NSYS 10-Q
Nortech Systems Inc (NSYS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
file number
State
of Incorporation:
IRS
Employer Identification No.
Executive
Offices:
Telephone
number:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
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).
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 ☐ |
| 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 $ par value common stock outstanding as of August 5, 2026 was .
TABLE OF CONTENTS
| 2 |
PART I
ITEM 1. FINANCIAL STATEMENTS
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
| JUNE 30, | JUNE 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Restructuring charges | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| Other expense: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense (benefit) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic (in dollars per share) | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average number of common shares outstanding - basic (in shares) | ||||||||||||||||
| Diluted (in dollars per share) | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average number of common shares outstanding - diluted (in shares) | ||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Foreign currency translation | $ | $ | $ | $ | ||||||||||||
| Comprehensive income (loss), net of tax | $ | $ | $ | $ | ( | ) | ||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 3 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2026 AND DECEMBER 31, 2025
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 2026 | DECEMBER 31, 2025 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, less allowance for credit losses of $ | ||||||||
| Inventories, net | ||||||||
| Contract assets | ||||||||
| Prepaid assets and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets, net | ||||||||
| Deferred tax assets | ||||||||
| Other intangible assets, net | ||||||||
| Deferred line of credit issuance costs, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Lines of credit | $ | $ | ||||||
| Current portion of term loan, net of debt issuance costs | ||||||||
| Accounts payable | ||||||||
| Accrued payroll and commissions | ||||||||
| Customer deposits | ||||||||
| Current portion of operating leases | ||||||||
| Current portion of finance lease obligations | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Term loan, net of debt issuance costs | ||||||||
| Long-term operating lease obligations | ||||||||
| Long-term finance lease obligations | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 4 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
| SIX MONTHS ENDED | ||||||||
| JUNE 30, | ||||||||
| 2026 | 2025 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Compensation on stock-based awards | ||||||||
| Change in allowance for credit losses | ( | ) | ||||||
| Change in inventory reserves | ( | ) | ||||||
| Deferred taxes | ( | ) | ( | ) | ||||
| Changes in current operating items: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued payroll and commissions | ( | ) | ||||||
| Customer deposits | ||||||||
| Other accrued liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of property and equipment | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from lines of credit | ||||||||
| Payments to line of credit | ( | ) | ( | ) | ||||
| Proceeds from term loan | ||||||||
| Payments of debt issuance costs | ( | ) | ||||||
| Principal payments on term loan | ( | ) | ||||||
| Principal payments on financing leases | ( | ) | ( | ) | ||||
| Stock award exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and restricted cash | ||||||||
| Net change in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash and restricted cash - end of period | $ | $ | ||||||
| Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash reported in the condensed consolidated statements of cash flows | $ | $ | ||||||
| 5 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
| SIX MONTHS ENDED | ||||||||
| JUNE 30, | ||||||||
| 2026 | 2025 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash (received) paid for income taxes | $ | ( | ) | $ | ||||
| Supplemental noncash investing and financing activities: | ||||||||
| Property and equipment purchases in accounts payable | $ | $ | ||||||
| Conversion of notes payable to finance leases | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 6 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Comprehensive | Retained | Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Equity | |||||||||||||||||||||||||
| Balance as of March 31, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Stock option exercises | - | |||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance as of March 31, 2026 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Stock award exercises | - | |||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2026 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Stock option exercises | - | |||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Balance as of December 31, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Stock award exercises | - | |||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2026 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
| 7 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2025, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All dollar amounts are stated in thousands of U.S. dollars.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements. Estimates also affect the reported amounts of net sales and expenses during each reporting period. Significant items subject to estimates and assumptions include the lower of cost or net realizable value reserves for inventories, allowance for credit losses, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.
Tariff Legislation
In February 2026, the U.S. Supreme Court ruled that the International Emergency Economic Powers Act (“IEEPA”) does not authorize the President to impose tariffs, resulting in the termination of all IEEPA-based tariffs effective February 24, 2026. Following this ruling, the Administration imposed a temporary 10% global tariff on most imported products under Section 122 of the Trade Expansion Act of 1962, effective February 24, 2026, for a 150-day period.
The tariffs apply broadly to manufactured goods and component parts purchased by the Company. Management is evaluating the impact of these tariff actions on future product costs and sourcing strategies. The Company is also pursuing reimbursement and recovery of previously paid IEEPA-related tariffs from the federal government and certain vendors. As of June 30, 2026, no amounts have been recognized related to potential recoveries. The Company is evaluating and pursuing potential refund claims; however, the timing and amount of any recoveries remain uncertain.
