NSYS 10-Q Quarterly Report Sept. 30, 2025

NORTECH SYSTEMS INC

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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 September 30, 2025

☐

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 November 6, 2025 was 2,786,134 .

TABLE OF CONTENTS

	PAGE

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income	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	8-18
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	25
Item 4 - Controls and Procedures	25

PART II – OTHER INFORMATION

Item 1 - Legal Proceedings	26
Item 1A. - Risk Factors	26
Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds	27
Item 3 - Defaults on Senior Securities	27
Item 4 - Mine Safety Disclosures	27
Item 5 - Other Information	27
Item 6 - Exhibits	27
SIGNATURES	28

PART I

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	2025			2024			2025			2024
	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
	2025			2024			2025			2024

Net sales	$	30,482		$	31,407		$	88,052		$	99,513
Cost of goods sold		25,457			27,572			75,112			85,613
Gross profit		5,025			3,835			12,940			13,900
Operating expenses:
Selling		1,221			891			3,609			2,605
General and administrative		2,593			2,951			8,097			9,103
Research and development		266			284			894			893
Restructuring charges		-			176			266			267
Total operating expenses		4,080			4,302			12,866			12,868
Income (loss) from operations		945			( 467	)		74			1,032
Other expense:
Interest expense		( 273	)		( 216	)		( 744	)		( 548	)
Income (loss) before income taxes		672			( 683	)		( 670	)		484
Income tax expense		818			56			479			301
Net (loss) income	$	( 146	)	$	( 739	)	$	( 1,149	)	$	183

Net (loss) income per common share:
Basic (in dollars per share)	$	( 0.05	)	$	( 0.27	)	$	( 0.41	)	$	0.07
Weighted average number of common shares outstanding - basic (in shares)		2,785,541			2,760,438			2,773,401			2,754,399
Diluted (in dollars per share)	$	( 0.05	)	$	( 0.27	)	$	( 0.41	)	$	0.06
Weighted average number of common shares outstanding - diluted (in shares)		2,785,541			2,760,438			2,773,401			2,931,343

Other comprehensive (loss) income
Foreign currency translation		( 21	)		223			109			( 135	)
Comprehensive (loss) income, net of tax	$	( 167	)	$	( 516	)	$	( 1,040	)	$	48

See Accompanying Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2025 AND DECEMBER 31, 2024

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	SEPTEMBER 30, 2025			DECEMBER 31, 2024
ASSETS
Current assets:
Cash	$	1,271		$	916
Accounts receivable, less allowances of $ 186 and $ 196 , respectively		18,810			14,875
Inventories, net		18,425			21,638
Contract assets		15,328			13,792
Prepaid assets and other assets		5,372			4,094
Total current assets		59,206			55,315
Property and equipment, net		5,322			6,232
Operating lease assets, net		7,306			8,139
Deferred tax assets		2,763			2,575
Other intangible assets, net		160			174
Total assets	$	74,757		$	72,435

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	12,030		$	-
Accounts payable		11,678			11,582
Accrued payroll and commissions		2,402			1,841
Customer deposits		4,716			5,140
Current portion of operating lease obligations		1,319			1,175
Current portion of finance lease obligations		239			143
Notes payable		-			344
Other accrued liabilities		1,221			1,203
Total current liabilities		33,605			21,428
Long-term liabilities:
Long-term line of credit		-			8,634
Long-term operating lease obligations, net of current portion		6,795			7,773
Long-term finance lease obligations, net of current portion		713			311
Other long-term liabilities		287			284
Total long-term liabilities		7,795			17,002
Total liabilities		41,400			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; 2,786,134 and 2,760,793 shares issued and outstanding, respectively		28			28
Additional paid-in capital		17,721			17,329
Accumulated other comprehensive loss		( 868	)		( 977	)
Retained earnings		16,226			17,375
Total shareholders’ equity		33,357			34,005
Total liabilities and shareholders’ equity	$	74,757		$	72,435

See Accompanying Notes to Condensed Consolidated Financial Statements .

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	2025			2024
	NINE MONTHS ENDED
	SEPTEMBER 30,
	2025			2024
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	( 1,149	)	$	183
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		986			1,400
Compensation on stock-based awards		369			334
Deferred income taxes		( 189	)		-
Change in accounts receivable allowance		( 10	)		( 72	)
Change in inventory reserves		346			194
Other, net		-			9
Changes in current operating assets and liabilities:
Accounts receivable		( 3,875	)		2,727
Inventories		2,823			( 922	)
Contract assets		( 1,536	)		( 577	)
Prepaid expenses and other assets		( 1,244	)		( 2,888	)
Accounts payable		165			( 3,609	)
Accrued payroll and commissions		555			( 1,198	)
Customer deposits		( 424	)		1,195
Other accrued liabilities		318			181
Net cash used in operating activities		( 2,865	)		( 3,043	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment		504			9
Purchases of equipment		( 517	)		( 980	)
Net cash used in investing activities		( 13	)		( 971	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit		76,215			99,888
Payments to line of credit		( 72,880	)		( 96,185	)
Proceeds from financing leases		-			198
Principal payments on financing leases		( 140	)		( 304	)
Share repurchases		-			( 67	)
Stock option exercises		23			31
Net cash provided by financing activities		3,218			3,561

