NSYS 10-K/A
Nortech Systems Inc (NSYS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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EXPLANATORY NOTE
DOCUMENTS INCORPORATED BY REFERENCE
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NORTECH SYSTEMS INCORPORATED
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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NORTECH SYSTEMS INCORPORATED
FORM 10-K
For the Year Ended December 31, 2025
PART I
Item 1. Business
General
Nortech Systems Incorporated, (“the Company”, “we”, “our”) organized in 1990, is a provider of engineering design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou, China. All dollar amounts herein, excluding incorporated by reference documents, are in thousands of US Dollars.
We offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing, testing, prototyping, manufacturing, supply chain management and post-market services. Our manufacturing and engineering services include 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. In the design phase, we provide technical support, subject matter expertise in design for manufacturing and testing capabilities that allow our customer programs to get to production faster while meeting both their quality and cost requirements.
Our breadth of manufacturing, technical expertise and experience make us attractive to our broad customer base. Our customers are original equipment manufacturers (“OEMs”) in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets. The diversity in the markets we serve is an advantage to mitigate the effects of fluctuations from the economy and competition. Our customers rely on our experience and capabilities in manufacturing and supply chain to manage and reduce total overall cost over the life cycle of their products. This requires a strong relationship with our customers based on a trusting partnership as we perform as an extension of their operations. Most of our net sales are derived from products built to the customer’s unique design specifications.
Our quality systems and processes are based on ISO standards with all facilities certified to at least one of the following: ISO 9001, ISO 13485 or AS9100. Additionally, our facility in Monterrey, Mexico is now certified in AS9100:D. These certifications and registrations provide our customers assurance of our capabilities and proven processes. Our Milaca operation is a U.S. Food and Drug Administration (“FDA”) registered facility, and our Suzhou operation is National Medical Products Administration certified for class II medical devices. In addition to industry standard certifications, we actively manage quality metrics throughout product life cycle at all levels of the organization to provide real-time, pro-active support to our customers and their projects. Process validation is performed through the strict phases of installation qualification, operation qualification and performance qualification.
Business Segment
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. Substantially all of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services (“EMS”) industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate finance functions. Our financial information is evaluated regularly on a consolidated basis by the chief operating decision maker in assessing performance and allocating resources.
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Business Strategy
The EMS industry has evolved into a dynamic, high-tech, regulated global electronics contract services industry. We continue to expand our capabilities and footprint to better meet these changing market requirements. Along with offering technical expertise in our quality processes, engineering design applications and testing, we continue to transform our business model from one that is less transactional, and price/commodity driven to a solution-based model. Our model is focused on value-added customer and supplier-managed inventory solutions and the underlying cost drivers throughout the global supply chain. We continue to pursue strategic opportunities that may include acquisitions, mergers, and/or joint ventures with complementary companies to expand our service offering, advance our competitive edge, grow our customer base and increase net sales. Our strategic objectives and our history have been based on both organic and acquired growth.
We are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, we have invested in equipment, plant capacity studies, people, enterprise resource planning systems, lean manufacturing and supply chain management techniques at our facilities. We have also invested in fiber optic technologies to provide a lighter weight, data-driven and environmentally cleaner solution to our customers. We are committed to continuous improvement and have invested in training our people to identify and act on improvement opportunities. We maintain a diversified customer base and expand into other capabilities and services when there is a fit with our core competencies and strategic vision.
Marketing
We concentrate our marketing efforts in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets. Our marketing strategy emphasizes our breadth, expertise and experience in each of our markets. Our expertise helps our customers save time and money and reduces their risks. The breadth of our manufacturing, supply chain, engineering services and complete turnkey solutions assist our customers in getting their products to market quickly while managing the total cost solution. Our strength is managing low to moderate volume components and assemblies with high mix customer demand. This requires us to have close customer relationships and operational flexibility to manage the variation of product demands.
Our customer emphasis continues to be on companies that require an electronic manufacturing partner with a high degree of manufacturing and quality sophistication, including statistical process control, statistical quality control, ISO standards, military specifications, AS9100 and FDA facility registration. We continue efforts to penetrate our existing customer base and expand market opportunities with participation in industry forums and selected trade shows. We target customers who value proven manufacturing performance, design, project management and application engineering expertise and who value the flexibility to manage the supply chain of a high mix of products and services. We market our services through a mix of traditional marketing outreach, a specialized business development team and in limited circumstances, independent manufacturers’ representatives. For more information on our marketing and service offerings see our website at www.nortechsys.com. The information on our Company’s website is not part of this filing.
Sources and Availability of Materials
We currently purchase most of our electronic components globally and directly from electronic component manufacturers and large electronic distributors. During the COVID pandemic, we, like many other companies in our industries, experienced significant supply chain and shipping disruptions. More recently, we are experiencing shifts in customer order patterns as they seek to reduce fulfillment times, which requires changes to our procurement strategies and inventory investments. We seek to develop, in partnership with our customers, a commitment to strong supplier partnerships and risk management tools through advanced supply chain solutions.
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Major Customers
One customer individually accounted for 32.2% of net sales for the year ended December 31, 2025 and 27.7% of net sales for the year ended December 31, 2024.
Patents and Licenses
Our success depends on our technical expertise, trade secrets, supply chain and manufacturing skills. During the normal course of business, we obtain or develop proprietary products requiring licensing, patent, copyright or trademark protection.
Competition
The contract manufacturing EMS industry’s competitive makeup includes small closely held contract manufacturing companies, large global full-service contract manufacturers, company-owned in-house manufacturing facilities and foreign contract manufacturers. We do not believe that the small closely held operations pose a significant competitive threat in the markets and customers we serve, as they generally do not have the complete manufacturing and engineering services or capabilities required by our target customers. We believe the larger global full service and foreign manufacturers are more focused on higher volume customer engagements and we do not see them as our primary competition. We continue to see opportunities with OEM companies that have their own in-house electronic manufacturing capabilities as they evaluate their internal costs and investments against outsourcing to contract manufacturers like us. We see trends of the low volume, high mix customer demand going to a regional supply base. This is a good fit with our operations in US, Mexico and China. We continue to study and investigate other regions and global alternatives to meet our competitive challenges and customer requirements.