In July 2026, following the expiration of the Section 122 tariffs, the U.S. Trade Representative implemented new tariffs under Section 301 of the Trade Act of 1974 on imports from certain countries, with rates generally ranging from 10% to 12.5%. Management is continuing to evaluate the potential impact of these tariffs on the Company’s future product costs, supply chain, and sourcing strategies.
Recently Issued New Accounting Standards
In November 2024, the FASB issued ASU No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU No. 2024-03”), which requires disaggregated expense information in the notes to the financial statements related to purchases of inventory, employee compensation, depreciation, intangible asset amortization and selling expenses for each statement of earnings line item that contains those expenses. ASU No. 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. The guidance is to be applied on a prospective basis with the option to apply the standard retrospectively; this ASU allows for early adoption. The Company is currently evaluating the impact of this ASU on its consolidated financial statement disclosures.
Adoption of New Accounting Standard
In July 2025, the FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets (“ASU No. 2025-05”), which reduces the complexity of applying credit losses to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606 (revenue from contracts with customers). ASU 2025-05 is effective for annual and interim reporting periods beginning after December 15, 2025. The Company has adopted this ASU and it did not have a material impact on the consolidated financial statements.
| 8 |
Restricted Cash
Restricted cash on our consolidated balance sheets relates to contractual cash dominion provisions under the Company’s
financing arrangements, which at June 30, 2026 were governed by the new Associated Bank facility. As of June 30, 2026 and December 31,
2025, we had restricted cash of $
The restricted cash balance at June 30, 2026 primarily represents customer deposits that are temporarily restricted due to timing at period end and are subject to the cash dominion provisions of the financing arrangement. These customer deposits are applied against the Company’s line of credit on the next business day.
Inventories
Inventories are as follows:
| June 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Reserves | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
Other Intangible Assets
Other intangible assets as of June 30, 2026 and December 31, 2025 are as follows:
| Patents | ||||
| Balances as of December 31, 2025 | $ | |||
| Amortization | ( | ) | ||
| Balances as of June 30, 2026 | $ | |||
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
Amortization
expense of finite life intangible assets for both the three months ended June 30, 2026 and 2025 was $
As of June 30, 2026, estimated future annual amortization expense related to these assets is as follows:
| Year | Amount | |||
| Remainder of 2026 | $ | | ||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter | ||||
| Total | $ | |||
Property and Equipment
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. At June 30, 2026, the Company determined that no triggering events existed that would require an impairment assessment.
| 9 |
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial
instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract
assets. We maintain our excess cash balances in checking accounts primarily at two financial institutions,
We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances or contract asset balances individually represented 10% or more of gross accounts receivable.
Customers who represent 10% or more of net sales for the three and six months ended June 30, 2026 and 2025 are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
| Total | % | % | % | % | ||||||||||||
Customers who represent 10% or more of accounts receivable and contract assets for the periods ended June 30, 2026 and December 31, 2025 are as follows:
| Accounts Receivable | ||||||||
June 30, 2026 | December 31, 2025 | |||||||
| Customer A | % | % | ||||||
| Contract Assets | ||||||||
June 30, 2026 | December 31, 2025 | |||||||
| Customer A | % | % | ||||||
| Customer C | % | % | ||||||
| Total | % | % | ||||||
Export
sales from the U.S. represented approximately
| 10 |
NOTE 3. NET SALES
Revenue Recognition
Revenue
under contract manufacturing agreements that was recognized over time, excluding noncash consideration, accounted for
| Three Months Ended June 30, 2026 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | | $ | | $ | | $ | |||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Three Months Ended June 30, 2025 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | | $ | | $ | | $ | |||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Six Months Ended June 30, 2026 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | | $ | | $ | | $ | |||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Six Months Ended June 30, 2025 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration1 | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | | $ | | $ | | $ | |||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| 1 |
| 11 |
Contract Assets
Contract assets, recorded in the condensed consolidated balance sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the six months ended June 30, 2026 were as follows:
| Balance as of December 31, 2025 | $ | |||
| Increase (decrease) attributed to: | ||||
| Amounts transferred over time to contract assets | ||||
| Allowance for current expected credit losses | ||||
| Amounts invoiced during the period | ( | ) | ||
| Balance outstanding as of June 30, 2026 | $ |
We expect substantially all amounts recorded as contract assets as of June 30, 2026 to be billed and reclassified to accounts receivable within 90 days, with any remaining amounts expected to be billed and reclassified within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.