Effect of exchange rate changes on cash		15			17

Net change in cash		355			( 436	)
Cash - beginning of period		916			1,675
Cash - end of period	$	1,271		$	1,239

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	NINE MONTHS ENDED
	SEPTEMBER 30,
	2025		2024

Supplemental disclosure of cash flow information:
Cash paid for interest	$	740	$	531
Cash paid for income taxes	$	580	$	374

Supplemental noncash investing and financing activities:
Property and equipment purchases in accounts payable	$	66	$	107
Conversion of notes payable to finance leases	$	637	$	-
Operating lease assets acquired under operating leases	$	-	$	1,923
Equipment acquired under finance leases	$	-	$	256

See Accompanying Notes to Condensed Consolidated Financial Statements.

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 June 30, 2024		250	$	250		2,762		$	28	$	17,165		$	( 890	)	$	19,592		$	36,145
Net loss		-		-		-			-		-			-			( 739	)		( 739	)
Foreign currency translation adjustment		-		-		-			-		-			223			-			223
Compensation on stock-based awards		-		-		-			-		128			-			-			128
Stock repurchases		-		-		( 6	)		-		( 67	)		-			-			( 67	)
Balance as of September 30, 2024		250	$	250		2,756		$	28	$	17,226		$	( 667	)	$	18,853		$	35,690

Balance as of June 30, 2025		250	$	250		2,780		$	28	$	17,585		$	( 847	)	$	16,372		$	33,388
Net loss		-		-		-			-		-			-			( 146	)		( 146	)
Foreign currency translation adjustment		-		-		-			-		-			( 21	)		-			( 21	)
Stock option exercises		-		-		6			-		2			-			-			2
Compensation on stock-based awards		-		-		-			-		134			-			-			134
Balance as of September 30, 2025		250	$	250		2,786		$	28	$	17,721		$	( 868	)	$	16,226		$	33,357

Balance as of December 31, 2023		250	$	250		2,740		$	27	$	16,929		$	( 532	)	$	18,670		$	35,344
Net income		-		-		-			-		-			-			183			183
Foreign currency translation adjustment		-		-		-			-		-			( 135	)		-			( 135	)
Compensation on stock-based awards		-		-		-			-		334			-			-			334
Stock option exercises		-		-		22			1		30			-			-			31
Stock repurchases		-		-		( 6	)		-		( 67	)		-			-			( 67	)
Balance as of September 30, 2024		250	$	250		2,756		$	28	$	17,226		$	( 667	)	$	18,853		$	35,690

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		-		-		-			-		-			-			( 1,149	)		( 1,149	)
Net income (loss)		-		-		-			-		-			-			( 1,149	)		( 1,149	)
Foreign currency translation adjustment		-		-		-			-		-			109			-			109
Stock option exercises		-		-		25			-		23			-			-			23
Compensation on stock-based awards		-		-		-			-		369			-			-			369
Balance as of September 30, 2025		250	$	250		2,786		$	28	$	17,721		$	( 868	)	$	16,226		$	33,357
Balance		250	$	250		2,786		$	28	$	17,721		$	( 868	)	$	16,226		$	33,357

See Accompanying Notes to Condensed Consolidated Financial Statements.

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 December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 (“ASU No. 2024-03”), which requires disaggregated expense information in the notes to the financial statements related to purchases of inventory, employee compensation, depreciation, intangible asset amortization and selling expenses for each statement of earnings line item that contains those expenses. ASU No. 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. The guidance is to be applied on a prospective basis with the option to apply the standard retrospectively; this ASU allows for early adoption. The Company is currently evaluating the impact of this ASU on its consolidated financial statements disclosures.

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 is currently evaluating the impact of this ASU on its consolidated financial statements disclosures.

Inventories

Inventories are as follows:

	September 30,			December 31,
	2025			2024
Raw materials	$	17,818		$	21,122
Work in process		1,354			892
Finished goods		1,048			1,070
Reserves		( 1,795	)		( 1,446	)
Inventories, net	$	18,425		$	21,638

Other Intangible Assets

Other intangible assets as of September 30, 2025 and December 31, 2024 are as follows:

	Patents
Balances as of December 31, 2024	$	174
Amortization		( 14	)
Balances as of September 30, 2025	$	160

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 4.3 years. Of the patents value as of September 30, 2025, $ 76 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 September 30, 2025 and 2024 was $ 5 and $ 4 , respectively. Amortization expense of finite life intangible assets for the nine months ended September 30, 2025 and 2024 was $ 14 and $ 84 , respectively.

As of September 30, 2025, estimated future annual amortization expense (except projects in process) related to these assets is as follows:

Year	Amount
Remainder of 2025	$	5
2026		18
2027		18
2028		18
2029		12
Thereafter		5
Total	$	76

Property and Equipment

The sale of the Blue Earth manufacturing facility and related land was completed in the three months ended September 30, 2025, for $ 500 , which approximated book value and therefore, no gain or loss was recorded on the sale.

