NORTECH SYSTEMS INC 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2026 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to NORTECH SYSTEMS INCORPORATED Commission file number 0-13257 State of Incorporation: Minnesota IRS Employer Identification No. 41-1681094 Executive Offices: 7550 Meridian Circle N ., Suite # 150 , Maple Grove , MN 55369 Telephone number: (952) 345-2244 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $.01 per share NSYS NASDAQ Capital Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer ☒ Smaller Reporting Company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Number of shares of $ 0.01 par value common stock outstanding as of August 5, 2026 was 2,853,766 . TABLE OF CONTENTS PAGE PART I – FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5-6 Condensed Consolidated Statements of Shareholders’ Equity 7 Notes to Condensed Consolidated Financial Statements 8-17 Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23 Item 4 - Controls and Procedures 23 PART II – OTHER INFORMATION Item 1 - Legal Proceedings 24 Item 1A. - Risk Factors 24 Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds 24 Item 3 - Defaults on Senior Securities 24 Item 4 - Mine Safety Disclosures 24 Item 5 - Other Information 24 Item 6 - Exhibits 24 SIGNATURES 25 2 PART I 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) 2026 2025 2026 2025 THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2026 2025 2026 2025 Net sales $ 33,540 $ 30,675 $ 63,856 $ 57,570 Cost of goods sold 27,837 25,838 53,451 49,655 Gross profit 5,703 4,837 10,405 7,915 Operating expenses: Selling 1,484 1,204 2,815 2,388 General and administrative 3,250 2,589 6,264 5,504 Research and development 346 302 656 628 Restructuring charges - - - 266 Total operating expenses 5,080 4,095 9,735 8,786 Income (loss) from operations 623 742 670 ( 871 ) Other expense: Interest expense, net ( 197 ) ( 257 ) ( 453 ) ( 471 ) Income (loss) before income taxes 426 485 217 ( 1,342 ) Income tax expense (benefit) 110 172 ( 65 ) ( 339 ) Net income (loss) $ 316 $ 313 $ 282 $ ( 1,003 ) Net income (loss) per common share: Basic (in dollars per share) $ 0.11 $ 0.12 $ 0.10 $ ( 0.36 ) Weighted average number of common shares outstanding - basic (in shares) 2,805,183 2,773,598 2,795,659 2,767,263 Diluted (in dollars per share) $ 0.11 $ 0.12 $ 0.09 $ ( 0.36 ) Weighted average number of common shares outstanding - diluted (in shares) 2,999,002 2,954,765 3,007,439 2,767,263 Other comprehensive income (loss) Foreign currency translation $ 21 $ 124 $ 90 $ 130 Comprehensive income (loss), net of tax $ 337 $ 437 $ 372 $ ( 873 ) See Accompanying Notes to Condensed Consolidated Financial Statements. 3 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2026 AND DECEMBER 31, 2025 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 2026 DECEMBER 31, 2025 ASSETS Current assets: Cash $ 1,380 $ 1,655 Restricted cash 294 - Accounts receivable, less allowance for credit losses of $ 154 and $ 161 , respectively 19,850 16,998 Inventories, net 24,512 20,695 Contract assets 16,979 15,184 Prepaid assets and other assets 1,279 1,618 Total current assets 64,294 56,150 Property and equipment, net 4,977 5,203 Operating lease assets, net 6,420 7,016 Deferred tax assets 3,963 3,394 Other intangible assets, net 147 156 Deferred line of credit issuance costs, net 244 - Total assets $ 80,045 $ 71,919 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Lines of credit $ 7,868 $ 7,000 Current portion of term loan, net of debt issuance costs 432 - Accounts payable 14,949 12,809 Accrued payroll and commissions 2,808 1,822 Customer deposits 6,848 5,386 Current portion of operating leases 1,246 1,332 Current portion of finance lease obligations 243 274 Other accrued liabilities 1,644 1,221 Total current liabilities 36,038 29,844 Long-term liabilities: Term loan, net of debt issuance costs 1,636 - Long-term operating lease obligations 5,929 6,476 Long-term finance lease obligations 534 626 Other long-term liabilities 434 426 Total long-term liabilities 8,533 7,528 Total liabilities 44,571 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; 2,853,766 and 2,786,134 shares issued and outstanding, respectively 29 28 Additional paid-in capital 18,409 17,855 Accumulated other comprehensive loss ( 619 ) ( 709 ) Retained earnings 17,405 17,123 Total shareholders’ equity 35,474 34,547 Total liabilities and shareholders’ equity $ 80,045 $ 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) 2026 2025 SIX MONTHS ENDED JUNE 30, 2026 2025 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 282 $ ( 1,003 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 618 678 Compensation on stock-based awards 320 235 Change in allowance for credit losses ( 7 ) 10 Change in inventory reserves ( 311 ) 351 Deferred taxes ( 569 ) ( 700 ) Changes in current operating items: Accounts receivable ( 2,705 ) ( 2,842 ) Inventories ( 3,530 ) 2,714 Contract assets ( 1,795 ) ( 1,192 ) Prepaid expenses and other assets 338 ( 1,647 ) Accounts payable 2,077 295 Accrued payroll and commissions 978 ( 94 ) Customer deposits 1,463 36 Other accrued liabilities 