Contract Liabilities
Contract
liabilities, recorded as customer deposits, were $
NOTE 4. FINANCING ARRANGEMENTS
Associated Bank Financing Arrangement
On
March 20, 2026, the Company entered into a new Credit and Security Agreement with Associated Bank, National Association, which
provides for a revolving credit facility of up to $
| 12 |
The Associated Facility contains customary affirmative and negative covenants that restrict or limit our ability to incur additional indebtedness, create liens, make investments, sell assets, pay dividends or engage in certain transactions without lender consent. This agreement also requires us to comply with financial covenants, including maintaining a Fixed Charge Coverage Ratio of 1.10 to 1.00, which measures the ratio of EBITDA, as defined to exclude certain other non-cash items, and less unfunded capital expenditures, to fixed charges such as interest as well as debt and capital lease principal payments. The Company was in compliance with all covenants under the Associated Facility as of June 30, 2026.
The Associated Facility agreement includes broad and customary events of default such as non-payment of obligations, breaches of representations or covenants, unauthorized liens, insolvency events, material adverse changes, cross-defaults to other significant indebtedness, and change-of-control triggers. Additional events include unsatisfied judgments, loss of lender lien priority, defaults under material business agreements, impairment of key intellectual property, destruction of collateral, and certain ERISA, hedging, or legal compliance violations. Upon an event of default, including the lender’s determination that a material adverse event has occurred, as defined by the Associated Facility agreement, the lender may accelerate all obligations, terminate the commitments, and exercise its full rights and remedies against the collateral.
The
Company incurred $
The table below reflects scheduled principal repayments of the term loan. Amounts outstanding under the revolving credit facility, if any, are due at maturity in March 2029.
| Year | Amount | |||
| Remainder of 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
Bank Of America Revolver
On
February 29, 2024, we closed on a $
Equipment Financing Arrangement
The
Company entered into an equipment financing arrangement during the second quarter of 2026. As of June 30, 2026, the equipment had not
been delivered and the financing had not been funded. Accordingly, no related asset or financing obligation was recorded. The Company
had made a required deposit, an initial payment, and paid closing costs under the arrangement totaling less than $
Interim Funding Agreement
The Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when the equipment was received and operational. The equipment was received, and the lease agreements were finalized during the second quarter of 2025. As of June 30, 2026, we have no amounts outstanding on the interim funding agreement for equipment.
China Financing Agreement
Our
China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of
| 13 |
NOTE 5. LEASES
We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one 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:
| Three Months Ended June 30, | ||||||||
| Lease Cost | 2026 | 2025 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease interest cost | ||||||||
| Finance lease amortization expense | ||||||||
| Total lease cost | $ | $ | ||||||
| Six Months Ended June 30, | ||||||||
| Lease Cost | 2026 | 2025 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease interest cost | ||||||||
| Finance lease amortization expense | ||||||||
| Total lease cost | $ | $ | ||||||
Supplemental condensed consolidated balance sheet information related to leases was as follows:
| Balance Sheet Location | June 30, 2026 | December 31, 2025 | ||||||||
| Assets | ||||||||||
| Finance lease assets | Property and equipment, net | $ | $ | |||||||
| Operating lease assets | Operating lease assets, net | |||||||||
| Total leased assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Current operating lease liabilities | Current portion of operating leases | $ | $ | |||||||
| Current finance lease liabilities | Current portion of finance lease obligations | |||||||||
| Noncurrent | ||||||||||
| Long-term operating lease liabilities | Long-term operating lease obligations | |||||||||
| Long-term finance lease liabilities | Long-term finance lease obligations | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| 14 |
Supplemental condensed consolidated statements of cash flows information for the six months ended June 30, 2026 and 2025 related to leases was as follows:
| June 30, | June 30, | |||||||
| 2026 | 2025 | |||||||
| Operating Leases | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Conversion of notes payable to finance leases | $ | $ | ||||||
Future annual payments of lease liabilities as of June 30, 2026 were as follows:
Operating Leases | Finance Leases | Total | ||||||||||
| Remainder of 2026 | $ | $ | | $ | ||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| 2029 | ||||||||||||
| 2030 | ||||||||||||
| Thereafter | ||||||||||||
| Total lease payments | $ | $ | $ | |||||||||
| Less: imputed interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
The lease term and discount rate as of June 30, 2026 and 2025 were as follows:
June 30, 2026 | June 30, 2025 | |||||||
| Weighted-average remaining lease term (years) | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted-average discount rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Stock-based compensation expense of $ and $ for the three months ended June 30, 2026 and 2025, respectively, and $ and $ for the six months ended June 30, 2026 and 2025, respectively, was reported in the condensed consolidated statements of operations within general and administrative expenses.