During the third 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 are 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 $ 1,271 cash balance as of September 30, 2025, included approximately $ 1,042 and $ 120 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 nine months ended September 30, 2025 and 2024 are as follows:

	2025			2024			2025			2024
	Three Months Ended September 30,						Nine Months Ended September 30,
	2025			2024			2025			2024
Customer A		32	%		28	%		31	%		26	%
Customer B		11	%		N/A			10	%		N/A
Total		43	%		28	%		41	%		26	%

Customers who represent 10% or more of accounts receivable and contract assets for the period ended September 30, 2025 and December 31, 2024 are as follows:

	September 30, 2025			December 31, 2024
	Accounts Receivable
	September 30, 2025			December 31, 2024
Customer A		26	%		23	%
Customer C		10	%		13	%
Total		36	%		36	%

	September 30, 2025			December 31, 2024
	Contract Assets
	September 30, 2025			December 31, 2024
Customer A		33	%		33	%
Customer D		14	%		12	%
Total		47	%		45	%

Export sales from the U.S. represented approximately 2 % of net sales for both the three and nine months ended September 30, 2025. Export sales from the U.S. represented approximately 2 % of net sales for both the three and nine months ended September 30, 2024.

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 nine months ended September 30, 2025 and 72 % and 73 % of net sales for the three and nine months ended September 30, 2024, respectively.

The following tables summarize our net sales by market for the three and nine months ended September 30, 2025 and 2024, respectively:

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
	Three Months Ended September 30, 2025
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
Medical Device	$	5,758	$	2,004	$	589	$	8,351
Medical Imaging		8,215		2,169		5		10,389
Industrial		6,163		1,798		251		8,212
Aerospace and Defense		2,576		886		68		3,530
Total net sales	$	22,712	$	6,857	$	913	$	30,482

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
	Three Months Ended September 30, 2024
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
Medical Device ⁽²⁾	$	5,505	$	2,087	$	898	$	8,490
Medical Imaging ⁽²⁾		7,206		2,348		3		9,557
Industrial		5,505		2,667		262		8,434
Aerospace and Defense		4,394		494		38		4,926
Total net sales	$	22,610	$	7,596	$	1,201	$	31,407

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
	Nine Months Ended September 30, 2025
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
Medical Device	$	16,579	$	5,738	$	1,654	$	23,971
Medical Imaging		22,413		6,211		17		28,641
Industrial		17,459		5,729		485		23,673
Aerospace and Defense		9,333		2,250		184		11,767
Total net sales	$	65,784	$	19,928	$	2,340	$	88,052

	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
	Nine Months Ended September 30, 2024
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration ¹		Total Net Sales by Market
Medical Device ⁽²⁾	$	17,178	$	6,919	$	2,396	$	26,493
Medical Imaging ⁽²⁾		20,291		7,193		14		27,498
Industrial		18,847		7,682		1,114		27,643
Aerospace and Defense		16,494		1,231		154		17,879
Total net sales	$	72,810	$	23,025	$	3,678	$	99,513

¹	Noncash consideration represents material provided by the customer used in the manufacturing 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.

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 nine months ended September 30, 2025 were as follows:

Balance as of December 31, 2024	$	13,792
Increase (decrease) attributed to:
Amounts transferred over time to contract assets		65,784
Allowance for current expected credit losses		( 1	)
Amounts invoiced during the period		( 64,247	)
Balance outstanding as of September 30, 2025	$	15,328

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 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 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. We were in compliance with financial covenants related to adjusted EBITDA for the third quarter of 2025.

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 $ 12,030 as a current liability on the condensed consolidated balance sheets.

The Revolver, as amended, bears interest at a weighted-average interest rate of 8.0 % and 7.7 % as of September 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $ 12,030 and $ 8,695 outstanding as of September 30, 2025 and December 31, 2024, respectively. As of September 30, 2025, we had unused availability on the line of credit of $ 2,970 , 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 second quarter of 2025. As of September 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment.

In the preparation of the Company's financial statements, U.S. GAAP requires the Company to assess its ability to continue as a going concern. This analysis includes a number of factors including the Company's ability to repay debt which matures within one year of the issuance date of the Company's financial statements, as well as management's plan to mitigate any such considerations. The Company's Revolver, which has $ 12,030 outstanding as of September 30, 2025, matures on August 31, 2026 , and the Company has not completed its plan to refinance this debt as of the issuance date of these financial statements. Pursuant to U.S. GAAP, this raises substantial doubt about the Company’s ability to continue as a going concern. The Company is executing a plan to refinance the maturing cash-flow-based Revolver to an asset-backed line of credit. As of the date of issuance of these financial statements, the Company has received non-binding asset-backed financing term sheets from multiple lenders and engaged a financial advisor to assist in the refinancing process. Based on these proposals and the Company’s available assets, management believes it is probable that the refinancing will be effectively implemented before the maturity of the Revolver and will mitigate the conditions that raise substantial doubt. Accordingly, the Company has concluded that substantial doubt is alleviated.

