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) 2025 2024 2025 2024 THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2025 2024 2025 2024 Net sales $ 30,675 $ 33,891 $ 57,570 $ 68,106 Cost of goods sold 25,838 29,274 49,655 58,041 Gross profit 4,837 4,617 7,915 10,065 Operating expenses: Selling 1,204 909 2,388 1,714 General and administrative 2,589 2,982 5,504 6,152 Research and development 302 291 628 609 Restructuring charges - 91 266 91 Total operating expenses 4,095 4,273 8,786 8,566 Income (loss) from operations 742 344 ( 871 ) 1,499 Other expense: Interest expense ( 257 ) ( 165 ) ( 471 ) ( 332 ) Income (loss) before income taxes 485 179 ( 1,342 ) 1,167 Income tax expense (benefit) 172 22 ( 339 ) 245 Net income (loss) $ 313 $ 157 $ ( 1,003 ) $ 922 Net income (loss) per common share: Basic (in dollars per share) $ 0.12 $ 0.06 $ ( 0.36 ) $ 0.34 Weighted average number of common shares outstanding - basic (in shares) 2,773,598 2,760,052 2,767,263 2,751,330 Diluted (in dollars per share) $ 0.12 $ 0.05 $ ( 0.36 ) $ 0.32 Weighted average number of common shares outstanding - diluted (in shares) 2,954,765 2,935,671 2,767,263 2,922,113 Other comprehensive income (loss) Foreign currency translation 124 ( 175 ) 130 ( 358 ) Comprehensive income (loss), net of tax $ 437 $ ( 18 ) $ ( 873 ) $ 564 See Accompanying Notes to Condensed Consolidated Financial Statements. 3 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2025 AND DECEMBER 31, 2024 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 2025 DECEMBER 31, 2024 ASSETS Current assets: Cash $ 652 $ 916 Accounts receivable, less allowances of $ 206 and $ 196 , respectively 17,810 14,875 Inventories, net 18,628 21,638 Contract assets 14,984 13,792 Assets held for sale 495 - Prepaid assets and other assets 5,749 4,094 Total current assets 58,318 55,315 Property and equipment, net 5,443 6,232 Operating lease assets, net 7,563 8,139 Deferred tax assets 3,275 2,575 Other intangible assets, net 165 174 Other assets 61 - Total assets $ 74,825 $ 72,435 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 11,931 $ 11,582 Accrued payroll and commissions 1,752 1,841 Customer deposits 5,176 5,140 Current portion of operating lease obligations 1,237 1,175 Current portion of finance lease obligations 229 143 Notes payable - 344 Other accrued liabilities 1,283 1,203 Total current liabilities 21,608 21,428 Long-term liabilities: Long-term line of credit 11,615 8,634 Long-term operating lease obligations, net of current portion 7,145 7,773 Long-term finance lease obligations, net of current portion 781 311 Other long-term liabilities 288 284 Total long-term liabilities 19,829 17,002 Total liabilities 41,437 38,430 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; 2,780,134 and 2,760,793 shares issued and outstanding, respectively 28 28 Additional paid-in capital 17,585 17,329 Accumulated other comprehensive loss ( 847 ) ( 977 ) Retained earnings 16,372 17,375 Total shareholders’ equity 33,388 34,005 Total liabilities and shareholders’ equity $ 74,825 $ 72,435 See Accompanying Notes to Condensed Consolidated Financial Statements . 4 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) 2025 2024 SIX MONTHS ENDED JUNE 30, 2025 2024 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ ( 1,003 ) $ 922 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 678 966 Compensation on stock-based awards 235 206 Deferred taxes ( 700 ) - Change in accounts receivable allowance 10 ( 88 ) Change in inventory reserves 351 113 Other, net - ( 59 ) Changes in current operating assets and liabilities: Accounts receivable ( 2,842 ) 1,690 Inventories 2,714 ( 1,288 ) Contract assets ( 1,192 ) ( 476 ) Prepaid expenses and other assets ( 1,647 ) ( 531 ) Accounts payable 295 ( 2,546 ) Accrued payroll and commissions ( 94 ) ( 1,516 ) Customer deposits 36 1,385 Other accrued liabilities 386 ( 236 ) Net cash used in operating activities ( 2,773 ) ( 1,458 ) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment 9 9 Purchases of property and equipment ( 367 ) ( 1,020 ) Net cash used in investing activities ( 358 ) ( 1,011 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit 51,405 68,323 Payments to line of credit ( 48,485 ) ( 65,809 ) Principal payments on financing leases ( 85 ) ( 202 ) Stock option exercises 23 31 Net cash provided by financing activities 2,858 2,343 Effect of exchange rate changes on cash 9 ( 7 ) Net change in cash ( 264 ) ( 133 ) Cash - beginning of period 916 1,675 Cash - end of period $ 652 $ 1,542 5 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, 2025 2024 Supplemental disclosure of cash flow information: Cash paid for interest $ 470 $ 307 Cash paid for income taxes $ 389 $ 279 Supplemental noncash investing and financing activities: Property and equipment purchases in accounts payable $ 27 $ 75 Conversion of notes payable to finance leases $ 637 $ - Operating lease assets acquired under operating leases $ - $ 1,923 See Accompanying Notes to Condensed Consolidated Financial Statements. 