Research and Development
We perform research and development (“R&D”) for customers on an as requested, project and program basis for development of conceptual engineering and design activities as well as products moving into production. We spent $1,172 and $1,191 on product research and development in the years ended December 31, 2025 and 2024, respectively. We continue to explore opportunities for developing proprietary manufacturing methods or products, particularly in complex wire and cable interconnect technologies.
In addition to customer directed R&D, we invest in strategic initiatives to expand our technical capabilities and support long-term growth. Our efforts include advancing fiber-optic interconnect technologies, which are becoming increasingly important in the EMS market as customers require higher-speed data transmission, improved signal integrity, and greater bandwidth. These initiatives are designed to strengthen our position in markets rapidly adopting optical solutions, including industrial automation, medical devices, defense communication platforms, and other high reliability connectivity applications.
Environmental Law Compliance
We believe that our manufacturing facilities are currently operating in compliance with local, state, and federal environmental laws. We plan to continue acquiring environmentally efficient equipment and incurring the expenditures we deem necessary for compliance with applicable laws. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital expenditures, earnings or competitive position.
Government Regulation
As a medical device manufacturer, we have additional compliance requirements. We are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality Management System Regulation (“QMSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring by the FDA. In January 2024, the FDA finalized its transition to the new QMSR, which became effective February 2, 2026. The new QMSR incorporates ISO 13485:2016 by reference and replaces most prior Quality System Regulation (“QSR”) requirements, retaining only select U.S.-specific expectations such as labeling and complaint handling. As part of this shift, the FDA adopts the ISO defined Medical Device File structure in place of traditional QSR documentation while emphasizing a risk-based approach consistent with ISO 13485 and ISO 14971 principles. We believe our ISO certified facilities position us well for this transition, and we continue to review and enhance our systems to ensure full compliance.
To support the quality requirements of our Aerospace and Defense market customers, all our US locations are International Traffic in Arms Regulations (“ITAR”) compliant.
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Human Capital Resources
We have 685 full-time and 28 part-time/temporary employees as of December 31, 2025, none which are covered by union agreements. Of full-time employees, manufacturing personnel, including direct, indirect support and sales functions, comprise 642 employees, while general administrative employees total 43.
Foreign Operations and Export Sales from Our Domestic Operations
We have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China. Monterrey, Mexico has approximately $607 and $687 in long-term assets, and $1,408 and $1,758 of net operating lease assets as of December 31, 2025 and 2024, respectively. Suzhou, China has approximately $953 and $812 in long-term assets, and $375 and $685 of net operating lease assets as of December 31, 2025 and 2024, respectively. Export sales from our U.S. domestic operations represented 3.3% and 3.4% of net sales for the years ended December 31, 2025 and 2024, respectively.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available free of charge, as soon as reasonably practicable, after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (“SEC”). These reports are available on our website at http://www.nortechsys.com and on the SEC’s website at http://www.sec.gov. Information included on our website is not deemed to be incorporated into this Annual Report on Form 10-K.
Item 1A. Risk Factors
In evaluating our Company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and/or financial condition, as well as adversely affect the value of an investment in our common stock. In addition to the following disclosures, please refer to the other information contained in this report, including our consolidated financial statements and the related notes.
Risks Related to our Business
A large percentage of our net sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us.
One customer accounted for at 32.2% of net sales for the year ended December 31, 2025, and 27.7% of net sales for the year ended December 31, 2024. The loss of a substantial portion of net sales to our largest customers could have a material adverse effect on us.
We are dependent on suppliers for components and raw materials and may experience shortages, extended lead times, cost premiums and shipment delays that would adversely affect our customers and us.
We purchase raw materials, commodities and components for use in our production process. Increased costs of these materials, including tariffs, could have an adverse effect on our production costs if we are unable to pass along price increases or reduce the other cost of goods produced through cost improvement initiatives. Fuel and energy cost increases could also adversely affect our freight and operating costs. Due to customer specifications and requirements, we are dependent on suppliers to provide critical electronic and other components and materials for our operations that could result in shortages of some of the components needed for production. Component shortages may result in an inability to deliver products on time or at all, expedited freight, overtime premiums and increased component costs. In addition to the financial impact on operations from lost net sales and increased cost, there could potentially be harm to our customer relationships. To reduce the effects of supply chain disruption for our customers, we purchase and hold raw material and finished goods inventory, which results in a reduction of cash available. If we are unable to sell such inventory or sell such inventory within a reasonable timeframe, it may adversely affect our operations, financial results and liquidity.
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Our customers cancel orders, change order quantity, timing and product specifications that if not managed would have an adverse effect on the timing of net sales and inventory carrying costs.
We face, through the normal course of business, customer cancellations and rescheduled orders and are not always successful in recovering the costs of such cancellations or rescheduling. With every new product or substantial redesign of a product, we utilize our new product introduction process. Such process is intended to improve the manufacturability, compliance with customer specifications and quality standards relating to the product but may result in delays in commencement of production impacting the timing of net sales. In addition, excess and obsolete inventory losses as a result of customer order changes, cancellations, changes to the components required to produce products, and contract termination could have an adverse effect on our operations, financial results and liquidity. We record inventory at the lower of cost or net realizable value in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for exposures related to the estimated impact from these possibilities. To reduce the impact of canceled or charged orders, our terms and conditions require customers to purchase excess inventory.
We depend heavily on our people and may from time to time have difficulty attracting and retaining skilled employees and the cost of labor may continue to increase. The loss of key management or an ineffective transition of leadership could adversely affect our operations and strategic direction.
Our operations depend upon the continued contributions of our key management, marketing, technical, financial, accounting, product development engineers, salespeople and operations personnel. We also believe that our continued success will depend upon our ability to attract, retain and develop highly skilled managerial and technical resources and direct labor resources within our highly competitive industries. Not being able to attract or retain these employees could have a material adverse effect on net sales and earnings. In addition, the cost of attracting and retaining direct and indirect labor may continue to increase, which will increase our operating costs and may reduce our profitability.
Our senior leadership team possess significant industry knowledge, operational expertise, strategic vision and relationships with customers, lenders, suppliers and other stakeholders that are important to the operation and growth of our business.