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

The components of lease expense were as follows:

Lease Cost	2025		2024
	Three Months Ended September 30,
Lease Cost	2025		2024
Operating lease cost	$	609	$	569
Finance lease interest cost		15		6
Finance lease amortization expense		62		265
Total lease cost	$	686	$	840

Lease Cost	2025		2024
	Nine Months Ended September 30,
Lease Cost	2025		2024
Operating lease cost	$	1,738	$	1,746
Finance lease interest cost		30		18
Finance lease amortization expense		147		394
Total lease cost	$	1,915	$	2,158

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

	Balance Sheet Location	September 30, 2025		December 31, 2024
Assets
Finance lease assets	Property and equipment, net	$	891	$	411
Operating lease assets	Operating lease assets, net		7,306		8,139
Total leased assets		$	8,197	$	8,550

Liabilities
Current
Current operating lease liabilities	Current portion of operating lease obligations	$	1,319	$	1,175
Current finance lease liabilities	Current portion of finance lease obligations		239		143
Noncurrent
Long-term operating lease liabilities	Long-term operating lease obligations, net of current portion		6,795		7,773
Long-term finance lease liabilities	Long-term finance lease obligations, net of current portion		713		311
Total lease liabilities		$	9,066	$	9,402

Supplemental condensed consolidated statements of cash flows information for the nine months ended September 30, 2025 and 2024 related to leases was as follows:

	September 30,		September 30,
	2025		2024
Operating Leases
Cash paid for amounts included in the measurement of lease liabilities	$	1,342	$	468
Conversion of notes payable to finance leases	$	637	$	-
Property acquired under operating lease	$	-	$	1,923

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

	Operating Leases			Finance Leases			Total
Remainder of 2025	$	464		$	72		$	536
2026		1,866			320			2,186
2027		1,579			211			1,790
2028		1,569			211			1,780
2029		986			196			1,182
Thereafter		4,669			76			4,745
Total lease payments	$	11,133		$	1,086		$	12,219
Less: imputed interest		( 3,019	)		( 134	)		( 3,153	)
Present value of lease liabilities	$	8,114		$	952		$	9,066

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

	September 30, 2025			September 30, 2024
Weighted-average remaining lease term (years)
Operating leases		7.3			7.9
Finance leases		4.2			3.4
Weighted-average discount rate
Operating leases		8.1	%		7.8	%
Finance leases		6.7	%		5.7	%

NOTE 6. STOCK BASED AWARDS

Stock-based compensation expense of $ 134 and $ 127 for the three months ended September 30, 2025 and 2024, respectively, and $ 369 and $ 334 for the nine months ended September 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 no and 43,382 service-based stock options during the three and nine months ended September 30, 2025. We granted 1,000 and 23,000 service-based stock options during the three and nine months ended September 30, 2024, respectively. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows:

	2025			2024
Stock option fair value assumptions:
Risk-free interest rate		4.14	%		4.38	%
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		$	6.49

Total compensation expense related to stock options was $ 84 and $ 206 for the three and nine months ended September 30, 2025, respectively. Total compensation expense related to stock options was $ 61 and $ 184 for the three and nine months ended September 30, 2024, respectively. As of September 30, 2025, there was $ 680 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 2.4 years.

Following is a summary of stock option activity as of and for the nine months ended September 30, 2025 and 2024:

	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		23,000			11.08
Exercised		( 5,500	)		5.42
Forfeited		( 12,400	)		10.13
Outstanding – September 30, 2024		463,800		$	6.78		5.94	$	2,301

Outstanding – December 31, 2024		453,400		$	6.79		5.70	$	1,654
Granted		43,382			8.73
Exercised		( 1,200	)		3.98
Forfeited		( 10,400	)		8.22
Outstanding – September 30, 2025		485,182		$	6.91		5.34	$	1,244
Exercisable on September 30, 2025		310,200		$	5.36		3.9	$	1,223

Restricted Stock Units

Total compensation expense related to restricted stock units (“RSUs”) was $ 50 and $ 163 for the three and nine months ended September 30, 2025, respectively. Total compensation expense related to RSUs was $ 66 and $ 150 for the three and nine months ended September 30, 2024, respectively. During the nine-month periods ended September 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 September 30, 2025, total unrecognized compensation expense related to the RSUs was $ 306 , which will vest over a weighted average period of 1.6 years.

Following is a summary of RSU activity as of and for the nine months ended September 30, 2025 and 2024:

	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 – September 30, 2024		24,141			0.6	$	283

Outstanding – December 31, 2024		24,141			0.3	$	248
Granted		43,664
Vested		( 24,141	)
Forfeited		-
Outstanding – September 30, 2025		43,664			1.6	$	394

NOTE 7. NET (LOSS) INCOME PER SHARE DATA

Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding. Dilutive net income 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:

	2025		2024		2025		2024

	Three Months Ended September 30,				Nine Months Ended September 30,
	2025		2024		2025		2024
Basic weighted average shares outstanding		2,785,541		2,760,438		2,773,401		2,754,399
Dilutive effect of outstanding stock options and non-vested restricted stock units ¹		-		-		-		176,944
Diluted weighted average shares outstanding		2,785,541		2,760,438		2,773,401		2,931,343

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 nine months ended September 30, 2025, restricted stock units and stock options totaling 528,846 and 512,411 , respectively.
	b.	For the three and nine months ended September 30, 2024, restricted stock units and stock options totaling 189,265 and 93,391 , 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.