6 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) (IN THOUSANDS) Shares Amount Shares Amount Capital Loss Earnings Equity 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, 2024 250 $ 250 2,755 $ 27 $ 17,009 $ ( 715 ) $ 19,435 $ 36,006 Net income - - - - - - 157 157 Foreign currency translation adjustment - - - - - ( 175 ) - ( 175 ) Compensation on stock-based awards - - - - 126 - - 126 Issuance for stock-based awards - - 7 1 30 - - 31 Balance as of June 30, 2024 250 $ 250 2,762 $ 28 $ 17,165 $ ( 890 ) $ 19,592 $ 36,145 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 December 31, 2023 250 $ 250 2,740 $ 27 $ 16,929 $ ( 532 ) $ 18,670 $ 35,344 Net income - - - - - - 922 922 Foreign currency translation adjustment - - - - - ( 358 ) - ( 358 ) Compensation on stock-based awards - - - - 206 - - 206 Issuance for stock-based awards - - 22 1 30 - - 31 Balance as of June 30, 2024 250 $ 250 2,762 $ 28 $ 17,165 $ ( 890 ) $ 19,592 $ 36,145 Balance as of December 31, 2024 250 $ 250 2,761 $ 28 $ 17,329 $ ( 977 ) $ 17,375 $ 34,005 Balance 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 250 $ 250 2,780 $ 28 $ 17,585 $ ( 847 ) $ 16,372 $ 33,388 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, 2024, 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 net realizable value reserves for inventories, accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates. Recently Issued New Accounting Standards In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure . The ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The Company adopted this ASU in the fourth quarter of 2024 and has included related interim reporting disclosures in Note 9 – Segment Information to these condensed consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements disclosures. 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 , 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. In July 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted. The OBBBA makes permanent key elements of the Tax Cuts and Jobs Act of 2017, including 100% bonus depreciation, domestic research cost expensing and the business interest expense limitation, among other tax changes. The new legislation has multiple effective dates, with certain provisions effective in 2025 and others in the future. The Company is currently evaluating the provisions of the new law and the potential effects on the Company’s financial position, results of operations, and cash flows. 8 Inventories Inventories are as follows: SCHEDULE OF INVENTORIES June 30, December 31, 2025 2024 Raw materials $ 18,570 $ 21,122 Work in process 802 892 Finished goods 1,053 1,070 Reserves ( 1,797 ) ( 1,446 ) Inventories, net $ 18,628 $ 21,638 Other Intangible Assets Other intangible assets as of June 30, 2025 and December 31, 2024 are as follows: SCHEDULE OF OTHER INTANGIBLE ASSETS Patents Balances as of December 31, 2024 $ 174 Amortization ( 9 ) Balances as of June 30, 2025 $ 165 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 4.6 years. Of the patents value as of June 30, 2025, $ 81 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 June 30, 2025 and 2024 was $ 4 and $ 40 , respectively. Amortization expense of finite life intangible assets for the six months ended June 30, 2025 and 2024 was $ 9 and $ 80 , respectively. As of June 30, 2025, estimated future annual amortization expense (except projects in process) related to these assets is as follows: SCHEDULE OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE Year Amount Remainder of 2025 $ 10 2026 18 2027 18 2028 18 2029 12 Thereafter 5 Total $ 81 Property and Equipment As of June 30, 2025, the Company classified its Blue Earth manufacturing facility and related land as held for sale as the criteria for classification as held for sale were met. The sale of the Blue Earth facility was completed in July 2025 for $ 500 . The carrying value of these assets held for sale was $ 495 as of June 30, 2025 and is classified as a current asset in our condensed consolidated balance sheets. During the second quarter of 2025, in light of our sustained low stock price, we performed a Step 1 recoverability test in accordance with U.S. GAAP for our long-lived assets. Based on our assessment of undiscounted future cash flows, we concluded that the carrying amounts of our asset group is recoverable, and therefore, no impairment was recognized at this stage. However, as a result of the sale of our Blue Earth facility in July 2025, we are now closer to meeting the criteria for a Step 2 impairment analysis, which involves estimating the fair value of the asset group. If future developments, including changes in market conditions or operational forecasts, result in a decline in fair value below carrying amounts, this may lead to the recognition of an impairment loss in subsequent periods. 