NORTECH SYSTEMS INC

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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.

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:

Other Intangible Assets

Other intangible assets as of June 30, 2026 and December 31, 2025 are as follows:

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:

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.

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 andone 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:

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:

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.

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:

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:

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.

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.

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%.

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 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. We have financing leases for certain property and equipment used in the normal course of business.

The components of lease expense were as follows:

Supplemental condensed consolidated balance sheet information related to leases was as follows:

Supplemental condensed consolidated statements of cash flows information for the six months ended June 30, 2026 and 2025 related to leases was as follows:

Future annual payments of lease liabilities as of June 30, 2026 were as follows:

The lease term and discount rate as of June 30, 2026 and 2025 were as follows:

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:

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.

Following is a summary of stock option activity as of and for the six months ended June 30, 2026 and 2025:

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:

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:

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 asingle 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:

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:

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:

We did not record any restructuring charges or restructuring charge activity in the three or six months ended June 30, 2026.