Our effective tax rate for the three and nine months ended September 30, 2025 was 122 % and ( 71 )%, respectively, compared to 8 % and 62 % for the same periods in 2024. The primary drivers of the change in effective tax rate were fluctuations in pretax income (loss), taxes on foreign entities and impact of the U.S. book loss on the Global Intangible Low-Taxed Income (“GILTI”).

In the third quarter of 2025, the One Big Beautiful Bill Act (“OBBBA”) restored the Company’s ability to immediately deduct domestic research and development expenses. The Company has prepared its tax provision for three and nine-months ending September 30, 2025 assuming it will take advantage of this provision of the OBBBA. As a result, the Company currently estimates that it will incur a U.S. tax loss for the Company in 2025, which will temporarily limit the Company’s ability to deduct interest expense and would impact the ability to claim foreign tax deductions and credits under the GILTI provisions of the US tax code. The impact to the GILTI results in a permanent unfavorable impact to the overall tax rate for the quarter and year-to-date periods in 2025. The Company plans to continue to review the impact of the OBBBA, and the various elections, including the Company’s deduction of research and development expense, to optimize tax cash payments, along with overall tax expense.

NOTE 9. SEGMENT INFORMATION

Our results of operations for the nine months ended September 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 several considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Our chief operating decision maker (the “CODM”) is the Company’s President and Chief Executive Officer. The CODM regularly evaluates financial information prepared in accordance with U.S. GAAP on a consolidated basis to assess performance and allocate resources.

The Company’s net sales were located as follows:

	2025		2024		2025		2024
	Three Months Ended September 30,				Nine Months Ended September 30,
	2025		2024		2025		2024
United States	$	18,170	$	20,704	$	52,485	$	66,713
Mexico		7,079		7,207		21,554		21,564
China		5,233		3,496		14,013		11,236
Total net sales	$	30,482	$	31,407	$	88,052	$	99,513

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:

	September 30, 2025		December 31, 2024
United States	$	9,568	$	10,429
Mexico		2,087		2,445
China		973		1,497
Total long-lived tangible assets	$	12,628	$	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 nine months ended September 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 or restructuring charge activity in the three months ended September 30, 2025.

The following table summarizes the related activity for the nine months ended September 30, 2025:

	Facility Consolidation			Workforce Reductions			Total

December 31, 2024	$	154		$	-		$	154
Charges		31			235			266
Cash payments		( 185	)		( 235	)		( 420	)
September 30, 2025	$	-		$	-		$	-

The following table summarizes the related activity for the nine months ended September 30, 2024:

	Facility Consolidation

December 31, 2023	$	-
Beginning	$	-
Charges		267
Cash payments		-
September 30, 2024	$	267
Ending	$	267

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 nine months ended September 30, 2025, we recognized no net sales to Marpe Technologies. During the three and nine months ended September 30, 2024, we recognized net sales to Marpe Technologies of $ 8 and $ 75 , respectively. As of September 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.

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, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove as well as facilities in Monterrey, Mexico and Suzhou, China. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility on July 24, 2025.

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 and defense 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.

Restructuring Activities

In fiscal year 2024, the Company initiated a restructuring plan related to the closure of its Blue Earth, MN facility. During the three and nine months ended September 30, 2025, the Company incurred restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The costs of these restructuring programs totaled $837, of which $266 was recorded in the nine months ended September 30, 2025 and $571 was recorded in the prior fiscal year. We did not record any amounts related to restructuring in the three months ended September 30, 2025. These costs are included in restructuring charges on the condensed consolidated statements of operations. These charges relate to employee severance and facility closure costs. We do not expect significant additional expenses related to this plan.

Results of Operations

Net Sales. Net sales for the three months ended September 30, 2025 and 2024 were $30,482 and $31,407, respectively, a comparative period decrease of $925 or 2.9%. Net sales for the nine months ended September 30, 2025 and 2024 were $88,052 and $99,513, respectively, a comparative period decrease of $11,461 or 11.5%. Net sales in the three and nine months ended September 30, 2025 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. Over the past two quarters, we have improved our manufacturing efficiencies as we complete product transfers between plants and realize improved manufacturing yields and productivity. The following is a summary of net sales by our major industry markets:

	Three Months Ended September 30,
	2025		2024		Increase (Decrease)
Medical Device	$	8,351	$	8,490	$	(139	)	(1.6	)%
Medical Imaging		10,389		9,557		832		8.7	%
Industrial		8,212		8,434		(222	)	(2.6	)%
Aerospace and Defense		3,530		4,926		(1,396	)	(28.3	)%
Total net sales	$	30,482	$	31,407	$	(925	)	(2.9	)%