392 386 Net cash used in operating activities ( 2,449 ) ( 2,773 ) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment - 9 Purchases of property and equipment ( 323 ) ( 367 ) Net cash used in investing activities ( 323 ) ( 358 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from lines of credit 35,061 51,405 Payments to line of credit ( 34,198 ) ( 48,485 ) Proceeds from term loan 2,200 - Payments of debt issuance costs ( 290 ) - Principal payments on term loan ( 110 ) - Principal payments on financing leases ( 124 ) ( 85 ) Stock award exercises 235 23 Net cash provided by financing activities 2,774 2,858 Effect of exchange rate changes on cash and restricted cash 17 9 Net change in cash and restricted cash 19 ( 264 ) Cash and restricted cash - beginning of period 1,655 916 Cash and restricted cash - end of period $ 1,674 $ 652 Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets: Cash $ 1,380 $ 652 Restricted cash 294 - Total cash and restricted cash reported in the condensed consolidated statements of cash flows $ 1,674 $ 652 5 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, 2026 2025 Supplemental disclosure of cash flow information: Cash paid for interest $ 279 $ 470 Cash (received) paid for income taxes $ ( 135 ) $ 389 Supplemental noncash investing and financing activities: Property and equipment purchases in accounts payable $ 17 $ 27 Conversion of notes payable to finance leases $ - $ 637 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 March 31, 2025 250 $ 250 2,761 $ 28 $ 17,466 $ ( 971 ) $ 16,059 $ 32,832 Net income - - - - - - 313 313 Foreign currency translation adjustment - - - - - 124 - 124 Stock option exercises - - 19 - 2 - - 2 Compensation on stock-based awards - - - - 117 - - 117 Balance as of June 30, 2025 250 $ 250 2,780 $ 28 $ 17,585 $ ( 847 ) $ 16,372 $ 33,388 Balance as of March 31, 2026 250 $ 250 2,786 $ 28 $ 17,981 $ ( 640 ) $ 17,089 $ 34,708 Net income - - - - - - 316 316 Foreign currency translation adjustment - - - - - 21 - 21 Stock award exercises - - 68 1 234 - - 235 Compensation on stock-based awards - - - - 194 - - 194 Balance as of June 30, 2026 250 $ 250 2,854 $ 29 $ 18,409 $ ( 619 ) $ 17,405 $ 35,474 Balance as of December 31, 2024 250 $ 250 2,761 $ 28 $ 17,329 $ ( 977 ) $ 17,375 $ 34,005 Net loss - - - - - - ( 1,003 ) ( 1,003 ) Foreign currency translation adjustment - - - - - 130 - 130 Stock option exercises - - 19 - 21 - - 21 Compensation on stock-based awards - - - - 235 - - 235 Balance as of June 30, 2025 250 $ 250 2,780 $ 28 $ 17,585 $ ( 847 ) $ 16,372 $ 33,388 Balance as of December 31, 2025 250 $ 250 2,786 $ 28 $ 17,855 $ ( 709 ) $ 17,123 $ 34,547 Balance 250 $ 250 2,786 $ 28 $ 17,855 $ ( 709 ) $ 17,123 $ 34,547 Net income - - - - - - 282 282 Net income (loss) - - - - - - 282 282 Foreign currency translation adjustment - - - - - 90 - 90 Stock award exercises - - 68 1 234 - - 235 Compensation on stock-based awards - - - - 320 - - 320 Balance as of June 30, 2026 250 $ 250 2,854 $ 29 $ 18,409 $ ( 619 ) $ 17,405 $ 35,474 Balance 250 $ 250 2,854 $ 29 $ 18,409 $ ( 619 ) $ 17,405 $ 35,474 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. Tariff 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. The tariffs apply broadly to manufactured goods and component parts purchased by the Company. Management is evaluating the impact of these tariff actions on future product costs and sourcing strategies. The Company is also pursuing reimbursement and recovery of previously paid IEEPA-related tariffs from the federal government and certain vendors. As of June 30, 2026, no amounts have been recognized related to potential recoveries. The Company is evaluating and pursuing potential refund claims; however, the timing and amount of any recoveries remain uncertain. In July 2026, following the expiration of the Section 122 tariffs, the U.S. Trade Representative implemented new tariffs under Section 301 of the Trade Act of 1974 on imports from certain countries, with rates generally ranging from 10% to 12.5%. Management is continuing to evaluate the potential impact of these tariffs on the Company’s future product costs, supply chain, and sourcing strategies. 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 statement 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 Restricted cash on our consolidated balance sheets relates to contractual cash dominion provisions under the Company’s financing arrangements, which at June 30, 2026 were governed by the new Associated Bank facility. As of June 30, 2026 and December 31, 2025, we had restricted cash of $ 294 and $ 0 , respectively. The restricted cash balance at June 30, 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 June 30, December 31, 2026 2025 Raw materials $ 23,863 $ 20,575 Work in process 1,250 1,003 Finished goods 941 970 Reserves ( 1,542 ) ( 1,853 ) Inventories, net $ 24,512 $ 20,695 Other Intangible Assets Other intangible assets as of June 30, 2026 and December 31, 2025 are as follows: SCHEDULE OF OTHER INTANGIBLE ASSETS Patents Balances as of December 31, 2025 $ 156 Amortization ( 9 ) Balances as of June 30, 2026 $ 147 