Stock Options
Under the 2017 Stock Incentive Plan (“2017 Plan”), as amended, there are an aggregate of shares authorized for issuance. On March 18, 2026, the Company’s Board of Directors approved the 2026 Equity Incentive Plan (the “2026 Plan”). The shareholders approved the 2026 Plan on May 13, 2026. The 2026 Plan succeeded the Company’s 2017 Plan and authorized shares for various equity- and cash-based awards. The remaining available shares under the 2017 Plan are now available for issuance under the 2026 Plan. As of June 30, 2026, there were remaining authorized shares available for grant under the 2026 Plan.
During the six months ended June 30, 2026, the Company granted stock options under the 2017 Plan which vest over years and granted stock options under the 2026 Plan which vest over -. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows:
| 2026 | ||||
| Stock option fair value assumptions: | ||||
| Risk-free interest rate | % | |||
| Expected life (years) | ||||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Weighted average grant date fair value of stock options granted | $ | |||
Total compensation expense related to stock options was $ and $ for the three months ended June 30, 2026, and 2025, respectively. Total compensation expense related to stock options was $ and $ for the six months ended June 30, 2026, and 2025, respectively. As of June 30, 2026, there was $of unrecognized compensation related to stock options which will be recognized over a weighted average period of years.
| 15 |
| Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – June 30, 2025 | $ | $ | ||||||||||||||
| Outstanding – December 31, 2025 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – June 30, 2026 | $ | $ | ||||||||||||||
| Exercisable on June 30, 2026 | $ | $ | ||||||||||||||
Restricted Stock Units
Total compensation expense related to restricted stock units (“RSUs”) was $ and $for the three months ended June 30, 2026 and 2025, respectively. Total compensation expense related to restricted stock units (“RSUs”) was $ and $ for the six months ended June 30, 2026 and 2025, respectively. During the three- and six- month periods ended June 30, 2025, we granted RSUs at an average grant price per share of $ to non-employee directors which vest over two years. As of June 30, 2026, total unrecognized compensation expense related to the outstanding RSUs was $, which will vest over a weighted average period of years. On March 18, 2026 these RSU’s were modified to allow full vesting upon a change of control, as defined in the amendment. Management concluded that no incremental compensation cost was required, as the added change-in-control provision did not impact the fair value of the awards at the modification date.
| Shares | Weighted- Average Remaining Vesting Term (in years) | Aggregate Intrinsic Value | ||||||||||
| Outstanding – December 31, 2024 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ||||||||||||
| Outstanding – June 30, 2025 | $ | |||||||||||
| Outstanding – December 31, 2025 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ) | |||||||||||
| Outstanding – June 30, 2026 | $ | |||||||||||
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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Dilutive effect of outstanding stock options and non-vested restricted stock units1 | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
| 1 |
| a. | For the three and six months ended June 30, 2026, stock options totaling and , respectively. | |
| b. | For the three months ended June 30, 2025, stock options totaling . For the six months ended June 30, 2025, restricted stock units and stock options totaling . |
| 16 |
NOTE 8. INCOME TAXES
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.
Our
effective tax rate for the three and six months ended June 30, 2026 was
NOTE 9. SEGMENT INFORMATION
Our results of operations for the three and six months ended June 30, 2026 and 2025 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. Net income is the measure of segment profitability used by the CODM to assess performance and allocate resources. Significant segment expenses reviewed by the CODM include those that are presented in the condensed consolidated statements of operations. The measure of segment assets is reported on the condensed consolidated balance sheets as total assets.
The Company’s net sales were located as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Mexico | ||||||||||||||||
| China | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
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:
June 30, 2026 | December 31, 2025 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| China | ||||||||
| Total long-lived tangible assets | $ | $ | ||||||
NOTE 10. RESTRUCTURING CHARGES
During
2024, we recorded restructuring charges of $
The following table summarizes the related activity for the six months ended June 30, 2025:
| Facility Consolidation | Workforce Reductions | Total | ||||||||||
| December 31, 2024 | $ | | $ | $ | ||||||||
| Charges | ||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ||||||
| June 30, 2025 | $ | $ | $ | |||||||||
We did not record any restructuring charges or restructuring charge activity in the three or six months ended June 30, 2026.
| 17 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. As of December 31, 2025, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility in July 2025. We also have facilities in Monterrey, Mexico and Suzhou, China.