Although our Board of Directors, the Nominating and Corporate Governance Committee and the Compensation and Talent Committee periodically evaluate succession planning for senior management positions, there can be no assurance that we will be able to effectively manage the transition of responsibilities if one or more of these executives were to depart, retire, become unable to serve, or otherwise be replaced. The loss of any member of senior management could result in disruption to our operations, delays in executing our strategic plans, loss of institutional knowledge, and uncertainty among employees, customers, suppliers or investors.
In addition, the process of identifying, recruiting, hiring and integrating qualified executive leadership may be time-consuming and costly, and we may not be able to attract and retain suitable candidates with the necessary experience and industry expertise on acceptable terms or within an acceptable timeframe. Any leadership transition that is not effectively managed could adversely affect our business, financial condition, results of operations and cash flows.
Our engineering net sales depend on our ability to deliver quality value-added engineering services required by our customers.
The markets for our engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business to generate engineering net sales will depend upon our ability to hire and retain qualified engineering personnel and maintain and enhance our technological leadership. Although we believe that we currently can provide the value-added engineering services that are required by our customers, there is no certainty that we will develop the capabilities required by our customers in the future. The emergence of new technology, industry standards or customer requirements may render the engineering services we currently provide obsolete or uncompetitive. The acquisition and implementation of new engineering knowledge, technical skills and related equipment may require significant expense that could adversely affect our operating results, as could our failure to anticipate and adapt to our customers’ changing technological requirements.
We operate in highly competitive industries, and we depend on continuing outsourcing by Original Equipment Manufacturers (“OEM”).
We compete against many companies that engineer and manufacture complex electromedical and electromechanical medical device, medical imaging, aerospace and defense, and industrial products. The larger global competitors have more resources and greater economies of scale and have more geographically diversified international operations. We also compete with OEM operations that are continually evaluating manufacturing products internally against the advantages of outsourcing or delaying their decision to outsource. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with excess capacity, lower cost structures and availability of lower cost labor.
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Competitive factors in our targeted markets are believed to be manufacturing capabilities, product and service pricing, quality, the ability to meet delivery schedules, customer service, value-added engineering, technology solutions and geographic location. We also expect that our competitors will continue to improve the performance of their current products or services, to reduce their current products or service sales prices and improve services that may be offered. Any of these could cause a decline in net sales, loss of market share, or lower profit margin.
Our customers may also change their geographic manufacturing preferences based on factors such as tariffs, supply chain resiliency initiatives, geopolitical developments, regulatory requirements, or proximity to end markets. If our manufacturing capabilities do not align with these evolving preferences, we may lose existing programs, be unable to secure new business, or incur costs associated with transferring production between facilities, which could adversely affect our net sales, operating results and cash flows.
The availability of excess manufacturing capacity of our competitors also creates competitive pressure on price and winning new business. We must continue to provide a quality product, be responsive and flexible to customers’ requirements, and deliver to customers’ expectations. Our lack of execution could have an adverse effect on our results of operations and financial condition.
The manufacture and sale of products carries potential risk for product liability claims and warranty claims.
We generally are required to represent and warrant to our customers that the goods and services we deliver are free from defects in material and workmanship generally for one year. Certain customers require longer warranty periods. If a product liability claim results in our being liable, it could have a material adverse effect on our business, financial position and liquidity. We have insurance coverage for product liability claims, but there can be no assurances that the amount of coverage will be adequate or that insurance proceeds will be available for a particular claim. Our insurance may not cover claims for non-conformance or defective products that are not product liability claims from customers.
The Company is majority owned by one group of shareholders, and those shareholders may be able to take actions that do not reflect the will or best interests of other shareholders.
Curtis Squire, Inc. and the Kunin family, collectively as a group, own a majority of our common stock. As a result, our majority shareholder group will have the ability to elect all of the members of our Board of Directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our articles of incorporation, as amended and amended and restated bylaws and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with interests of other shareholders.
In addition, the majority shareholder group may have an interest in pursuing transactions that, in its judgment, could enhance its investment, even though such transactions might be inconsistent with your investment objectives.
As a majority owned or controlled company, NASDAQ does not require the Company to comply with certain corporate governance rules including that we are not required to have a majority of independent directors on the board, an independent compensation committee, or an independent nominating and corporate governance committee. The Company is required to have an audit committee comprised of independent directors. Having fewer independent directors or fewer independent members of the Compensation and Talent Committee or the Nominating and Corporate Governance Committee may result in increased influence of the majority ownership group over business operations.
Operating in foreign countries exposes our operations to risks that could adversely affect our operating results.
We operate manufacturing facilities in Mexico and China. Our operations in those countries are subject to risks that could adversely impact our financial results and costs, such as economic or political volatility, foreign legal and regulatory requirements, international trade relations factors (such as tariffs, trade sanctions, duties, export controls and other trade restrictions), protection of our and our customers’ intellectual property and proprietary technology in certain countries, potentially burdensome taxes, crime, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations.
Legal and regulatory requirements in Mexico and China are continually changing which may and has affected our ability to predict timing and/or whether we will receive applicable tax refunds such as value-added tax (“VAT”) tax refunds. The changing regulatory environment may impact negatively the timing and recognition of such net sales and/or whether we ultimately collect cash from these net sales. In particular, our Mexico operations involve significant VAT refund receivables generated from purchasing activities. The Mexican government has periodically delayed VAT refund processing, and regulatory changes have made the timing and collectability of such refunds increasingly difficult to predict. We currently have exposure related to past due VAT receivables that remain outstanding beyond statutory processing periods, and future delays or non-collection of these amounts could adversely affect our liquidity, working capital, and operating results.
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We face risks arising from the restructuring of our operations.
In recent years, we have undertaken initiatives to restructure our business operations with the intention of improving utilization and realizing cost savings. These initiatives have included reducing the size of our workforce, reducing the number of facilities, and changing the location of certain customer part production to different facilities in an effort to align our capacity and infrastructure with current and anticipated customer demand. The process of restructuring entails, among other activities, moving production between facilities, transferring programs from higher cost geographies to lower cost geographies, closing facilities, reducing size of our workforce, realigning our business processes and reorganizing our management.