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 3.6 years. Of the patents’ value as of June 30, 2026, $ 62 are being amortized and $ 85 are in process and a patent has not yet been issued. Amortization expense of finite life intangible assets for both the three months ended June 30, 2026 and 2025 was $ 4 . Amortization expense of finite life intangible assets for both the six months ended June 30, 2026 and 2025 was $ 9 . As of June 30, 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 $ 9 2027 18 2028 18 2029 12 2030 4 Thereafter 1 Total $ 62 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 June 30, 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 $ 1,380 cash balance as of June 30, 2026, included approximately $ 1,047 and $ 146 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 and six months ended June 30, 2026 and 2025 are as follows: SCHEDULE OF NET SALES CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS 2026 2025 2026 2025 Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Customer A 30 % 31 % 31 % 31 % Customer B 11 % 10 % 12 % 10 % Total 41 % 41 % 43 % 41 % Customers who represent 10% or more of accounts receivable and contract assets for the periods ended June 30, 2026 and December 31, 2025 are as follows: SCHEDULE OF ACCOUNTS RECEIVABLE CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Accounts Receivable June 30, 2026 December 31, 2025 Customer A 26 % 20 % SCHEDULE OF CONTRACT ASSETS CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS June 30, 2026 December 31, 2025 Contract Assets June 30, 2026 December 31, 2025 Customer A 37 % 36 % Customer C 11 % 13 % Total 48 % 49 % Export sales from the U.S. represented approximately 3 % of net sales for both the three and six months ended June 30, 2026. Export sales from the U.S. represented approximately 2 % of net sales for both the three and six months ended June 30, 2025. 10 NOTE 3. NET SALES Revenue Recognition Revenue under contract manufacturing agreements that was recognized over time, excluding noncash consideration, accounted for 68 % and 71 % of net sales for the three and six months ended June 30, 2026, respectively, and 75 % of net sales for both the three and six months ended June 30, 2025. The following tables summarize our net sales by market for the three and six months ended June 30, 2026 and 2025, respectively: SCHEDULE OF NET SALES BY MARKET Three Months Ended June 30, 2026 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device $ 7,252 $ 1,882 $ 1,135 $ 10,269 Medical Imaging 8,478 2,358 5 10,841 Industrial 3,846 4,198 76 8,120 Aerospace and Defense 3,390 916 4 4,310 Total net sales $ 22,966 $ 9,354 $ 1,220 $ 33,540 1 Three Months Ended June 30, 2025 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device $ 5,049 $ 2,004 $ 497 $ 7,550 Medical Imaging 7,490 2,169 5 9,664 Industrial 6,590 1,799 127 8,516 Aerospace and Defense 3,975 886 84 4,945 Total net sales $ 23,104 $ 6,858 $ 713 $ 30,675 1 Six Months Ended June 30, 2026 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device $ 13,931 $ 3,372 $ 1,877 $ 19,180 Medical Imaging 16,484 4,225 8 20,717 Industrial 7,535 7,216 251 15,002 Aerospace and Defense 7,644 1,272 41 8,957 Total net sales $ 45,594 $ 16,085 $ 2,177 $ 63,856 1 Six Months Ended June 30, 2025 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device $ 10,821 $ 3,734 $ 1,065 $ 15,620 Medical Imaging 14,198 4,042 12 18,252 Industrial 11,296 3,931 234 15,461 Aerospace and Defense 6,757 1,364 116 8,237 Total net sales $ 43,072 $ 13,071 $ 1,427 $ 57,570 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 six months ended June 30, 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 45,594 Allowance for current expected credit losses - Amounts invoiced during the period ( 43,799 ) Balance outstanding as of June 30, 2026 $ 16,979 We expect substantially all amounts recorded as contract assets as of June 30, 2026 to be billed and reclassified to accounts receivable within 90 days, with any remaining amounts expected to be billed and reclassified 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 $ 6,848 and $ 5,386 at June 30, 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 and six months ended June 30, 2026 that was included in the contract liability balance at January 1, 2026 was $ 905 and $ 1,470 , respectively. 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. The revolving credit facility and term loan bear interest at a weighted-average interest rate of 7.9% and 7.7%, respectively, for the three months ended June 30, 2026 . At June 30, 2026, there was $ 7,573 outstanding under the revolving credit facility and $ 3,552 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. 