Our net sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support. Quality, on-time delivery, and reliability are of utmost importance. Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.
Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.
All dollar amounts are stated in thousands of U.S. dollars.
Results of Operations
The Company’s results of operations in 2026 have benefited from higher gross margin from increased net sales as the result of improved backlog. This increase was offset in 2026 with increased incentive compensation expense. For the three and six months ended June 30, 2026, incentive compensation expense (reversal of expense) aggregated $402 and $647, respectively, as compared with ($131) and $0 in the three and six months ended June 30, 2025, respectively.
Net Sales. Net sales for the three months ended June 30, 2026 and 2025 were $33,540 and $30,675, respectively, a comparative period increase of $2,865 or 9.3%. Net sales for the six months ended June 30, 2026 and 2025 were $63,856 and $57,570, respectively, a comparative period increase of $6,286 or 10.9%. The following is a summary of net sales by our major industry markets:
| Three Months Ended June 30, | ||||||||||||||||
| 2026 | 2025 | Increase (Decrease) | ||||||||||||||
| Medical Device | $ | 10,269 | $ | 7,550 | $ | 2,719 | 36.0 | % | ||||||||
| Medical Imaging | 10,841 | 9,664 | 1,177 | 12.2 | % | |||||||||||
| Industrial | 8,120 | 8,516 | (396 | ) | (4.7 | )% | ||||||||||
| Aerospace and Defense | 4,310 | 4,945 | (635 | ) | (12.8 | )% | ||||||||||
| Total net sales | $ | 33,540 | $ | 30,675 | $ | 2,865 | 9.3 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2026 | 2025 | Increase (Decrease) | ||||||||||||||
| Medical Device | $ | 19,180 | $ | 15,620 | $ | 3,560 | 22.8 | % | ||||||||
| Medical Imaging | 20,717 | 18,252 | 2,465 | 13.5 | % | |||||||||||
| Industrial | 15,002 | 15,461 | (459 | ) | (3.0 | )% | ||||||||||
| Aerospace and Defense | 8,957 | 8,237 | 720 | 8.7 | % | |||||||||||
| Total net sales | $ | 63,856 | $ | 57,570 | $ | 6,286 | 10.9 | % | ||||||||
| 18 |
| ● | Medical Device: Net sales to our Medical Device customers increased $2,719, or 36.0%, in the three months ended June 30, 2026 as compared with the same period in 2025 and increased $3,560, or 22.8%, in the six months ended June 30, 2026 as compared with the same period in 2025. The increase was primarily due to higher customer demand from existing customers and continued ramp up of new programs. | |
| ● | Medical Imaging: Net sales to our Medical Imaging customers increased $1,177, or 12.2%, in the three months ended June 30, 2026 as compared with the same period in 2025 and increased $2,465, or 13.5%, in the six months ended June 30, 2026 as compared with the same period in 2025. The increase was driven by higher customer demand, supported in part by increased revenues from a stocking program with a key customer that improved product availability and enabled shorter lead times. | |
| ● | Industrial: Net sales to our industrial customers decreased $396, or 4.7%, in the three months ended June 30, 2026 as compared with the same period in 2025 and decreased $459, or 3.0%, in the six months ended June 30, 2026 as compared with the same period in 2025. Industrial revenue reflects customer inventory adjustments and temporary production disruptions associated with the transfer of manufacturing activities to Monterrey, Mexico. The decline was largely offset by revenue growth in China. | |
| ● | Aerospace and Defense: Net sales to our aerospace and defense customers decreased $635, or 12.8%, in the three months ended June 30, 2026 as compared with the same period in 2025 and increased $720, or 8.7%, in the six months ended June 30, 2026 as compared with the same period in 2025. The decrease in the second quarter of 2026 was primarily due to reduced demand from one customer who is rebalancing post-COVID inventory balances, which partially offset the benefits from the completion of the transfer of production programs to our Bemidji location. For the six-month period ended June 30, 2026, revenue increased compared to the prior-year period primarily due to higher production volumes associated with completed transfers to our Bemidji location, offset by impact of the above noted customer rebalancing activities. |
Backlog. Our 90-day shipment backlog as of June 30, 2026 was $33,445, an increase of 6.3% from $31,475 at the beginning of the quarter, and a 25.8% increase from June 30, 2025. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.
Our total order backlog as of June 30, 2026, was $93,849, representing a 3.4% increase from $90,802 at the beginning of the quarter and a 19.8% increase compared to the same period in the prior year; this year over year growth was primarily driven by an increase in Aerospace and Defense orders.