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 $ 652 cash balance as of June 30, 2025, included approximately $ 573 and $ 5 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, 2025 and 2024 are as follows: SCHEDULE OF NET SALES CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS 2025 2024 2025 2024 Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Customer A 31 % 26 % 31 % 25 % Customer B 10 % - % 10 % - % Total 41 % 26 % 41 % 25 % 9 Customers who represent 10% or more of accounts receivable and contract assets for the period ended June 30, 2025 and December 31, 2024 are as follows: SCHEDULE OF ACCOUNTS RECEIVABLE CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS June 30, 2025 December 31, 2024 Accounts Receivable June 30, 2025 December 31, 2024 Customer A 22 % 23 % Customer C 10 % 13 % Total 32 % 36 % SCHEDULE OF CONTRACT ASSETS CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS June 30, 2025 December 31, 2024 Contract Assets June 30, 2025 December 31, 2024 Customer A 30 % 33 % Customer D 16 % 12 % Total 46 % 45 % Export sales from the U.S. represented approximately 2 % of net sales for both the three and six months ended June 30, 2025. Export sales from the U.S. represented approximately 3 % and 2 % of net sales for the three and six months ended June 30, 2024, respectively. NOTE 3. NET SALES Revenue Recognition Revenue under contract manufacturing agreements that was recognized over time, excluding noncash consideration, accounted for 75 % of net sales for both the three and six months ended June 30, 2025 and 74 % of net sales for both the three and six months ended June 30, 2024. The following tables summarize our net sales by market for the three and six months ended June 30, 2025 and 2024, respectively: SCHEDULE OF NET SALES BY MARKET Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market 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 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Three Months Ended June 30, 2024 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device (2) $ 6,857 $ 2,129 $ 703 $ 9,689 Medical Imaging (2) 5,868 2,306 8 8,182 Industrial 6,163 2,667 555 9,385 Aerospace and Defense 6,097 494 44 6,635 Total net sales $ 24,985 $ 7,596 $ 1,310 $ 33,891 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market 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 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Six Months Ended June 30, 2024 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical Device (2) $ 13,748 $ 4,648 $ 1,497 $ 19,893 Medical Imaging (2) 12,041 5,031 11 17,083 Industrial 13,110 5,014 853 18,977 Aerospace and Defense 11,301 736 116 12,153 Total net sales $ 50,200 $ 15,429 $ 2,477 $ 68,106 1 Noncash consideration represents material provided by the customer used in the build of the product. 2 Medical, as reported in the prior-year period filing, has been split between Medical Device and Medical Imaging to conform with the current-year presentation. 10 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, 2025 were as follows: SCHEDULE OF CONTRACT ASSETS Balance as of December 31, 2024 $ 13,792 Increase (decrease) attributed to: Amounts transferred over time to contract assets 43,072 Allowance for current expected credit losses ( 1 ) Amounts invoiced during the period ( 41,879 ) Balance outstanding as of June 30, 2025 $ 14,984 We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2025 to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days. NOTE 4. FINANCING ARRANGEMENTS On February 29, 2024, we entered into a $ 15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver. The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Provisions of the First Amendment relating to the Company’s compliance with these ratios were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”) at specified levels were replaced with provisions of the Second Amendment (described below). The First Amendment also requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. The First Amendment increases the borrowing rate for revolving loans by 100 basis points. On May 14, 2025, we further amended (the “Second Amendment”) the Revolver, which amended the First Amendment in part, to defer the Company’s compliance with the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 2.5 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter; and (b) a minimum fixed charge coverage ratio to 1.25 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter. The Company must also maintain adjusted EBITDA (earnings before interest, taxes depreciation and amortization), as defined in the Revolver, as of the end of the second quarter of 2025 of at least $1,000, the third quarter of 2025 of at least $1,300 and the fourth quarter of 2025 and each quarter thereafter of at least $1,600. In addition, the Second Amendment requires the Company to always maintain Liquidity of at least $2,500. The Second Amendment shortened the duration of the Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points. On July 29, 2025, we amended the Revolver (the “Third Amendment”) to extend the expiration of the Revolver to August 31, 2026. We have recorded the outstanding Revolver amount of $ 11,615 as long-term on the condensed consolidated balance sheets based on extension in the signed Third Amendment. The Revolver, as amended, bears interest at a weighted-average interest rate of 7.8 % and 7.7 % as of June 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $ 11,615 and $ 8,695 outstanding as of June 30, 2025 and December 31, 2024, respectively. As of June 30, 2025, we had unused availability on the line of credit of $ 3,385 , which is subject to a month end cap based on the previously noted minimum Liquidity. 