	Nine Months Ended September 30,
	2025		2024		Increase (Decrease)
Medical Device	$	23,971	$	26,493	$	(2,522	)	(9.5	)%
Medical Imaging		28,641		27,498		1,143		4.2	%
Industrial		23,673		27,643		(3,970	)	(14.4	)%
Aerospace and Defense		11,767		17,879		(6,112	)	(34.2	)%
Total net sales	$	88,052	$	99,513	$	(11,461	)	(11.5	)%

	●	Medical Device: Net sales to our medical customers decreased $139, or 1.6%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $2,522, or 9.5%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The decrease was primarily due to inventory re-balancing with existing customers and timing of customer product launches as well as lower productivity as we managed our facility consolidation primarily in the first quarter of 2025.

	●	Medical Imaging: Net sales to our Medical Imaging customers increased $832, or 8.7%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $1,143, or 4.2%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The increase was primarily due to higher sales volume to existing customers as well as new program awards.

	●	Industrial: Net sales to our industrial customers decreased $222, or 2.6%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $3,970, or 14.4%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The decrease in net sales was primarily due to customer order delays and part shortages.

	●	Aerospace and Defense: Net sales to our aerospace and defense customers decreased $1,396, or 28.3%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $6,112, or 34.2%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The decrease in net sales in the quarterly comparison primarily relates to higher over time revenue in the third quarter of 2024 due from increased production in anticipation of the closure of the Blue Earth facility. The decrease in net sales in the year-to-date comparison relates to delays in customer approvals as we have consolidated this business into our Bemidji facility and higher over time revenue in the third quarter of 2024 due from increased production in anticipation of the closure of the Blue Earth facility.

Backlog. Our 90-day shipment backlog as of September 30, 2025 was $31,322, an in crease of 17.8% from $26,592 at the beginning of the quarter, and a 5.7% increase from September 30, 2024. 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 September 30, 2025, was $77,292, representing a 1.4% decrease from $78,351 at the beginning of the quarter and a 10.8% 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:

	September 30, 2025				June 30, 2025				September 30, 2024
	90 Day		Total		90 Day		Total		90 Day		Total
Medical Device	$	7,369	$	24,130	$	7,897	$	32,222	$	7,783	$	24,519
Medical Imaging		7,428		10,821		5,101		7,584		7,901		10,835
Industrial		8 ,888		12,466		6,010		9,349		7,200		9,445
Aerospace and Defense		7,637		29,875		7,584		29,196		6,747		24,971
Total backlog	$	31,322	$	77,292	$	26,592	$	78,351	$	29,631	$	69,770

The 90-day and total backlog as of September 30, 2025 includes orders already recognized in net sales and included in the contract asset value of $15,328.

Operating Costs and Expenses.

Net sales, cost of goods sold, gross profit, and operating costs were as follows:

	Three Months Ended September 30,
	2025			2024			Increase/(Decrease)
Net sales	$	30,482		$	31,407		$	(925	)	(2.9	)%
Cost of goods sold ⁽³⁾		25,457			27,572			(2,115	)	(7.7	)%
Gross profit		5,025			3,835			1,190		31.0	%
Gross margin percentage ⁽¹⁾		16.5	%		12.2	%		430	bpc ⁽²⁾
Selling ⁽³⁾		1,221			891			330		37.0	%
% of Net sales		4.0	%		2.7	%
General and administrative		2,593			2,951			(358	)	(12.1	)%
% of Net sales		8.5	%		9.4	%
Research and development		266			284			(18	)	(6.3	)%
% of Net sales		0.9	%		0.9	%
Restructuring charges		-			176			(176	)	(100	)%
% of Net sales		-	%		0.6	%
Operating income (loss)		945			(467	)		1,412		302.4	%
% of Net sales		3.1	%		(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.
	⁽³⁾	During the first quarter of 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing managers. As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported as selling expenses to better reflect the nature of the activities performed.

	Nine Months Ended September 30,
	2025			2024			Increase/(Decrease)
Net sales	$	88,052		$	99,513		$	(11,461	)	(11.5	)%
Cost of goods sold ⁽³⁾		75,112			85,613			(10,501	)	(12.3	)%
Gross profit		12,940			13,900			(960	)	(6.9	)%
Gross margin percentage ⁽¹⁾		14.7	%		14.0	%		70	bpc ⁽²⁾
Selling ⁽³⁾		3,609			2,605			1,004		38.5	%
% of Net sales		4.1	%		2.6	%
General and administrative		8,097			9,103			(1,006	)	(11.1	)%
% of Net sales		9.2	%		9.1	%
Research and development		894			893			1		0.1	%
% of Net sales		1.0	%		0.9	%
Restructuring charges		266			267			(1	)	(0.4	)%
% of Net sales		0.3	%		0.3	%
Operating income		74			1,032			(958	)	(92.8	)%
% of Net sales		0.1	%		1.0	%

	⁽¹⁾	Gross margin percentage is defined as gross profit as a percentage of net sales.
	⁽²⁾	Basis points change in gross margin percentage.
	⁽³⁾	During the first quarter of 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing managers. As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported as selling expenses to better reflect the nature of the activities performed.