12 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 June 30, 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 $ 244 was classified as a long-term asset as of June 30, 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 $ 220 2027 440 2028 440 2029 990 Thereafter - Total $ 2,090 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. Equipment Financing Arrangement The Company entered into an equipment financing arrangement during the second quarter of 2026. As of June 30, 2026, the equipment had not been delivered and the financing had not been funded. Accordingly, no related asset or financing obligation was recorded. The Company had made a required deposit, an initial payment, and paid closing costs under the arrangement totaling less than $ 3 as of June 30, 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 June 30, 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 $ 295 outstanding as of June 30, 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 June 30, 2026 was approximately 3 %. 13 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 Lease Cost 2026 2025 Three Months Ended June 30, Lease Cost 2026 2025 Operating lease cost $ 592 $ 564 Finance lease interest cost 12 9 Finance lease amortization expense 62 33 Total lease cost $ 666 $ 606 Lease Cost 2026 2025 Six Months Ended June 30, Lease Cost 2026 2025 Operating lease cost $ 1,180 $ 1,129 Finance lease interest cost 26 15 Finance lease amortization expense 124 85 Total lease cost $ 1,330 $ 1,229 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 June 30, 2026 December 31, 2025 Assets Finance lease assets Property and equipment, net $ 622 $ 714 Operating lease assets Operating lease assets, net 6,420 7,016 Total leased assets $ 7,042 $ 7,730 Liabilities Current Current operating lease liabilities Current portion of operating leases $ 1,246 $ 1,332 Current finance lease liabilities Current portion of finance lease obligations 243 274 Noncurrent Long-term operating lease liabilities Long-term operating lease obligations 5,929 6,476 Long-term finance lease liabilities Long-term finance lease obligations 534 626 Total lease liabilities $ 7,952 $ 8,708 14 Supplemental condensed consolidated statements of cash flows information for the six months ended June 30, 2026 and 2025 related to leases was as follows: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION June 30, June 30, 2026 2025 Operating Leases Cash paid for amounts included in the measurement of lease liabilities $ 946 $ 880 Conversion of notes payable to finance leases $ - $ 637 Future annual payments of lease liabilities as of June 30, 2026 were as follows: SCHEDULE OF FUTURE PAYMENTS OF LEASE LIABILITIES Operating Leases Finance Leases Total Remainder of 2026 $ 936 $ 176 $ 1,112 2027 1,581 211 1,792 2028 1,569 211 1,780 2029 986 196 1,182 2030 900 76 976 Thereafter 3,769 - 3,769 Total lease payments $ 9,741 $ 870 $ 10,611 Less: imputed interest ( 2,566 ) ( 93 ) ( 2,659 ) Present value of lease liabilities $ 7,175 $ 777 $ 7,952 The lease term and discount rate as of June 30, 2026 and 2025 were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE June 30, 2026 June 30, 2025 Weighted-average remaining lease term (years) Operating leases 6.8 7.4 Finance leases 3.5 2.0 Weighted-average discount rate Operating leases 8.2 % 7.8 % Finance leases 6.7 % 6.6 % NOTE 6. STOCK BASED AWARDS Stock-based compensation expense of $ 194 and $ 117 for the three months ended June 30, 2026 and 2025, respectively, and $ 320 and $ 235 for the six months ended June 30, 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. On March 18, 2026, the Company’s Board of Directors approved the 2026 Equity Incentive Plan (the “2026 Plan”). The shareholders approved the 2026 Plan on May 13, 2026. The 2026 Plan succeeded the Company’s 2017 Plan and authorized 250,000 shares for various equity- and cash-based awards. The remaining available shares under the 2017 Plan are now available for issuance under the 2026 Plan. As of June 30, 2026, there were 253,890 remaining authorized shares available for grant under the 2026 Plan. During the six months ended June 30, 2026, the Company granted 30,000 stock options under the 2017 Plan which vest over 5 years and granted 60,800 stock options under the 2026 Plan which vest over 1 - 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 4.03 % Expected life (years) 6.1 Dividend yield - % Expected volatility 58 % Weighted average grant date fair value of stock options granted $ 7.29 Total compensation expense related to stock options was $ 151 and $ 69 for the three months ended June 30, 2026, and 2025, respectively. Total compensation expense related to stock options was $ 228 and $ 123 for the six months ended June 30, 2026, and 2025, respectively. As of June 30, 2026, there was $ 990 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 2.0 years. 