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, 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.

Inventories

Inventories are as follows:

Other Intangible Assets

Other intangible assets as of June 30, 2025 and December 31, 2024 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 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:

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 attwo 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 $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:

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:

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:

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:

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.

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 tofive 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:

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, 2025 and 2024 related to leases was as follows:

Future annual payments of lease liabilities as of June 30, 2025 were as follows:

The lease term and discount rate as of June 30, 2025 and 2024 were as follows:

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:

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:

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:

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.

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:

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. 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:

The following table summarizes the related activity for the six months ended June 30, 2024:

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 recognizedno net sales to Marpe Technologies. As of June 30, 2025, we haveno 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.”