Gross profit and gross margins. Gross profit as a percentage of net sales was 16.5% and 12.2% for the three months ended September 30, 2025, and 2024, respectively. Gross profit as a percentage of net sales was 14.7% and 14.0% for the nine months ended September 30, 2025, and 2024, respectively. The increase in gross profit as a percentage of net sales in the quarterly and year to date comparison periods was the result of improved plant utilization primarily from our restructuring activities and favorable sales mix.

Selling expenses . Selling expenses, as measured as a percentage of net sales , were 4.0% and 2.7% for the three months ended September 30, 2025, and 2024, respectively. Selling expenses, as measured as a percentage of net sales , were 4.1% and 2.6% for the nine months ended September 30, 2025, and 2024, respectively. In 2025, we realigned the reporting structure of our customer facing managers from plant operations to business development. As a result, this increase is a result of this realignment from cost of sales as well as the impact of fixed costs on a lower revenue base.

General and administrative expenses. General and administrative expenses, as measured as a percentage of net sales, were 8.5% and 9.4% for the three months ended September 30, 2025 and 2024, respectively, and 9.2% and 9.1% for the nine months ended September 30, 2025 and 2024, respectively. General and administrative expenses decreased in the quarterly and year to date 2025 periods by $358 and $1,006, respectively, as compared with the 2024 periods primarily as the result of lower incentive compensation accruals in the current year.

Restructuring charges . Restructuring charges were $0 and $266 in the three and nine months ended September 30, 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. Restructuring charges were $176 and $267 in the three and nine months ended September 30, 2024, respectively, for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility.

Operating (loss) income. Operating income was $945 for the three months ended September 30, 2025 or 3.1% of net sales and operating loss was $(467) or (1.5)% of net sales for the three months ended September 30, 2024. This increase was driven by the improved gross margin and lower incentive compensation expense. Operating income was $74 or 0.1% of net sales for the nine months ended September 30, 2025 and was $1,032 or 1.0% of net sales for the nine months ended September 30, 2024. The decrease was driven by the decrease in net sales and resulting gross margin.

Interest expense. Interest expense was $273 and $216 for the three months ended September 30, 2025 and 2024, respectively. Interest expense was $744 and $548 for the nine months ended September 30, 2025 and 2024, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

Income taxes. Our effective tax rate for the three and nine months ended September 30, 2025 was 122% and (71)%, respectively. Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively. The primary drivers of the change in effective tax rate were changes in pretax income (loss) and taxes on foreign entities.

Cash Flow Operating Results

The following is a summary of cash flow results:

	Nine Months Ended September 30,
	2025			2024
Cash provided by (used in):
Operating activities	$	(2,865	)	$	(3,043	)
Investing activities		(13	)		(971	)
Financing activities		3,218			3,561
Effect of exchange rates on changes in cash and cash equivalents		15			17
Net change in cash and cash equivalents	$	355		$	(436	)

Operating Activities. Cash used in operating activities was $2,865 in the first nine months of 2025, compared with $3,043 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 $5,411 in the nine months ended September 30, 2025 as compared with cash provided of $2,150 in the same prior-year period. The use of cash in the nine months ended September 30, 2025 is largely due to timing of customer shipments and cash collections. The cash provided in the prior year was due to an expected increase in cash collections due to higher sales and the timing of customer payments, partially offset by an increase in contract assets to support future customer shipments.
	●	Cash provided by inventory was $2,823 in the nine months ended September 30, 2025 as compared with cash used of $922 in the prior-year period. The decrease in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of product shipments as well as the results of our plan to reduce inventory balances in 2025.

Investing Activities. Cash used in investing activities was $13 in the first nine months of 2025, compared with $971 in the same prior-year period. The increase in proceeds from sale of property and equipment of $504 in the nine months ended September 30, 2025 compared with $9 in the same prior-year period was primarily due to the sale of the Blue Earth property and equipment.

Financing Activities. Cash provided by financing activities was $3,218 in the first nine months of 2025 and $3,561 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.

Liquidity and Capital Resources

In the preparation of the Company's financial statements, U.S. GAAP requires the Company to assess its ability to continue as a going concern. This analysis includes a number of factors including the Company's ability to repay debt which matures within one year of the issuance date of the Company's financial statements, as well as management's plan to mitigate any such considerations. The Company's Revolver, which has $12,030 outstanding as of September 30, 2025, matures on August 31, 2026, and the Company has not completed its plan to refinance this debt as of the issuance date of these financial statements. Pursuant to U.S. GAAP, this raises substantial doubt about the Company’s ability to continue as a going concern. The Company is executing a plan to refinance the maturing cash-flow-based Revolver to an asset-backed line of credit. As of the date of issuance of these financial statements, the Company has received non-binding asset-backed financing term sheets from multiple lenders and engaged a financial advisor to assist in the refinancing process. Based on these proposals and the Company’s available assets, management believes it is probable that the refinancing will be effectively implemented before the maturity of the Revolver and will mitigate the conditions that raise substantial doubt. Accordingly, the Company has concluded that substantial doubt is alleviated. Based on the planned refinancing arrangement, anticipated operating cash flows, and cash on hand, we believe we will have sufficient liquidity to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months. We were in compliance with financial covenants related to adjusted EBITDA for the third quarter of 2025.