15 Following is a summary of stock option activity as of and for the six months ended June 30, 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 43,382 8.73 Exercised ( 1,200 ) 3.98 Forfeited ( 9,800 ) 9.66 Outstanding – June 30, 2025 485,782 $ 6.92 5.60 $ 1,213 Outstanding – December 31, 2025 490,182 $ 6.91 5.14 $ 828 Granted 90,800 12.46 Exercised ( 45,800 ) 5.13 Forfeited ( 16,916 ) 7.05 Outstanding – June 30, 2026 518,266 $ 7.99 5.63 $ 4,063 Exercisable on June 30, 2026 310,591 $ 6.04 3.86 $ 3,036 Restricted Stock Units Total compensation expense related to restricted stock units (“RSUs”) was $ 43 and $ 48 for the three months ended June 30, 2026 and 2025, respectively. Total compensation expense related to restricted stock units (“RSUs”) was $ 92 and $ 112 for the six months ended June 30, 2026 and 2025, respectively. During the three- and six- month periods ended June 30, 2025, we granted 43,664 RSUs at an average grant price per share of $ 8.73 to non-employee directors which vest over two years. As of June 30, 2026, total unrecognized compensation expense related to the outstanding RSUs was $ 134 , 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. Following is a summary of RSU activity as of and for the six months ended June 30, 2026 and 2025: SCHEDULE OF RESTRICTED STOCK UNITS ACTIVITY Shares Weighted- Average Remaining Vesting Term (in years) Aggregate Intrinsic Value Outstanding – December 31, 2024 24,141 0.3 $ 248 Granted 43,664 Vested ( 24,141 ) Forfeited - Outstanding – June 30, 2025 43,664 1.9 $ 63 Outstanding – December 31, 2025 43,664 1.3 $ 324 Granted - Vested ( 21,832 ) Forfeited ( 3,438 ) Outstanding – June 30, 2026 18,394 1.0 $ 131 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 2026 2025 2026 2025 Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Basic weighted average shares outstanding 2,805,183 2,773,598 2,795,659 2,767,263 Dilutive effect of outstanding stock options and non-vested restricted stock units 1 193,819 181,167 211,780 - Diluted weighted average shares outstanding 2,999,002 2,954,765 3,007,439 2,767,263 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 and six months ended June 30, 2026, stock options totaling 26,331 and 96,875 , respectively. b. For the three months ended June 30, 2025, stock options totaling 89,927 . For the six months ended June 30, 2025, restricted stock units and stock options totaling 504,194 . 16 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, by each tax jurisdiction. Our effective tax rate for the three and six months ended June 30, 2026 was 26 % and ( 30 % ), respectively. Our effective tax rate for the three and six months ended June 30, 2025 was 35 % and 25 %, respectively. 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. The Company’s effective tax rate differs from the statutory federal rate primarily due to earnings in jurisdictions with tax rates that are different from the U.S. federal statutory rate and research and development credits. Fluctuations in the geographic mix of income may cause variability in the Company’s quarterly effective tax rate. NOTE 9. SEGMENT INFORMATION Our results of operations for the three and six months ended June 30, 2026 and 2025 represent a 1 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. Net income is the measure of segment profitability used by the CODM to assess performance and allocate resources. Significant segment expenses reviewed by the CODM include those that are presented in the condensed consolidated statements of operations. The measure of segment assets is reported on the condensed consolidated balance sheets as total assets. The Company’s net sales were located as follows: SCHEDULE OF NET SALES WERE LOCATED 2026 2025 2026 2025 Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 United States $ 17,635 $ 18,005 $ 35,099 $ 34,315 Mexico 8,100 7,895 15,442 14,475 China 7,805 4,775 13,315 8,780 Total net sales $ 33,540 $ 30,675 $ 63,856 $ 57,570 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 June 30, 2026 December 31, 2025 United States $ 8,581 $ 8,876 Mexico 1,718 2,015 China 1,098 1,328 Total long-lived tangible assets $ 11,397 $ 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 six months ended June 30, 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. We did not record any restructuring charges in the three months ended June 30, 2025. The following table summarizes the related activity for the six months ended June 30, 2025: SCHEDULE OF RESTRUCTURING CHARGES Facility Consolidation Workforce Reductions Total December 31, 2024 $ 154 $ - $ 154 Charges 31 235 266 Cash payments ( 185 ) ( 235 ) ( 420 ) June 30, 2025 $ - $ - $ - We did not record any restructuring charges or restructuring charge activity in the three or six months ended June 30, 2026. 17 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. As of December 31, 2025, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility in July 2025. We also have facilities in Monterrey, Mexico and Suzhou, China. Our net sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support. Quality, on-time delivery, and reliability are of utmost importance. Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing. Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping. All dollar amounts are stated in thousands of U.S. dollars. Results of Operations The Company’s results of operations in 2026 have benefited from higher gross margin from increased net sales as the result of improved backlog. This increase was offset in 2026 with increased incentive compensation expense. For the three and six months ended June 30, 2026, incentive compensation expense (reversal of expense) aggregated $402 and $647, respectively, as compared with ($131) and $0 in the three and six months ended June 30, 2025, respectively. Net Sales. Net sales for the three months ended June 30, 2026 and 2025 were $33,540 and $30,675, respectively, a comparative period increase of $2,865 or 9.3%. Net sales for the six months ended June 30, 2026 and 2025 were $63,856 and $57,570, respectively, a comparative period increase of $6,286 or 10.9%. The following is a summary of net sales by our major industry markets: Three Months Ended June 30, 2026 2025 Increase (Decrease) Medical Device $ 10,269 $ 7,550 $ 2,719 36.0 % Medical Imaging 10,841 9,664 1,177 12.2 % Industrial 8,120 8,516 (396 ) (4.7 )% Aerospace and Defense 4,310 4,945 (635 ) (12.8 )% Total net sales $ 33,540 $ 30,675 $ 2,865 9.3 % Six Months Ended June 30, 2026 2025 Increase (Decrease) Medical Device $ 19,180 $ 15,620 $ 3,560 22.8 % Medical Imaging 20,717 18,252 2,465 13.5 % Industrial 15,002 15,461 (459 ) (3.0 )% Aerospace and Defense 8,957 8,237 720 8.7 % Total net sales $ 63,856 $ 57,570 $ 6,286 10.9 % 18 ● Medical Device: Net sales to our Medical Device customers increased $2,719, or 36.0%, in the three months ended June 30, 2026 as compared with the same period in 2025 and increased $3,560, or 22.8%, in the six months ended June 30, 2026 as compared with the same period in 2025. The increase was primarily due to higher customer demand from existing customers and continued ramp up of new programs. ● Medical Imaging: Net sales to our Medical Imaging customers increased $1,177, or 12.2%, in the three months ended June 30, 2026 as compared with the same period in 2025 and increased $2,465, or 13.5%, in the six months ended June 30, 2026 as compared with the same period in 2025. The increase was driven by higher customer demand, supported in part by increased revenues from a stocking program with a key customer that improved product availability and enabled shorter lead times. ● Industrial: Net sales to our industrial customers decreased $396, or 4.7%, in the three months ended June 30, 2026 as compared with the same period in 2025 and decreased $459, or 3.0%, in the six months ended June 30, 2026 as compared with the same period in 2025. Industrial revenue reflects customer inventory adjustments and temporary production disruptions associated with the transfer of manufacturing activities to Monterrey, Mexico. The decline was largely offset by revenue growth in China. ● Aerospace and Defense: Net sales to our aerospace and defense customers decreased $635, or 12.8%, in the three months ended June 30, 2026 as compared with the same period in 2025 and increased $720, or 8.7%, in the six months ended June 30, 2026 as compared with the same period in 2025. The decrease in the second quarter of 2026 was primarily due to reduced demand from one customer who is rebalancing post-COVID inventory balances, which partially offset the benefits from the completion of the transfer of production programs to our Bemidji location. For the six-month period ended June 30, 2026, revenue increased compared to the prior-year period primarily due to higher production volumes associated with completed transfers to our Bemidji location, offset by impact of the above noted customer rebalancing activities. Backlog. Our 90-day shipment backlog as of June 30, 2026 was $33,445, an increase of 6.3% from $31,475 at the beginning of the quarter, and a 25.8% increase from June 30, 2025. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days. Our total order backlog as of June 30, 2026, was $93,849, representing a 3.4% increase from $90,802 at the beginning of the quarter and a 19.8% increase compared to the same period in the prior year; this year over year growth was primarily driven by an increase in Aerospace and Defense orders. 90-day shipment and total backlog by our major industry markets are as follows: June 30, 2026 March 31, 2026 June 30, 2025 90 Day Total 90 Day Total 90 Day Total Medical Device $ 11,103 $ 22,060 $ 10,512 $ 27,332 $ 7,897 $ 32,222 Medical Imaging 6,971 11,041 6,509 9,476 5,101 7,584 Industrial 5,975 20,227 4,842 13,113 6,010 9,349 Aerospace and Defense 9,396 40,521 9,612 40,881 7,584 29,196 Total backlog $ 33,445 $ 93,849 $ 31,475 $ 90,802 $ 26,592 $ 78,351 The 90-day and total backlog as of June 30, 2026 includes orders already recognized in net sales and included in the contract asset value of $16,979. 19 Operating Costs and Expenses. Net sales, cost of goods sold, gross profit, and operating costs were as follows: Three Months Ended June 30, 2026 2025 Increase/(Decrease) Net sales $ 33,540 $ 30,675 $ 2,865 9.3 % Cost of goods sold 27,837 25,838 1,999 7.7 % Gross profit 5,703 4,837 866 17.9 % Gross margin percentage (1) 17.0 % 15.8 % 120 bpc (2) Selling 1,484 1,204 280 23.3 % % of Net sales 4.4 % 3.9 % General and administrative 3,250 2,589 661 25.5 % % of Net sales 9.7 % 8.4 % Research and development 346 302 44 14.6 % % of Net sales 1.0 % 1.0 % Operating income 623 742 (119 ) (16.0 )% % of Net sales 1.9 % 2.4 % (1) Gross margin percentage is defined as gross profit as a percentage of net sales. (2) Basis points change in gross margin percentage. Six Months Ended June 30, 2026 2025 Increase/(Decrease) Net sales $ 63,856 $ 57,570 $ 6,286 10.9 % Cost of goods sold 53,451 49,655 3,796 7.6 % Gross profit 10,405 7,915 2,490 31.5 % Gross margin percentage (1) 16.3 % 13.7 % 260 bpc (2) Selling 2,815 2,388 427 17.9 % % of Net sales 4.4 % 4.1 % General and administrative 6,264 5,504 760 13.8 % % of Net sales 9.8 % 9.6 % Research and development 656 628 28 4.5 % % of Net sales 1.0 % 1.1 % Restructuring charges - 266 (266 ) (100 )% % of Net sales - % 0.5 % Operating income (loss) 670 (871 ) 1,541 176.9 % % of Net sales 1.0 % (1.5 )% (1) Gross margin percentage is defined as gross profit as a percentage of net sales. (2) Basis points change in gross margin percentage. 