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 three months ended June 30, 2025. As of June 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment. 11 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 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. As of June 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment. 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 2025 2024 Three Months Ended June 30, Lease Cost 2025 2024 Operating lease cost $ 564 $ 581 Finance lease interest cost 9 6 Finance lease amortization expense 33 129 Total lease cost $ 606 $ 716 Lease Cost 2025 2024 Six Months Ended June 30, Lease Cost 2025 2024 Operating lease cost $ 1,129 $ 1,177 Finance lease interest cost 15 12 Finance lease amortization expense 85 129 Total lease cost $ 1,229 $ 1,318 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, 2025 December 31, 2024 Assets Finance lease assets Property and equipment, net $ 878 $ 411 Operating lease assets Operating lease assets, net 7,563 8,139 Total leased assets $ 8,441 $ 8,550 Liabilities Current Current operating lease liabilities Current portion of operating lease obligations $ 1,237 $ 1,175 Current finance lease liabilities Current portion of finance lease obligations 229 143 Noncurrent Long-term operating lease liabilities Long-term operating lease obligations, net of current portion 7,145 7,773 Long-term finance lease liabilities Long-term finance lease obligations, net of current portion 781 311 Total lease liabilities $ 9,392 $ 9,402 12 Supplemental condensed consolidated statements of cash flows information for the six months ended June 30, 2025 and 2024 related to leases was as follows: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION June 30, June 30, 2025 2024 Operating Leases Cash paid for amounts included in the measurement of lease liabilities $ 880 $ 933 Conversion of notes payable to finance leases $ 637 $ 1,923 Future annual payments of lease liabilities as of June 30, 2025 were as follows: SCHEDULE OF FUTURE PAYMENTS OF LEASE LIABILITIES Operating Leases Finance Leases Total Remainder of 2025 $ 925 $ 144 $ 1,069 2026 1,864 320 2,184 2027 1,571 212 1,783 2028 1,569 212 1,781 2029 986 197 1,183 Thereafter 4,669 67 4,736 Total lease payments $ 11,584 $ 1,152 $ 12,736 Less: imputed interest ( 3,202 ) ( 142 ) ( 3,344 ) Present value of lease liabilities $ 8,382 $ 1,010 $ 9,392 The lease term and discount rate as of June 30, 2025 and 2024 were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE June 30, 2025 June 30, 2024 Weighted-average remaining lease term (years) Operating leases 7.4 8.1 Finance leases 2.0 1.7 Weighted-average discount rate Operating leases 7.8 % 8.0 % Finance leases 6.6 % 5.3 % 13 NOTE 6. STOCK BASED AWARDS Stock-based compensation expense of $ 117 and $ 126 for the three months ended June 30, 2025 and 2024, respectively, and $ 235 and $ 206 for the six months ended June 30, 2025 and 2024, 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. We granted 43,382 service-based stock options during the three and six months ended June 30, 2025. We granted 22,000 service-based stock options during the three and six months ended June 30, 2024. 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 2025 2024 Stock option fair value assumptions: Risk-free interest rate 4.14 % 4.40 % Expected life (years) 6.4 6.0 Dividend yield - % - % Expected volatility 58 % 58 % Weighted average grant date fair value of stock options granted $ 5.21 $ 6.47 Total compensation expense related to stock options was $ 69 and $ 123 for the three and six months ended June 30, 2025, respectively. Total compensation expense related to stock options was $ 65 and $ 121 for the three and six months ended June 30, 2024, respectively. As of June 30, 2025, there was $ 764 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 2.66 years. Following is a summary of stock option activity as of and for the six months ended June 30, 2025 and 2024: SCHEDULE OF OPTION ACTIVITY Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding – December 31, 2023 458,700 $ 6.63 6.53 $ 1,432 Granted 22,000 11.06 Exercised ( 5,500 ) 5.42 Forfeited ( 9,600 ) 10.26 Outstanding – June 30, 2024 465,600 $ 6.78 6.20 $ 3,150 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 Exercisable on June 30, 2025 305,000 $ 5.28 4.10 $ 1,198 Restricted Stock Units Total compensation expense related to restricted stock units (“RSUs”) was $ 48 and $ 112 for the three and six months ended June 30, 2025, respectively. Total compensation expense related to RSUs was $ 61 and $ 85 for the three and six months ended June 30, 2024, respectively. During the three- and six-month periods ended June 30, 2025 and 2024, we granted 43,664 and 15,141 