Restructurings could adversely affect us, including a slower than expected more costly transition of customers between facilities, a decrease in employee morale, delays encountered in finalizing the scope of, and implementing, the restructurings, failure to achieve targeted cost savings, and failure to meet operational targets and customer requirements due to the restructuring process. These risks are further complicated by our extensive international operations, which subject us to different legal and regulatory requirements that govern the extent and speed of our ability to reduce our manufacturing capacity and workforce.
We have and may be required to take additional restructuring charges in the future to align our operations and cost structures with global economic conditions, market demands, cost competitiveness, and our geographic footprint as it relates to our customers’ production requirements or following divestitures. We may consolidate or divest certain manufacturing facilities or transfer certain of our operations to other geographies. If we are required to take additional restructuring charges in the future, our operating results, financial condition, and cash flows could be adversely impacted.
Risks Related to our Assets
We are dependent on our information technology systems for order, inventory procurement and management, production management, treasury, financial reporting, communications and other functions. If our information systems fail or experience major interruptions due to physical damage or loss of power or incur disruptions to our information systems, including security breaches, losses of data or outages, cyberattacks and other security issues, it could adversely affect our operations and/or financial results.
We rely on our information technology systems to effectively manage our operations, administration and financial functions. Our computer systems, web sites, telecommunications, and data networks are vulnerable to damage or interruption from power loss, natural disasters and other sources of physical damage or disruption to the equipment which maintains, stores and hosts our information technology systems. We have taken steps to protect and create redundancies for the equipment that facilitates the use of our management information systems, but these steps may not be adequate to ensure that our operations are not disrupted by events within and outside of our control.
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We also rely on information systems, some of which are managed by third parties, to store, process and transmit confidential information, including financial reporting, inventory management, procurement, invoicing and electronic communications, belonging to our customers, our suppliers, our employees and/or us. We monitor and mitigate our exposure to cybersecurity issues and modify our systems when warranted and we have implemented certain business continuity items, including, to the extent feasible, leveraging our multiple sites for redundancies, as well as backup and restore methods inclusive of off-site, secure hosted and cloud based third-party providers. Nevertheless, these systems are vulnerable to, and at times have suffered from, among other things, damage from power loss or natural disasters, computer system and network failures, loss of telecommunication services, physical and electronic loss of data, terrorist attacks, computer viruses, cyberattacks and security breaches, ranging from uncoordinated individual attempts to gain unauthorized access to our information technology systems to sophisticated and targeted measures. These include data theft, malware, phishing, ransomware attacks, or other cybersecurity threats or incidents. The increased use of mobile technologies and the internet of things can heighten these and other operational risks. If we, or the third parties who own and operate certain of our information systems, are unable to prevent such breaches, losses of data and outages, our operations could be disrupted. Also, the time and funds spent on monitoring and mitigating our exposure and responding to breaches, including the training of employees, the purchase of protective technologies and the hiring of additional employees and consultants to assist in these efforts could adversely affect our financial results. The increasing sophistication of cyberattacks requires us to continually evaluate the threat landscape and new technologies and processes intended to detect and prevent these attacks. There can be no assurance that the security measures and systems configurations we choose to implement will be sufficient to protect the data we manage. Any theft or misuse of information resulting from a security breach could result in, among other things, loss of significant and/or sensitive information, litigation by affected parties, financial obligations resulting from such theft or misuse, higher insurance premiums, governmental investigations, negative reactions from current and potential future customers (including potential negative financial ramifications under certain customer contract provisions) and negative publicity and any of these could adversely affect our financial results.
In addition, we must comply with increasingly complex regulations intended to protect business and personal data in the U.S. and globally. In many cases, these laws apply not only to third-party transactions, but also restrict transfers of personal information among the Company and its international subsidiaries. Several jurisdictions have passed laws in this area, and additional jurisdictions are considering imposing additional restrictions or have laws that are pending. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements causes the Company to incur substantial costs and has required and may in the future require the Company to change its business practices. Compliance with these regulations can be costly and any failure to comply could result in legal and reputational risks as well as penalties, fines and damages that could adversely affect our financial results.
We are investing in new technologies which are inherently risky.
We have made investments in R&D of new technologies that we believe if successful will strengthen our relationships with customers. Our intent is that the Company own intellectual property arising from R&D activities. To the extent that those investment efforts are unsuccessful, our competitive position may be harmed, and we may not realize a return on our investments.
To compete more successfully, we believe it is advantageous to maintain an effective R&D program to develop new products and manufacturing processes that will benefit our customers. Our R&D efforts are currently funded through investment of cash flow generated from operations, and we incurred R&D expenses of 1,172 and $1,191 in the years ended December 31, 2025 and 2024, respectively. We are focusing our R&D efforts across several key areas, including development of fiber optic technologies for a wide range of applications like active optical cables, expanded beam technology and physical contact cables.
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Our growth strategy in general requires capital to support R&D, working capital, capital expenditures, new program launches and other strategic initiatives. If internally generated cash flow and available borrowings are not sufficient, and we are unable to obtain additional financing on acceptable terms or at all, we may be required to delay, scale back or abandon R&D growth initiatives, which could adversely affect our competitiveness, results of operations and long-term prospects.
We do not expect all our R&D investments to be successful. Some of our efforts to develop and market new products and technologies fail or fall short of our expectations, or will not be well-received by customers, who may adopt competing technologies.
Our investments in new products and technologies are inherently risky and are a departure from historical business operations.
Developing Company owned technology and products is different than our historical manufacturing business. While we believe that this is an important step to further cultivate relationships with customers and partners, the Company has not historically developed its own technologies or products; rather, it has historically developed and manufactured products designed by our customers.
Development of new products and technologies may expose us to potential product liability risks that are inherent in the design, manufacture and marketing of those products. As a result, we face an inherent risk of damage to our reputation if one or more of our products or technologies are, or are alleged to be, defective. Although we carry product liability insurance, we may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Product liability, warranty and recall costs may have a material adverse effect on our business, financial condition and results of operations.
Financial Risks
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.
On March 20, 2026, we entered into a new Credit and Security Agreement with Associated Bank, National Association, which provides for a revolving credit facility of up to $15,000, subject to a borrowing base based on eligible accounts receivable and inventory, and a $2,200 term loan (the “Associated Facility”). The Associated Facility includes a sublimit of $1,500 for letters of credit and is secured by substantially all of our assets in the United States of America, and the facility and term loan each mature in March 2029. Borrowings under the Associated Facility bear interest, at our option, at a defined base rate, or at one-month or three-month Term Secured Overnight Financing Rate (“Term SOFR”), plus 2.00% in the case of revolving credit borrowings and plus 2.25% in the case of the term loan.