90-day shipment and total backlog by our major industry markets are as follows:
| June 30, 2026 | March 31, 2026 | June 30, 2025 | ||||||||||||||||||||||
| 90 Day | Total | 90 Day | Total | 90 Day | Total | |||||||||||||||||||
| Medical Device | $ | 11,103 | $ | 22,060 | $ | 10,512 | $ | 27,332 | $ | 7,897 | $ | 32,222 | ||||||||||||
| Medical Imaging | 6,971 | 11,041 | 6,509 | 9,476 | 5,101 | 7,584 | ||||||||||||||||||
| Industrial | 5,975 | 20,227 | 4,842 | 13,113 | 6,010 | 9,349 | ||||||||||||||||||
| Aerospace and Defense | 9,396 | 40,521 | 9,612 | 40,881 | 7,584 | 29,196 | ||||||||||||||||||
| Total backlog | $ | 33,445 | $ | 93,849 | $ | 31,475 | $ | 90,802 | $ | 26,592 | $ | 78,351 | ||||||||||||
The 90-day and total backlog as of June 30, 2026 includes orders already recognized in net sales and included in the contract asset value of $16,979.
| 19 |
Operating Costs and Expenses.
Net sales, cost of goods sold, gross profit, and operating costs were as follows:
| Three Months Ended June 30, | ||||||||||||||||
| 2026 | 2025 | Increase/(Decrease) | ||||||||||||||
| Net sales | $ | 33,540 | $ | 30,675 | $ | 2,865 | 9.3 | % | ||||||||
| Cost of goods sold | 27,837 | 25,838 | 1,999 | 7.7 | % | |||||||||||
| Gross profit | 5,703 | 4,837 | 866 | 17.9 | % | |||||||||||
| Gross margin percentage (1) | 17.0 | % | 15.8 | % | 120 | bpc(2) | ||||||||||
| Selling | 1,484 | 1,204 | 280 | 23.3 | % | |||||||||||
| % of Net sales | 4.4 | % | 3.9 | % | ||||||||||||
| General and administrative | 3,250 | 2,589 | 661 | 25.5 | % | |||||||||||
| % of Net sales | 9.7 | % | 8.4 | % | ||||||||||||
| Research and development | 346 | 302 | 44 | 14.6 | % | |||||||||||
| % of Net sales | 1.0 | % | 1.0 | % | ||||||||||||
| Operating income | 623 | 742 | (119 | ) | (16.0 | )% | ||||||||||
| % of Net sales | 1.9 | % | 2.4 | % | ||||||||||||
| (1) | Gross margin percentage is defined as gross profit as a percentage of net sales. | |
| (2) | Basis points change in gross margin percentage. |
| Six Months Ended June 30, | ||||||||||||||||
| 2026 | 2025 | Increase/(Decrease) | ||||||||||||||
| Net sales | $ | 63,856 | $ | 57,570 | $ | 6,286 | 10.9 | % | ||||||||
| Cost of goods sold | 53,451 | 49,655 | 3,796 | 7.6 | % | |||||||||||
| Gross profit | 10,405 | 7,915 | 2,490 | 31.5 | % | |||||||||||
| Gross margin percentage (1) | 16.3 | % | 13.7 | % | 260 | bpc(2) | ||||||||||
| Selling | 2,815 | 2,388 | 427 | 17.9 | % | |||||||||||
| % of Net sales | 4.4 | % | 4.1 | % | ||||||||||||
| General and administrative | 6,264 | 5,504 | 760 | 13.8 | % | |||||||||||
| % of Net sales | 9.8 | % | 9.6 | % | ||||||||||||
| Research and development | 656 | 628 | 28 | 4.5 | % | |||||||||||
| % of Net sales | 1.0 | % | 1.1 | % | ||||||||||||
| Restructuring charges | - | 266 | (266 | ) | (100 | )% | ||||||||||
| % of Net sales | - | % | 0.5 | % | ||||||||||||
| Operating income (loss) | 670 | (871 | ) | 1,541 | 176.9 | % | ||||||||||
| % of Net sales | 1.0 | % | (1.5 | )% | ||||||||||||
| (1) | Gross margin percentage is defined as gross profit as a percentage of net sales. | |
| (2) | Basis points change in gross margin percentage. |
| 20 |
Gross profit and gross margin percentage. Gross margin percentage was 17.0% and 15.8% for the three months ended June 30, 2026, and 2025, respectively. Gross margin percentage was 16.3% and 13.7% for the six months ended June 30, 2026, and 2025, respectively. The improvement was primarily attributable to higher revenue levels and improved manufacturing cost absorption resulting from increased production activity. The benefit of higher volumes was partially offset by unfavorable sales mix.
