as of March 31, 2025 250 $ 250 2,761 $ 28 $ 17,466 $ ( 971 ) $ 16,059 $ 32,832 Balance as of December 31, 2025 250 $ 250 2,786 $ 28 $ 17,855 $ ( 709 ) $ 17,123 $ 34,547 Net loss - - - - - - ( 34 ) ( 34 ) Foreign currency translation adjustment - - - - - 69 - 69 Compensation on stock-based awards - - - - 126 - - 126 Balance as of March 31, 2026 250 $ 250 2,786 $ 28 $ 17,981 $ ( 640 ) $ 17,089 $ 34,708 See Accompanying Notes to Condensed Consolidated Financial Statements. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2025, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC. The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All dollar amounts are stated in thousands of U.S. dollars. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP 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 condensed consolidated financial statements. Estimates also affect the reported amounts of net sales and expenses during each reporting period. Significant items subject to estimates and assumptions include the lower of cost or net realizable value reserves for inventories, allowance for credit losses, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates. Tarriff Legislation In 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. These new tariffs apply broadly to manufactured goods and component parts. The Company is evaluating the potential impact of these tariff actions on future material costs and sourcing decisions. The Company is actively seeking reimbursement of IEEPA tariffs from the federal government and the Company’s vendors. Recently Issued New Accounting Standards In 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. ASU No. 2024-03 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 disclosures. Adoption of New Accounting Standard In 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 has adopted this ASU and it did not have a material impact on the consolidated financial statements. 8 Restricted Cash Cash classified as restricted cash on our consolidated balance sheets relates to contractual cash dominion provisions under the Company’s financing arrangements, which at March 31, 2026 were governed by the new Associated Bank facility. As of March 31, 2026 and December 31, 2025, we had restricted cash of $244 and $0, respectively. The restricted cash balance at March 31, 2026 primarily represents customer deposits that are temporarily restricted due to timing at period end and are subject to the cash dominion provisions of the financing arrangement. These customer deposits are applied against the Company’s line of credit on the next business day. Inventories Inventories are as follows: SCHEDULE OF INVENTORIES March 31, December 31, 2026 2025 Raw materials $ 23,015 $ 20,575 Work in process 1,290 1,003 Finished goods 852 970 Reserves ( 1,596 ) ( 1,853 ) Inventories, net $ 23,561 $ 20,695 Other Intangible Assets Other intangible assets as of March 31, 2026 and December 31, 2025 are as follows: SCHEDULE OF OTHER INTANGIBLE ASSETS Patents Balances as of December 31, 2025 $ 156 Amortization ( 5 ) Balances as of March 31, 2026 $ 151 Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is 3.8 years. Of the patents’ value as of March 31, 2026, $ 67 are being amortized and $ 84 are in process and a patent has not yet been issued. Amortization expense of finite life intangible assets for the three months ended March 31, 2026 and 2025 was $ 5 and $ 5 , respectively. As of March 31, 2026, estimated future annual amortization expense related to these assets is as follows: SCHEDULE OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE Year Amount Remainder of 2026 $ 14 2027 18 2028 18 2029 12 2030 4 Thereafter 1 Total $ 67 Property and Equipment The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. At March 31, 2026, the Company determined that no triggering events existed that would require an impairment assessment. 9 NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract assets. 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 $ 1,964 cash balance as of March 31, 2026, included approximately $ 612 and $ 78 that was held at banks located in China and Mexico, respectively. We grant credit to customers in the normal course of business and generally do not require collateral on our accounts receivable. We 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. Customers who represent 10% or more of net sales for the three months ended March 31, 2026 and 2025 are as follows: SCHEDULE OF NET SALES CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Three Months Ended March 31, 2026 2025 Customer A 32 % 31 % Customer B 13 % 11 % Total 45 % 42 % Customers who represent 10% or more of accounts receivable and contract assets for the periods ended March 31, 2026 and December 31, 2025 are as follows: SCHEDULE OF ACCOUNTS RECEIVABLE CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Accounts Receivable March 31, 2026 December 31, 2025 Customer A 26 % 20 % SCHEDULE OF CONTRACT ASSETS CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Contract Assets March 31, 2026 December 31, 2025 Customer A 34 % 36 % Customer C 12 % 13 % Total 46 % 49 % Export sales from the U.S. represented approximately 3 % and 2 % of net sales for the three months ended March 31, 2026 and 2025, respectively. 