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 earnings before interest, tax, depreciation and amortization (“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.
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 including as described in these risk factors, we may not remain in compliance with our financial covenants under the Associated Facility.
If we fail to comply with the covenants in the future and our lender does not agree to waive or amend such noncompliance, an event of default could occur. Upon an event of default, the lender could terminate its commitments to lend, accelerate repayment of outstanding indebtedness, require us to cash collateralize outstanding letters of credit, or exercise remedies against the collateral securing the facility. Any of these actions could materially and adversely affect our liquidity, financial condition and ability to operate our business.
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Our future growth depends on our ability to generate and sustain customer bookings.
Our future sales growth depends in significant part on our ability to secure customer bookings and program awards from existing and new customers. Bookings may fluctuate significantly from period to period due to factors such as customer demand, product life cycles, changes in outsourcing strategies by OEMs, competitive pricing pressures, economic conditions, program timing, and customer capital spending decisions.
A significant portion of our bookings may relate to new programs that require engineering support, qualification processes, tooling, or production ramp-up periods before generating meaningful sales. As a result, bookings may not convert into sales within expected timeframes, or at all, and delays in customer program launches or production schedules could adversely affect the timing of sales and operating results.
In addition, our ability to sustain bookings growth depends on our ability to maintain strong customer relationships, demonstrate manufacturing and engineering capabilities, remain price competitive, and successfully bid for new business opportunities. If we fail to secure sufficient new bookings or if customers delay, cancel, or reduce awarded programs, our future net sales, operating results, EBITDA and cash flows could be adversely affected.
Our ability to generate positive EBITDA and operating cash flow may fluctuate and may be insufficient to support our operations, service our debt obligations or satisfy financial covenant requirements.
Our ability to generate EBITDA and operating cash flow depends on numerous factors, many of which are outside of our control, including demand from our customers, pricing pressures, supply chain disruptions, cost inflation, labor availability, and the timing of customer orders and payments. Our operations also require significant working capital investments, including purchases of raw materials and components, managed inventory programs for customers, and extended inventory holdings to mitigate supply chain disruptions.
Additionally, we may experience delays in collecting receivables, including value added tax refunds in Mexico, and may be required to fund inventory purchases in advance of customer demand. These factors may reduce operating cash flow and limit our ability to convert earnings into operating cash flow.
If we are unable to generate sufficient EBITDA or free cash flow, we may face challenges meeting our operating needs, funding capital expenditures, investing in research and development, servicing our indebtedness or complying with the financial covenants in our credit facilities. Any such circumstances could materially adversely affect our financial condition, liquidity and results of operations.
Our exposure to financially troubled customers, start-up businesses or suppliers may adversely affect our financial results.
We provide manufacturing services to companies and industries that have in the past, and may in the future, experience financial difficulty. Also, we provide services and products to new and high growth companies. If our customers experience financial difficulty or lack of funding for operations, we could have difficulty recovering amounts owed to us from these customers, or demand for our services or products from these customers could decline. Additionally, if our suppliers experience financial difficulty, we could have difficulty sourcing supply necessary to fulfill production requirements and meet scheduled shipments. If one or more of our customers were to become insolvent or otherwise were unable to pay for the services provided by us on a timely basis, or at all, our operating results and financial condition could be adversely affected. Such adverse effects could include one or more of the following: an increase in expenses for expected accounts receivable credit losses and inventory write-offs, a reduction in net sales, and an increase in our working capital requirements due to higher inventory levels and in days our accounts receivables are outstanding.
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Changes in foreign currency translation rates could adversely impact our net sales and earnings.
Changes in foreign currency exchange rates will impact our reported net sales and earnings. Substantially all our net sales are transacted in U.S. Dollars. A majority of our manufacturing and cost structure is based in the United States and transacted in U.S. Dollars. We have exposures to local currencies for certain net sales in China denominated in Chinese Yuan, value added tax receivables denominated in the Mexican Peso, as well as certain costs incurred at our facilities in China and Mexico that are denominated in their respective local currencies. Significant fluctuations in foreign exchange rates between the U.S. dollar and foreign currencies may adversely affect our results of operations.
Our Mexico facility operates as a maquiladora, and its financial records are kept in Mexican Pesos. As the functional currency of the maquiladora is the U.S. Dollar, we translate the Mexican Pesos financial records into U.S. Dollars and record a currency translation gain or loss in the statement of operations. These translation gains or losses may be material to the financial results of the Company. For the years ended December 31, 2025 and 2024, we recorded translation gain of $120 and a translation loss of $137, respectively, in our consolidated statements of operations. The majority of these gains and losses were related to the translation of value added tax receivables denominated in Mexican Pesos into US dollars.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends; investors must rely on stock appreciation for any return on investment in our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to, our financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize certain returns on their investment. As a result, investors must rely on stock appreciation and a liquid trading market for any return on investment in our common stock.
We expect volatility in the price of our common stock, which may subject us to securities litigation.
The market for our common stock may be characterized by significant price volatility when compared to other issuers, and we expect that our share price will be more volatile than other issuers for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud.
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. Any failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results or cause us to fail to meet our reporting obligations. As we expand our business operations both within the United States and internationally, we will need to maintain effective internal controls over financial reporting and disclosure controls and procedures.
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Our services involve other inventory risk.
Our production services primarily provide that we purchase some, or all, of the required materials and components based on customer forecasts or orders. Although, in general, our contracts with our customers obligate our customers to ultimately purchase inventory ordered to support their forecasts or orders, we generally initially finance these purchases. In addition, suppliers may require us to purchase materials and components in minimum order quantities that may exceed customer requirements. A customer’s cancellation, delay or reduction of forecasts or orders can also result in excess inventory or additional expense to us. Engineering changes by a customer or a product’s end-of-life may result in obsolete materials or components. While we attempt to cancel, return or otherwise mitigate excess and obsolete inventory, as well as require customers to reimburse us for these items and/or price our services to address related risks, we may not actually be reimbursed timely or in full, be able to collect on these obligations or adequately reflect such risks in our pricing. In addition to increasing inventory in certain instances to support new program ramps, we may also increase inventory if we experience component shortages or longer lead-times for certain components in order to maintain a high level of customer service. In such situations, we may procure components earlier, which leads to a short-term increase in inventory and may lead to increased excess or obsolete inventory in the future. Excess or obsolete inventory, the need to acquire increasing amounts of inventory due to shortages, customer demand or otherwise, or other failures to manage our working capital, could adversely affect our operating results, including our return on invested capital.