Selling expenses. Selling expenses, as measured as a percentage of net sales, were 4.4% and 3.9% for the three months ended June 30, 2026, and 2025, respectively. Selling expenses, as measured as a percentage of net sales, were 4.4% and 4.1% for the six months ended June 30, 2026, and 2025, respectively. The increase as a percentage of sales was primarily attributable to higher incentive compensation accruals in 2026.
General and administrative expenses. General and administrative expenses, as measured as a percentage of net sales, were 9.7% and 8.4% for the three months ended June 30, 2026 and 2025, respectively, and 9.8% and 9.6% for the six months ended June 30, 2026 and 2025, respectively. The increase as a percentage of net sales was primarily the result of higher incentive compensation accruals in 2026.
Research and development. Research and development expenses increased slightly at $346 and $302 in the three months ended June 30, 2026 and 2025, respectively, and $656 and $628 in the six months ended June 30, 2026 and 2025, respectively. The increases are the result of higher incentive compensation accruals in 2026.
Restructuring charges. Restructuring charges were $0 and $266 in the three and six months ended June 30, 2026 and 2025, respectively. During the first quarter of 2025, we incurred $235 of severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales and $31 of expenses related to our closed Blue Earth facility.
Operating income (loss). Operating income was $623 for the three months ended June 30, 2026 or 1.9% of net sales and operating income was $742 or 2.4% of net sales for the three months ended June 30, 2025. The decrease was primarily attributable to higher selling and general and administrative expenses, which more than offset the increase in gross profit resulting from higher sales volume. Operating income was $670 or 1.0% of net sales for the six months ended June 30, 2026 and operating loss was $(871) or (1.5)% of net sales for the six months ended June 30, 2025. The increase was primarily attributable to higher gross profit associated with increased revenue and improved operating leverage, together with the absence of restructuring charges recorded in the first quarter of 2025.
Interest expense, net. Interest expense, net was $197 and $257 for the three months ended June 30, 2026 and 2025, respectively. Interest expense, net was $453 and $471 for the six months ended June 30, 2026 and 2025, respectively. This decrease in the quarterly comparison was driven by the lower average borrowings and reduced interest costs following the transition to the Company’s new financing arrangements. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Income taxes. Our effective tax rate for the three and six months ended June 30, 2026 was 26% and (30)%, respectively. Our effective tax rate for the three and six months ended June 30, 2025 was 35% and 25%, respectively. The primary drivers of the change in the effective tax rate were differences in pretax book income (loss) by jurisdiction and taxes on foreign entities.
Cash Flow Operating Results
The following is a summary of cash flow results:
| Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (2,449 | ) | $ | (2,773 | ) | ||
| Investing activities | (323 | ) | (358 | ) | ||||
| Financing activities | 2,774 | 2,858 | ||||||
| Effect of exchange rates on changes in cash and restricted cash | 17 | 9 | ||||||
| Net change in cash and restricted cash | $ | 19 | $ | (264 | ) | |||
| 21 |
Operating Activities. Cash used in operating activities was $2,449 in the first six months of 2026, compared with $2,773 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
| ● | Cash used by accounts receivable and contract assets was $4,500 in the six months ended June 30, 2026 as compared with cash used of $4,034 in the same prior-year period. This use of cash is largely due to timing of customer shipments and cash collections in both periods and by an increase in contract assets in the current year period to support future customer shipments. | |
| ● | Cash used by inventory was $3,530 in the six months ended June 30, 2026 as compared with cash provided of $2,714 in the prior-year period. The current-year increase in inventory primarily reflects purchases of materials needed to support the growing backlog and anticipated production requirements in the second half of 2026. In contrast, inventory levels declined in the prior-year period due to lower customer demand and corresponding reductions in material purchases. | |
| ● | Cash provided by changes in accounts payable was $2,077 in the current-year period as compared with cash provided of $295 in the same prior-year period, primarily related to the timing of cash payments. |
Investing Activities. Cash used in investing activities was $323 in the first six months of 2026, compared with $358 in the same prior-year period, both due from the purchases of property and equipment.
Financing Activities. Cash provided by financing activities was $2,774 in the first six months of 2026 and $2,858 in the same prior-year period. The cash provided by financing activities in both periods resulted from the line of credit advances for working capital and operations as well as the term loan borrowing in the first six months of 2026.