20 Gross profit and gross margin percentage. Gross margin percentage was 17.0% and 15.8% for the three months ended June 30, 2026, and 2025, respectively. Gross margin percentage was 16.3% and 13.7% for the six months ended June 30, 2026, and 2025, respectively. The improvement was primarily attributable to higher revenue levels and improved manufacturing cost absorption resulting from increased production activity. The benefit of higher volumes was partially offset by unfavorable sales mix. Selling expenses . Selling expenses, as measured as a percentage of net sales , were 4.4% and 3.9% for the three months ended June 30, 2026, and 2025, respectively. Selling expenses, as measured as a percentage of net sales , were 4.4% and 4.1% for the six months ended June 30, 2026, and 2025, respectively. The increase as a percentage of sales was primarily attributable to higher incentive compensation accruals in 2026. General and administrative expenses. General and administrative expenses, as measured as a percentage of net sales, were 9.7% and 8.4% for the three months ended June 30, 2026 and 2025, respectively, and 9.8% and 9.6% for the six months ended June 30, 2026 and 2025, respectively. The increase as a percentage of net sales was primarily the result of higher incentive compensation accruals in 2026. Research and development. Research and development expenses increased slightly at $346 and $302 in the three months ended June 30, 2026 and 2025, respectively, and $656 and $628 in the six months ended June 30, 2026 and 2025, respectively. The increases are the result of higher incentive compensation accruals in 2026. Restructuring charges . Restructuring charges were $0 and $266 in the three and six months ended June 30, 2026 and 2025, respectively. During the first quarter of 2025, we incurred $235 of severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales and $31 of expenses related to our closed Blue Earth facility. Operating income (loss). Operating income was $623 for the three months ended June 30, 2026 or 1.9% of net sales and operating income was $742 or 2.4% of net sales for the three months ended June 30, 2025. The decrease was primarily attributable to higher selling and general and administrative expenses, which more than offset the increase in gross profit resulting from higher sales volume. Operating income was $670 or 1.0% of net sales for the six months ended June 30, 2026 and operating loss was $(871) or (1.5)% of net sales for the six months ended June 30, 2025. The increase was primarily attributable to higher gross profit associated with increased revenue and improved operating leverage, together with the absence of restructuring charges recorded in the first quarter of 2025. Interest expense, net. Interest expense, net was $197 and $257 for the three months ended June 30, 2026 and 2025, respectively. Interest expense, net was $453 and $471 for the six months ended June 30, 2026 and 2025, respectively. This decrease in the quarterly comparison was driven by the lower average borrowings and reduced interest costs following the transition to the Company’s new financing arrangements. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements. Income taxes. Our effective tax rate for the three and six months ended June 30, 2026 was 26% and (30)%, respectively. Our effective tax rate for the three and six months ended June 30, 2025 was 35% and 25%, respectively. The primary drivers of the change in the effective tax rate were differences in pretax book income (loss) by jurisdiction and taxes on foreign entities. Cash Flow Operating Results The following is a summary of cash flow results: Six Months Ended June 30, 2026 2025 Cash provided by (used in): Operating activities $ (2,449 ) $ (2,773 ) Investing activities (323 ) (358 ) Financing activities 2,774 2,858 Effect of exchange rates on changes in cash and restricted cash 17 9 Net change in cash and restricted cash $ 19 $ (264 ) 21 Operating Activities. Cash used in operating activities was $2,449 in the first six months of 2026, compared with $2,773 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included: ● Cash used by accounts receivable and contract assets was $4,500 in the six months ended June 30, 2026 as compared with cash used of $4,034 in the same prior-year period. This use of cash is largely due to timing of customer shipments and cash collections in both periods and by an increase in contract assets in the current year period to support