In addition, we provide managed inventory programs for some of our customers under which we hold and manage finished goods or work-in-process inventories. These managed inventory programs may result in higher inventory levels, further reduce our inventory turns and increase our financial exposure with such customers. In addition, our inventory is infrequently held at a customer’s facility or warehouse, or elsewhere outside of our control, which may increase the risk of loss. Even though our customers generally have contractual obligations to purchase such inventories from us, we remain subject to customers’ credit risks as well as the risk of potential customer default and the need to enforce those obligations.
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 December 31, 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 December 31, 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.
Market Risks
The economic conditions around the world could adversely affect demand for our products and services and the financial health of our customers.
Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, construction, tariffs, taxes, consumer spending and confidence, financing availability, employment rates, interest rates, inflation, defense spending levels, global politics and conflict, and the profits, capital spending, and liquidity of industrial companies.
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An economic downturn or financial market turmoil may depress demand for our products and/or services in all major geographies and markets. If customers are unable to purchase our products or services because of unavailable credit or unfavorable credit terms, depressed end-user demand, or are simply unwilling to purchase our products or services, our net sales and earnings will be adversely affected. Also, we are subject to the risk that our customers will have financial difficulties, which could harm their ability to satisfy their obligation to pay accounts receivable. Further, an economic downturn may affect our ability to satisfy the financial covenants in our financing arrangements.
Pandemics or disease outbreaks could adversely affect our operations, supply chains, financial condition and results of operations.
Outbreaks of epidemic, pandemic, or contagious diseases, such as, historically, the COVID-19 virus, Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could cause a disruption to our business. Business disruptions could include temporary closures of our facilities or the facilities of our suppliers, reduced demand from customers, unavailability or restricted availability of our material portions of our workforce, raw materials or components necessary to manufacture our products, or disruptions or restrictions on our ability to travel or to distribute our products. Any disruption of our operations, our suppliers or our customers would likely impact our net sales and operating results. In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and services. Any of these events could negatively impact our net sales and have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Legal and Regulatory Risks
We are subject to extensive government regulations and industry standards and the terms of complex contracts; a failure to comply with current and future regulations and standards, or the terms of our contractual arrangements, could have an adverse effect on our business, customer relationships, reputation and profitability.
We are subject to extensive government regulation and industry standards relating to the products we manufacture as well as how we conduct our business, including regulations and standards relating to labor and employment practices, workplace health and safety, the environment, sourcing and import/export practices, the market sectors we support, privacy and data protection, the regulations that apply to government contracts, and many other facets of our operations. The regulatory climate in the U.S. and other countries has become increasingly complex and fragmented, and regulatory activity has increased in recent periods. Failure or noncompliance with such regulations or standards could have an adverse effect on our reputation, customer relationships, profitability and results of operations. In addition, we regularly enter into a large number of complex contractual arrangements as well as operate pursuant to the terms of a significant number of ongoing intricate contractual arrangements. Our failure or our customers’ failure to comply with the terms of such arrangements could expose us to claims or other demands and could have an adverse effect on our reputation, customer relationships, profitability and results of operations.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes which could have an adverse effect on our business.
We are registered with the FDA and are subject to periodic inspection by the FDA for compliance with its Quality Management System Regulation/Medical Device Good Manufacturing Practices requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures.
Also, our US facilities are ITAR compliant which is required for our manufacturing of defense related products. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring. If any inspection reveals noncompliance with these regulations, it could adversely affect our operations.
Our international operations are, and will continue to be, subject to risks relating to changes in foreign legal and regulatory requirements.
It can be costly and time-consuming for the Company and our customers to obtain and maintain regulatory approvals and certifications to operate in these markets. Product approvals subject to regulations might not be granted for new medical devices on a timely basis, if at all. Proposed new regulations or changes to regulations could result in the need to incur significant additional costs to comply. Failure of the Company or any of its customers operating in these markets to effectively respond to changes to applicable laws and regulations or comply with existing and future laws and regulations may have a negative effect on the Company’s business, financial condition, results of operations and cash flows.
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Complying with securities laws, tax laws, accounting policies and regulations, and subsequent changes, may be costly for us and adversely affect our financial statements.
New or changing laws, regulations, governmental orders or mandates, policy and standards relating to corporate governance and public disclosure, including SEC and NASDAQ regulations, domestic or international tax legislation and the implementation of significant changes in U.S. GAAP, present challenges due to complexities, assumptions and judgements required to implement. We apply judgments based on our understanding, interpretation and analysis of the relevant facts, circumstances, historical experience and valuations, as appropriate. As a result, actual amounts could differ from those estimated at the time the financial statements are issued. In addition, implementation may change the financial accounting or reporting standards that govern the preparation of our financial statements or authoritative entities could reverse their previous interpretations or positions on how various financial accounting or reporting standards should be applied. These changes may be difficult to predict and implement and could materially or otherwise impact how we prepare and report our estimates, uncertainties, financial statements, operating results and financial condition. Our efforts to comply with evolving laws, regulations, accounting policies and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention from net sales-generating activities to compliance activities and may have an adverse effect on our financial statements, including cash flows.
Anti-Corruption and Trade Laws - We may incur costs and suffer damages if our employees, agents, or suppliers violate anti-bribery, anti-corruption or trade laws and regulations.
Laws and regulations related to bribery, corruption and trade, and enforcement thereof, are increasing in frequency, complexity and severity on a global basis. The continued geographic expansion of our business into China and Mexico increases our exposure to, and cost of complying with, these laws and regulations. If our internal controls and compliance program do not adequately prevent or deter our employees, agents, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions.
Non-compliance with environmental laws may result in restrictions and could adversely affect operations.