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.

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 $12,030 as a current liability on the condensed consolidated balance sheets.

The Revolver, as amended, bears interest at a weighted-average interest rate of 8.0% and 7.7% as of September 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $12,030 and $8,695 outstanding as of September 30, 2025 and December 31, 2024, respectively. As of September 30, 2025, we had unused availability on the line of credit of $2,970, which is subject to a month end cap based on the previously noted minimum Liquidity.

Net sales in the first two quarters of 2025 and fourth quarter of 2024 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. Over the past two quarters, we have improved our manufacturing efficiencies as we complete product transfers between plants and realize improved manufacturing yields and productivity. The Company implemented plant optimization activities and cost-cutting initiatives in the first two quarters of 2025 to address losses. As a result of these activities, we have realized combined income from operations of $1,687 over the past two quarters. These actions plus continued efforts to improve manufacturing efficiencies and the planned reduction in inventory levels are intended to drive reduced borrowings during the fourth quarter of 2025.

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, such as the recent novel coronavirus 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, 2024.

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.

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, 2024, except as set forth below.

If we fail to comply with the covenants contained in our credit agreement, we may be unable to secure additional financing and repayment obligations on our outstanding indebtedness may be accelerated.

Our credit agreement contains financial and operating covenants with which we must comply. Effective as of February 29, 2024, we entered into a new credit agreement with Bank of America (the “Revolver”.) Our Revolver contains financial and operating covenants with which we must comply. Our compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors. 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 received a waiver of the Mexican operating expenses event of default from the bank in August 2024.

On March 27, 2025, we signed the First Amendment to the Revolver to waive the leverage ratio and minimum charge coverage ratio events of default as of December 31, 2024 and March 31, 2025 and to further defer the Company’s compliance with these ratios until the third quarter of 2025, and reset compliance thresholds for our covenant ratios for 2025. The First Amendment also set minimum EBITDA levels for the second, third and fourth quarters and increased the borrowing rate by 100 basis points. On May 14, 2025, we signed the Second Amendment to the Revolver to defer the Company’s compliance with the leverage ratio and minimum charge coverage ratio until the fourth quarter. The Second Amendment also modified downward the minimum EBITDA levels for the second, third and fourth quarters and shortened the duration of the Revolver to June 30, 2026 and further increased the borrowing rate by 25 basis points. For the fiscal quarter ending December 31, 2025, the Consolidated Leverage Ratio of the Company may not be greater than 2.50/1.00 given the Company EBITDA loss in the first quarter of 2025. On July 29, 2025, we signed the Third Amendment to the Revolver delaying expiration of the Revolver to August 31, 2026.

We have included the Amendment No. 1 to Credit Agreement, Waiver, and Consent, Amendment No. 2 to Credit Agreement and Amendment No. 3 to Credit Agreement as exhibits to this filing and any description of that document contained in this risk factor is only a summary and is qualified by its entirety by the filed documents. If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be unable to borrow funds and any outstanding indebtedness could become immediately due and payable, which could materially harm our business.

Impairment of Our Long-Lived Assets Could Adversely Affect Our Results of Operations and Financial Condition.

We evaluate long-lived assets, primarily property and equipment, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

As of September 30, 2025, the Company’s common stock was trading at a value less than the Company’s net equity value. As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was required as of September 30, 2025. If the fair value of our other long-lived assets is less than their carrying value, we may be required to record a non-cash impairment charge, which could be material. Such charges could negatively impact our results of operations, potentially affect our compliance with debt covenants, and reduce the perceived value of our Company. There can be no assurance that future reviews of long-lived assets will not result in impairment charges, particularly in periods of market or economic volatility.

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 September 30, 2025, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith

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: November 13, 2025	by	/s/ Jay D. Miller
		Jay D. Miller
		Chief Executive Officer and President
		Nortech Systems Incorporated

Date: November 13, 2025	by	/s/ Andrew D. C. LaFrence
		Andrew D. C. LaFrence
		Chief Financial Officer and Senior Vice President of Finance
		Nortech Systems Incorporated

TABLE OF CONTENTS

Part I Item 1. Financial Statements Note 1. Summary Of Significant Accounting Policies Note 2. Concentration Of Credit Risk and Major Customers Note 3. Net Sales Note 4. Financing Arrangements Note 5. Leases Note 6. Stock Based Awards Note 7. Net (loss) Income Per Share Data Note 8. Income Taxes Note 9. Segment Information Note 10. Restructuring Charges Note 11. Related Party Transactions Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults on Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information 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.

NSYS 10-Q Quarter ended Sept. 30, 2025

Exhibits