RSUs, respectively, at an average grant price per share of $ 8.73 and $ 11.06 , respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. As of June 30, 2025, total unrecognized compensation expense related to the RSUs was $ 356 , which will vest over a weighted average period of 1.8 years. Following is a summary of RSU activity as of and for the six months ended June 30, 2025 and 2024: SCHEDULE OF RESTRICTED STOCK ACTIVITY Shares Weighted- Average Remaining Vesting Term (in years) Aggregate Intrinsic Value Outstanding – December 31, 2023 27,000 1.0 $ 254 Granted 15,141 Vested ( 16,500 ) Forfeited ( 1,500 ) Outstanding – June 30, 2024 24,141 0.9 $ 330 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 14 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 2025 2024 2025 2024 Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Basic weighted average shares outstanding 2,773,598 2,760,052 2,767,263 2,751,330 Dilutive effect of outstanding stock options and non-vested restricted stock units 1 181,167 175,619 - 170,783 Diluted weighted average shares outstanding 2,954,765 2,935,671 2,767,263 2,922,113 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, 2025, restricted stock units and stock options totaling 89,927 and 504,194 , respectively. b. For the three and six months ended June 30, 2024, restricted stock units and stock options totaling 31,611 and 45,453 , respectively. 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. 15 Our effective tax rate for the three and six months ended June 30, 2025 was 35 % and 25 %, respectively. Our effective tax rate for the three and six months ended June 30, 2024 was 12 % and 21 %, respectively. The primary drivers of the increase in effective tax rate were changes in pretax (loss) income and taxes on foreign entities. NOTE 9. SEGMENT INFORMATION Our results of operations for the six months ended June 30, 2025 and 2024 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. The Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets with over 50% of its net sales coming from the medical-related markets. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Our chief operating decision maker (the “CODM”) is the Company’s President and Chief Executive Officer. The CODM regularly evaluates financial information 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 2025 2024 2025 2024 Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 United States $ 18,005 $ 22,480 $ 34,315 $ 46,009 Mexico 7,895 7,571 14,475 14,357 China 4,775 3,840 8,780 7,740 Total net sales $ 30,675 $ 33,891 $ 57,570 $ 68,106 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, 2025 December 31, 2024 United States $ 9,326 $ 10,429 Mexico 2,195 2,445 China 1,485 1,497 Total long-lived tangible assets $ 13,006 $ 14,371 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. 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 have not recorded 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 $ - $ - $ - 16 The following table summarizes the related activity for the six months ended June 30, 2024: Facility Consolidation December 31, 2023 $ - Beginning $ - Charges 91 Cash payments - June 30, 2024 $ 91 Ending $ 91 NOTE 11. RELATED PARTY TRANSACTIONS David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We had accounts receivable related to Abilitech of $ 226 as of December 31, 2023. Payments of $ 33 were received during the year ended December 31, 2024 and we wrote off the remaining receivables during 2024. Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable. The Company believes that transactions with Abilitech were on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party. David Kunin, our Chairman, is a minority owner (less than 10 %) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $ 1,000 conditional grant. The Company and Marpe Technologies will each receive $ 500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $ 500 to match grant funds from the BIRD Foundation. The Company met its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies. The total value of the Company’s contribution will not exceed $ 500 . Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s services beyond its contribution. The Company will receive a 10 -year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device operations will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recover the value of services provided to Marpe if not paid when the services are provided. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the three and six months ended June 30, 2025 and 2024, we recognized no net sales to Marpe Technologies. As of June 30, 2025, we have no outstanding accounts receivable. The Company believes that transactions with Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party. NOTE 12. SUBSEQUENT EVENTS On July 24, 2025, the Company closed on the sale of the Blue Earth facility for $ 500 as discussed in Note 1 – “Summary of Significant Accounting Policies.” On July 29, 2025, the Company amended its Revolver line of credit agreement as discussed in Note 4 – “Financing Arrangements.” 17