Our operations are regulated under a number of federal, state, and foreign environmental and safety laws and regulations that govern the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of such materials. These laws and regulations include the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as well as similar federal, state and foreign laws. Compliance with these environmental laws is a major consideration for us due to our manufacturing processes and materials. It is possible we may be subject to potential financial liability for costs associated with the investigation and remediation at our sites; this may have an adverse effect on operations. We have not incurred significant costs related to compliance with environmental laws and regulations and we believe that our operations comply with all applicable environmental laws.
Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. We operate in environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes or restrictions on discharge limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capital investment or relocation. It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition, and results of operations.
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Global climate change and related regulations could negatively affect the Company.
Changes in environmental and climate change laws or regulations, including laws relating to Green House Gas (“GHG”) emissions, could lead to new or additional investment in the Company’s facilities and could increase environmental compliance expenditures. Changes in climate change concerns including GHG emissions, and the regulation of such concerns including climate-related disclosures, could subject the Company to additional costs and restrictions, including increased energy and raw material costs and other compliance requirements which could negatively impact the Company’s reputation, business, capital expenditures, results of operations and financial position.
Natural disasters, such as tornadoes and earthquakes, and possible future changes in climate could negatively impact our business and supply chain. Our properties may be exposed to rare catastrophic weather events, such as severe storms and/or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase.
If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We are subject to Federal, State, and local laws, rules and regulations governing the use, discharge, storage, handling, and disposal of biological material, chemicals, and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, remediation costs, and any related penalties or fines. This liability could exceed our resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could have a significant impact on our operating results.
If we are not able to comply with Department of Defense cybersecurity requirements, our net sales from defense contractors could be reduced.
In 2019, the U.S. Department of Defense announced the development of Cybersecurity Maturity Model Certification (“CMMC”) as a framework to assess and enhance the cybersecurity posture of the Defense Industrial Base (“DIB”), particularly as it relates to controlled unclassified information within the supply chain. CMMC is designed to ensure that contractors providing services to the U.S. Department of Defense have implemented cybersecurity controls and processes to adequately protect information that resides on DIB systems and networks. While we achieved CMMC level 2 certification in 2025, if we cannot maintain compliance with these regulations, our agreements with defense contractors and the resulting net sales may be impacted negatively.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 1C. Cybersecurity
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Risk Identification and Assessment.
We employ a risk-based approach to identify and assess cybersecurity threats, including threat-intelligence monitoring, vulnerability management, security logging and analytics, and periodic security testing (e.g., penetration tests and tabletop exercises). Cybersecurity risks are recorded in our enterprise risk register with likelihood and impact scoring and are prioritized for remediation based on potential operational, financial, regulatory, and reputational effects. We maintain an incident response plan that defines triage, escalation, containment, recovery, and post-incident review activities. During incident response, management, including representatives from information technology, legal, and executive leadership, evaluates cybersecurity incidents to determine whether an event is reasonably likely to have a material impact on our business, strategy, financial condition, or results of operations, which informs disclosure decisions under applicable SEC requirements.
Integration with Strategy, Operations, and Capital Allocation.
Cybersecurity risk considerations are incorporated into strategic planning, new program launches, capital allocation, and supplier selection. We evaluate cybersecurity controls in connection with our quality systems and regulatory commitments (including FDA QMSR/ISO 13485 and AS9100), our participation in defense supply chains, and customer expectations for secure manufacturing and data handling. We maintain cybersecurity insurance coverage and periodically reassess limits and retentions in light of market conditions and our evolving risk posture.
Third-Party and Supplier Risk Management.
Training and Awareness.
Employees with network access participate in periodic training and simulated phishing exercises. Role-based training is provided to personnel with elevated privileges or access to sensitive data. Awareness materials are refreshed to reflect current threat trends.
Cross-functional leaders from Operations, Quality/Regulatory, Supply Chain, and Legal participate in cybersecurity governance and incident response activities.
Prior Incidents and Program Improvements.
Like many companies, we have experienced cybersecurity incidents in the past. To date, none have had a material impact on our business, financial condition, or results of operations. Lessons learned from past events have informed enhancements to controls, user awareness, logging and monitoring, and incident response processes.
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Defense Supply Chain and CMMC Compliance.
We participate in the U.S. Department of Defense (“DoD”) supply chain, including handling Federal Contract Information and, for certain programs, Controlled Unclassified Information (CUI). On October 23, 2025, we obtained a Cybersecurity Maturity Model Certification (“CMMC”) Level 2 certification via an authorized C3PAO, applicable to the systems within our assessed boundary that process CUI. Beginning November 10, 2025, DoD CMMC rule phases in requirements for Level 1 or Level 2 compliance in solicitations, with increasing reliance on third-party assessments over a staged rollout. We maintain the technical and procedural controls necessary for Level 2 and manage ongoing compliance through evidence maintenance, annual affirmations, and timely updates to the Supplier Performance Risk System, as applicable. Non-compliance could limit our eligibility for certain defense contracts; therefore, we monitor and remediate any issues promptly, including through Plans of Action and Milestones where permitted.
ITAR and Other Regulatory Linkages.
All U.S. locations supporting defense customers operate in an ITAR-compliant manner. Our cybersecurity controls, including access control, network segmentation, encryption, and data-loss prevention, among others, support our ITAR compliance program and align with our quality systems for regulated manufacturing.
Item 2. Properties
Administration
Our corporate headquarters consists of an approximately 14,000 square feet building located in Maple Grove, Minnesota, a northwestern suburb of Minneapolis, Minnesota, and its lease expires August 2033.