10 NOTE 3. NET SALES Revenue Recognition Revenue under contract manufacturing agreements that was recognized over time, excluding noncash consideration, accounted for 75 % and 74 % of net sales for the three months ended March 31, 2026 and 2025, respectively. The following tables summarize our net sales by market for the three months ended March 31, 2026 and 2025, respectively: SCHEDULE OF NET SALES BY MARKET 1 Three Months Ended March 31, 2026 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device $ 6,679 $ 1,490 $ 742 $ 8,911 Medical Imaging 8,006 1,867 3 9,876 Industrial 3,689 3,018 175 6,882 Aerospace and Defense 4,254 356 37 4,647 Total net sales $ 22,628 $ 6,731 $ 957 $ 30,316 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Three Months Ended March 31, 2025 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device $ 5,772 $ 1,730 $ 568 $ 8,070 Medical Imaging 6,708 1,873 7 8,588 Industrial 4,706 2,132 107 6,945 Aerospace and Defense 2,782 478 32 3,292 Total net sales $ 19,968 $ 6,213 $ 714 $ 26,895 1 Noncash consideration represents material provided by the customer used in the manufacturing of the product. 11 Contract Assets Contract assets, recorded in the condensed consolidated balance sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three months ended March 31, 2026 were as follows: SCHEDULE OF CONTRACT ASSETS Balance as of December 31, 2025 $ 15,184 Increase (decrease) attributed to: Amounts transferred over time to contract assets 22,628 Allowance for current expected credit losses - Amounts invoiced during the period ( 21,802 ) Balance outstanding as of March 31, 2026 $ 16,010 We expect substantially all the remaining performance obligations for the contract assets recorded as of March 31, 2026 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. Contract Liabilities Contract liabilities, recorded as customer deposits, were $ 4,672 and $ 5,386 at March 31, 2026 and December 31, 2025, 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 three months ended March 31, 2026 that was included in the contract liability balance at January 1, 2026 was $ 565 . Changes between periods represent the timing of customer deposits and the satisfaction of performance obligations. NOTE 4. FINANCING ARRANGEMENTS Associated Bank Financing Arrangement On March 20, 2026, the Company 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. The Associated Facility matures in March 2029. The Company is required to pay a 25-basis point fee per annum, paid monthly, on the unused portion of the revolving credit facility. The term loan requires monthly principal payments of $ 37 plus interest. Borrowings under the Associated Facility bear interest, at the Company’s option, at a defined base rate derived from the Bank’s prime rate, or at one-month or three-month Term Secured Overnight Financing Rate, referred to as SOFR, plus 2.00% in the case of revolving credit borrowings, and plus 2.25% in the case of the term loan. At March 31, 2026, the revolving credit facility and term loan accrued interest at 8.52% and 8.00%, respectively. At March 31, 2026, there was $ 7,196 outstanding under the revolving credit facility and $ 3,500 of unused availability. Borrowings under the Associated Facility may be prepaid at any time without penalty. The Associated Facility does not contain prepayment premiums, make-whole provisions, or other features that would require separate accounting as embedded derivatives. The 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 Company was in compliance with all covenants under the Associated Facility as of March 31, 2026. 