future customer shipments. ● Cash used by inventory was $3,530 in the six months ended June 30, 2026 as compared with cash provided of $2,714 in the prior-year period. The current-year increase in inventory primarily reflects purchases of materials needed to support the growing backlog and anticipated production requirements in the second half of 2026. In contrast, inventory levels declined in the prior-year period due to lower customer demand and corresponding reductions in material purchases. ● Cash provided by changes in accounts payable was $2,077 in the current-year period as compared with cash provided of $295 in the same prior-year period, primarily related to the timing of cash payments. Investing Activities. Cash used in investing activities was $323 in the first six months of 2026, compared with $358 in the same prior-year period, both due from the purchases of property and equipment. Financing Activities. Cash provided by financing activities was $2,774 in the first six months of 2026 and $2,858 in the same prior-year period. The cash provided by financing activities in both periods resulted from the line of credit advances for working capital and operations as well as the term loan borrowing in the first six months of 2026. Liquidity and Capital Resources We believe that our existing financing arrangements, anticipated cash flows from operations, and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next year from the date of this filing with the Securities and Exchange Commission. 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 in the United States of America (“U.S.”), 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 U.S. 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. The revolving credit facility and term loan bear interest at a weighted-average interest rate of 7.9% and 7.7%, respectively, for the three months ended June 30, 2026. At June 30, 2026, there was $7,573 outstanding under the revolving credit facility and $3,552 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 finance lease principal payments. The Company was in compliance with all covenants under the Associated Facility as of June 30, 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. Our ability to comply with these covenants depends in part on our ability to generate sufficient EBITDA and operating cash flow. If our EBITDA or cash flows declines due to any factor, we may not remain in compliance with our financial covenants under the Associated Facility. 22 Off-Balance Sheet Arrangements We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K. Forward-Looking Statements Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. ♦ Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; ♦ Whether our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months; ♦ Supply chain disruption and unreliability; ♦ Lack of supply of sufficient human resources to produce our products; ♦ Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing; ♦ Changes in the reliability and efficiency of our operating facilities or those of third parties; ♦ Increases in certain raw material costs such as copper and oil; ♦ Commodity and energy cost instability; ♦ Risks related to FDA noncompliance; ♦ The loss of a major customer; ♦ General economic, financial and business conditions that could affect our financial condition and results of operations; ♦ Increased or unanticipated costs related to compliance with securities and environmental regulation; ♦ Disruption of global or local information management systems due to natural disaster or cyber-security incident; and ♦ Outbreaks of epidemic, pandemic, or contagious diseases that affect our operations, our customers’ operations or our suppliers’ operations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligation to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events. Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 23 PART II ITEM 1. LEGAL PROCEEDINGS We are subject to various legal proceedings and claims that arise in the ordinary course of business. ITEM 1A. RISK FACTORS We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A. Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2025. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS ON SENIOR SECURITIES None. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS Exhibits 31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. 31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. 32* Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101* Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 2026, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Condensed Consolidated Financial Statements. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). *Filed herewith 24 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Nortech Systems Incorporated and Subsidiaries Date: August 12, 2026 by /s/ Jay D. Miller Jay D. Miller Chief Executive Officer and President Nortech Systems Incorporated Date: August 12, 2026 by /s/ Andrew D. C. LaFrence Andrew D. C. LaFrence Chief Financial Officer and Senior Vice President of Finance Nortech Systems Incorporated 25