Liquidity and Capital Resources
We believe that our existing financing arrangements, anticipated cash flows from operations, and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next year from the date of this filing with the Securities and Exchange Commission.
On March 20, 2026, the Company entered into a new Credit and Security Agreement with Associated Bank, National Association, which provides for a revolving credit facility of up to $15,000, subject to a borrowing base based on eligible accounts receivable and inventory in the United States of America (“U.S.”), and a $2,200 term loan (the “Associated Facility”). The Associated Facility includes a sublimit of $1,500 for letters of credit and is secured by substantially all of our assets in the U.S. The Associated Facility matures in March 2029. The Company is required to pay a 25-basis point fee per annum, paid monthly, on the unused portion of the revolving credit facility. The term loan requires monthly principal payments of $37 plus interest. Borrowings under the Associated Facility bear interest, at the Company’s option, at a defined base rate derived from the Bank’s prime rate, or at one-month or three-month Term Secured Overnight Financing Rate, referred to as SOFR, plus 2.00% in the case of revolving credit borrowings, and plus 2.25% in the case of the term loan. The revolving credit facility and term loan bear interest at a weighted-average interest rate of 7.9% and 7.7%, respectively, for the three months ended June 30, 2026. At June 30, 2026, there was $7,573 outstanding under the revolving credit facility and $3,552 of unused availability. Borrowings under the Associated Facility may be prepaid at any time without penalty. The Associated Facility does not contain prepayment premiums, make-whole provisions, or other features that would require separate accounting as embedded derivatives.
The Associated Facility contains customary affirmative and negative covenants that restrict or limit our ability to incur additional indebtedness, create liens, make investments, sell assets, pay dividends or engage in certain transactions without lender consent. This agreement also requires us to comply with financial covenants, including maintaining a Fixed Charge Coverage Ratio of 1.10 to 1.00, which measures the ratio of EBITDA, as defined to exclude certain other non-cash items, and less unfunded capital expenditures, to fixed charges such as interest as well as debt and finance lease principal payments. The Company was in compliance with all covenants under the Associated Facility as of June 30, 2026.
The Associated Facility agreement includes broad and customary events of default such as non-payment of obligations, breaches of representations or covenants, unauthorized liens, insolvency events, material adverse changes, cross-defaults to other significant indebtedness, and change-of-control triggers. Additional events include unsatisfied judgments, loss of lender lien priority, defaults under material business agreements, impairment of key intellectual property, destruction of collateral, and certain ERISA, hedging, or legal compliance violations. Upon an event of default, including the lender’s determination that a material adverse event has occurred, as defined by the Associated Facility agreement, the lender may accelerate all obligations, terminate the commitments, and exercise its full rights and remedies against the collateral.
Our ability to comply with these covenants depends in part on our ability to generate sufficient EBITDA and operating cash flow. If our EBITDA or cash flows declines due to any factor, we may not remain in compliance with our financial covenants under the Associated Facility.
| 22 |
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
| ♦ | Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; | |
| ♦ | Whether our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months; | |
| ♦ | Supply chain disruption and unreliability; | |
| ♦ | Lack of supply of sufficient human resources to produce our products; | |
| ♦ | Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing; | |
| ♦ | Changes in the reliability and efficiency of our operating facilities or those of third parties; | |
| ♦ | Increases in certain raw material costs such as copper and oil; | |
| ♦ | Commodity and energy cost instability; | |
| ♦ | Risks related to FDA noncompliance; | |
| ♦ | The loss of a major customer; | |
| ♦ | General economic, financial and business conditions that could affect our financial condition and results of operations; | |
| ♦ | Increased or unanticipated costs related to compliance with securities and environmental regulation; | |
| ♦ | Disruption of global or local information management systems due to natural disaster or cyber-security incident; and | |
| ♦ | Outbreaks of epidemic, pandemic, or contagious diseases that affect our operations, our customers’ operations or our suppliers’ operations. |
The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligation to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A. Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2025.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibits | ||
| 31.1* | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. | |
| 31.2* | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. | |
| 32* | Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101* | Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 2026, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Condensed Consolidated Financial Statements. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Nortech Systems Incorporated and Subsidiaries | ||
| Date: August 12, 2026 | by | /s/ Jay D. Miller |
| Jay D. Miller | ||
| Chief Executive Officer and President | ||
| Nortech Systems Incorporated | ||
| Date: August 12, 2026 | by | /s/ Andrew D. C. LaFrence |
| Andrew D. C. LaFrence | ||
| Chief Financial Officer and Senior Vice President of Finance | ||
| Nortech Systems Incorporated | ||
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