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 Associated Facility agreement, the lender may accelerate all obligations, terminate the commitments, and exercise its full rights and remedies against the collateral. The Company incurred $ 290 of debt issuance costs related to the Associated Facility, of which $ 266 was classified as a long-term asset as of March 31, 2026 as it is related to the revolving facility. The table below reflects scheduled principal repayments of the term loan. Amounts outstanding under the revolving credit facility, if any, are due at maturity in March 2029. SCHEDULE OF PRINCIPAL REPAYMENTS OF THE TERM LOAN Year Amount Remainder of 2026 $ 330 2027 440 2028 440 2029 990 Thereafter - Total $ 2,200 Bank Of America Revolver On February 29, 2024, we closed on a $ 15,000 Senior Secured Revolving Line of Credit with Bank of America (the “BOA Revolver”). On 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 BOA Revolver was fully repaid and terminated on March 20, 2026. Interim Funding Agreement The 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 of 2025. As of March 31, 2026, we have no amounts outstanding on the interim funding agreement for equipment. China Financing Agreement Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10 million Renminbi (RMB) (approximately $ 1,400 ) that expires in August 2026. The Company had $ 289 outstanding as of March 31, 2026 that is classified as current debt. No amounts were outstanding under this financing arrangement as of December 31, 2025. The agreement does not include material cross-default provisions with the Associated Facility. The variable interest rate as of March 31, 2026 was approximately 4 %. 12 NOTE 5. LEASES We 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 to five 5 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 covenants. We have financing leases for certain property and equipment used in the normal course of business. The components of lease expense were as follows: SCHEDULE OF COMPONENTS OF LEASE EXPENSE Three Months Ended March 31, Lease Cost 2026 2025 Operating lease cost $ 588 $ 565 Finance lease interest cost 14 6 Finance lease amortization expense 62 42 Total lease cost $ 664 $ 613 Supplemental condensed consolidated balance sheet information related to leases was as follows: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS INFORMATION RELATED TO LEASES Balance Sheet Location March 31, 2026 December 31, 2025 Assets Finance lease assets Property and equipment, net $ 668 $ 714 Operating lease assets Operating lease assets, net 6,720 7,016 Total leased assets $ 7,388 $ 7,730 Liabilities Current Current operating lease liabilities Current portion of operating lease obligations $ 1,309 $ 1,332 Current finance lease liabilities Current portion of finance lease obligations 259 274 Noncurrent Long-term operating lease liabilities Long-term operating lease obligations, net of current portion 6,186 6,476 Long-term finance lease liabilities Long-term finance lease obligations, net of current portion 577 626 Total lease liabilities $ 8,331 $ 8,708 13 Supplemental condensed consolidated statements of cash flows information for the three months ended March 31, 2026 and 2025 related to leases was as follows: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION March 31, March 31, 2026 2025 Operating Leases Cash paid for amounts included in the measurement of lease liabilities $ 471 $ 433 Future annual payments of lease liabilities as of March 31, 2026 were as follows: SCHEDULE OF FUTURE PAYMENTS OF LEASE LIABILITIES Operating Leases Finance Leases Total Remainder of 2026 $ 1,406 $ 248 $ 1,654 2027 1,580 211 1,791 2028 1,569 211 1,780 2029 979 196 1,175 2030 900 76 976 Thereafter 3,769 - 3,769 Total lease payments $ 10,203 $ 942 $ 11,145 Less: imputed interest ( 2,708 ) ( 106 ) ( 2,814 ) Present value of lease liabilities $ 7,495 $ 836 $ 8,331 The lease term and discount rate as of March 31, 2026 and 2025 were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE March 31, 2026 March 31, 2025 Weighted-average remaining lease term (years) Operating leases 7.0 7.6 Finance leases 3.7 3.3 Weighted-average discount rate Operating leases 8.1 % 7.8 % Finance leases 6.6 % 5.7 % NOTE 6. STOCK BASED AWARDS Stock-based compensation expense of $ 126 and $ 118 for the three months ended March 31, 2026 and 2025, respectively, was reported in the condensed consolidated statements of operations within general and administrative expenses. Stock Options Under the 2017 Stock Incentive Plan (“2017 Plan”), as amended, there are an aggregate of 775,000 shares authorized for issuance. As of March 31, 2026, there were 35,136 remaining authorized shares available for grant. On March 18, 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. 14 The Company granted 30,000 stock options under the 2017 Plan which vest over 5 years. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows: SCHEDULE OF WEIGHTED AVERAGE GRANT DATE FAIR VALUE OF STOCK OPTIONS GRANTED 2026 Stock option fair value assumptions: Risk-free interest rate 3.99 % Expected life (years) 6.2 Dividend yield - % Expected volatility 58 % Weighted average grant date fair value of stock options granted $ 7.14 Total compensation expense related to stock options was $ 77 and $ 54 for the three months ended March 31, 2026, and 2025 respectively. As of March 31, 2026, there was $ 1,035 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 2.4 years. Following is a summary of stock option activity as of and for the three months ended March 31, 2026 and 2025: SCHEDULE OF OPTION ACTIVITY Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding – December 31, 2024 453,400 $ 6.79 5.70 $ 1,654 Granted - - Exercised ( 200 ) 9.37 Forfeited ( 4,400 ) 8.98 Outstanding – March 31, 2025 448,800 $ 6.77 5.45 $ 1,508 Outstanding – December 31, 2025 490,182 $ 6.91 5.14 $ 828 Granted 30,000 12.19 Exercised - - Forfeited ( 4,200 ) 9.94 Outstanding – March 31, 2026 515,982 $ 6.65 4.77 $ 2,584 Exercisable on March 31, 2026 331,100 $ 5.63 9.4 $ 2,180 Restricted Stock Units Total compensation expense related to restricted stock units (“RSUs”) was $ 49 and $ 64 for the three months ended March 31, 2026 and 2025, respectively. No RSUs were granted during the three-month periods ended March 31, 2026 and 2025. As of March 31, 2026, total unrecognized compensation expense related to the 43,664 outstanding RSUs was $ 207 , which will vest over a weighted average period of 1.0 years. On March 18, 2026 these RSU’s were modified to allow full vesting upon a change of control, as defined in the amendment. Management concluded that no incremental compensation cost was required, as the added change-in-control provision did not impact the fair value of the awards at the modification date. 15 NOTE 7. NET INCOME (LOSS) PER SHARE DATA Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net income (loss) 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: SCHEDULE OF BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING Three Months Ended March 31, 2026 2025 Basic weighted average shares outstanding 2,786,134 2,760,929 Dilutive effect of outstanding stock options and non-vested restricted stock units 1 - - Diluted weighted average shares outstanding 2,786,134 2,760,929 1 The following items were excluded from the computation of diluted weighted-average shares outstanding as their inclusion would be anti-dilutive: a. For the three months ended March 31, 2026, restricted stock units and stock options totaling 602,446 . b. For the three months ended March 31, 2025, restricted stock units and stock options totaling 472,941 . NOTE 8. INCOME TAXES On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events. 16 Our effective tax rate for the three months ended March 31, 2026 was 84 %, compared to 28 % for the three months ended March 31, 2025. The primary drivers of the change in the effective tax rate are the differences in pretax book income (loss) by jurisdiction and taxes on foreign entities. NOTE 9. SEGMENT INFORMATION Our results of operations for the three months ended March 31, 2026 and 2025 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 several 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 prepared in accordance with U.S. GAAP on a consolidated basis to assess performance and allocate resources. The Company’s net sales were located as follows: SCHEDULE OF NET SALES WERE LOCATED Three Months Ended March 31, 2026 2025 United States $ 17,464 $ 16,310 Mexico 7,342 6,580 China 5,510 4,005 Total net sales $ 30,316 $ 26,895 The Company’s long-lived tangible assets, including the Company’s operating lease assets recognized on the condensed consolidated balance sheets were located as follows: SCHEDULE OF LONG-LIVED TANGIBLE ASSETS March 31, 2026 December 31, 2025 United States $ 8,727 $ 8,876 Mexico 1,858 2,015 China 1,212 1,328 Total long-lived tangible assets $ 11,797 $ 12,219 NOTE 10. RESTRUCTURING CHARGES During 2024, we recorded restructuring charges of $ 571 related to the closure and consolidation of our Blue Earth, Minnesota production facility, which was completed in the fourth quarter of 2024. As of December 31, 2024, $ 154 of facility consolidation expenses related to the Blue Earth closure were accrued and paid in the first quarter of 2025. During the three months ended March 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. The following table summarizes the related activity for the three months ended March 31, 2025: SCHEDULE OF RESTRUCTURING CHARGES Facility Consolidation Workforce Reductions Total December 31, 2024 $ 154 $ - $ 154 Charges 31 235 266 Cash payments ( 185 ) ( 235 ) ( 420 ) March 31, 2025 $ - $ - $ - We did not record any restructuring charges or restructuring charge activity in the three months ended March 31, 2026. 17