Manufacturing facilities
Our manufacturing facilities are in good operating condition, and we believe our overall production capacity is sufficient to handle our foreseeable manufacturing needs and customer requirements. The following are our manufacturing facilities as of December 31, 2025:
| Manufacturing Space | Office Space | Total | ||||||||||||||
| Location | Own/Lease | Lease End Date | Square Feet | Square Feet | Square Feet | |||||||||||
| Bemidji, MN | Lease | August 31, 2035 | 56,000 | 13,000 | 69,000 | |||||||||||
| Milaca, MN | Lease | June 30, 2030 | 15,000 | 5,000 | 20,000 | |||||||||||
| Mankato, MN | Lease | August 31, 2035 | 43,000 | 15,000 | 58,000 | |||||||||||
| Monterrey, Mexico | Lease | January 24, 2029 | 67,000 | 10,000 | 77,000 | |||||||||||
| Suzhou, China | Lease | February 28, 2027 | 27,000 | 3,000 | 30,000 | |||||||||||
| Suzhou, China | Lease | January 20, 2027 | 15,000 | - | 15,000 | |||||||||||
| Suzhou, China | Lease | October 17, 2026 | 15,000 | - | 15,000 | |||||||||||
| Suzhou, China | Lease | November 22, 2028 | 2,000 | - | 2,000 | |||||||||||
Item 3. Legal Proceedings
From time to time, we are involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 12, 2026, there were 563 shareholders of record. Our stock is listed on the NASDAQ Capital Market under the symbol “NSYS”. We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in the foreseeable future. We did not declare or pay a cash dividend in 2025 or 2024. Future dividend policy and payments, if any, will depend upon earnings, our financial condition, our need for funds, limitations on payments of dividends present in our current or future debt agreements and other factors.
Stock price comparisons (NASDAQ):
| During the Three Months Ended | Low | High | ||||||
| March 31, 2025 | $ | 8.50 | $ | 11.97 | ||||
| June 30, 2025 | $ | 7.25 | $ | 12.40 | ||||
| September 30, 2025 | $ | 7.66 | $ | 9.97 | ||||
| December 31, 2025 | $ | 6.50 | $ | 10.04 | ||||
| March 31, 2024 | $ | 9.13 | $ | 14.35 | ||||
| June 30, 2024 | $ | 10.19 | $ | 19.15 | ||||
| September 30, 2024 | $ | 11.00 | $ | 15.55 | ||||
| December 31, 2024 | $ | 9.53 | $ | 13.90 | ||||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In May 2024, our Board of Directors approved a share repurchase program authorizing up to $100 in share repurchases. This share repurchase program commenced in August 2024 and expired in October 2024 upon completion of the program. We purchased 8,185 shares of the Company’s common stock at an average price of $12.09 per share.
Equity Compensation Plan Information
Certain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data [Reserved]
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Item 7. 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 upmost 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.
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Operating Results
Net Sales. Net sales for the year ended December 31, 2025 and 2024 were $118,365 and $128,133, respectively, a year over year decrease of $9,768 or 7.6%. The following is a summary of net sales by our major industry markets:
Year Ended December 31, | ||||||||||||||||
| 2025 | 2024 | Increase (Decrease) | ||||||||||||||
| Medical Device | $ | 31,930 | $ | 34,636 | $ | (2,706 | ) | (7.8 | )% | |||||||
| Medical Imaging | 39,999 | 37,492 | 2,507 | 6.7 | % | |||||||||||
| Industrial | 30,940 | 35,517 | (4,577 | ) | (12.9 | )% | ||||||||||
| Aerospace and Defense | 15,496 | 20,488 | (4,992 | ) | (24.4 | )% | ||||||||||
| Total net sales | $ | 118,365 | $ | 128,133 | $ | (9,768 | ) | (7.6 | )% | |||||||
| ● | Medical Device: Net sales to our Medical Device customers decreased $2,706, or 7.8%, in the year ended December 31, 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 $2,507, or 6.7%, in the year ended December 31, 2025 as compared with the same period in 2024. The increase was primarily due to higher sales volume to existing customers driven by new program awards. | |
| ● | Industrial: Net sales to our Industrial customers decreased $4,577, or 12.9%, in the year ended December 31, 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 $4,992, or 24.4%, in the year ended December 31, 2025, as compared with the same period in 2024. The decrease in net sales relates to delays in customer approvals as we have consolidated this business into our Bemidji facility and higher pre shipment over time revenue in 2024 due from increased production in anticipation of the closure of the Blue Earth facility. |
Backlog. Our 90-day shipment backlog as of December 31, 2025 was $27,288, up 3.2% from December 31, 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 December 31, 2025 was $77,343, a 17.4% increase from December 31, 2024. This was driven by increases in customer demand as well as customer shipment timing.
90-day and total shipment backlog by our major industry markets are as follows:
| December 31, 2025 | December 31, 2024 | % Change | ||||||||||||||||||||||
| 90 Day | Total | 90 Day | Total | 90 Day | Total | |||||||||||||||||||
| Medical Device | $ | 8,733 | $ | 27,094 | $ | 6,953 | $ | 21,706 | 25.6 | % | 24.8 | % | ||||||||||||
| Medical Imaging | 5,725 | 9,032 | 7,168 | 10,353 | (20.1 | )% | (12.8 | )% | ||||||||||||||||
| Industrial | 4,697 | 11,404 | 5,173 | 7,306 | (9.2 | )% | 56.1 | % | ||||||||||||||||
| Aerospace and Defense | 8,133 | 29,813 | 7,157 | 26,487 | 13.6 | % | 12.6 | % | ||||||||||||||||
| Total backlog | $ | 27,288 | $ | 77,343 | $ | 26,451 | $ | 65,852 | 3.2 | % | 17.4 | % | ||||||||||||
The 90-day and total backlog as of December 31, 2025 includes orders already recognized in net sales and included in the contract asset value of $15,184.
| 22 |
Operating Costs and Expenses.
Net sales, cost of goods sold, gross profit, and operating costs were as follows:
| Year Ended December 31, | ||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | ||||||||||||||
| Net sales | $ | 118,365 | $ | 128,133 | $ | (9,768 | ) | (7.6 | )% | |||||||
| Cost of goods sold | 100,359 | 111,411 | (11,052 | ) | (9.9 | )% | ||||||||||
| Gross profit | 18,006 | 16,722 | 1,284 | 7.7 | % | |||||||||||
| Gross margin percentage (1) | 15.2 | % | 13.1 | % | 210 | bpc(2) | ||||||||||
| Selling | 4,803 | 3,446 | 1,357 | 39.4 | % | |||||||||||
| % of Net sales | 4.1 | % | 2.7 | % | ||||||||||||
| General and administrative | 10,790 | 11,709 | (919 | ) | (7.8 | )% | ||||||||||
| % of Net sales | 9.1 | % | 9.1 | % | ||||||||||||
| Research and development | 1,172 | 1,191 | (19 | ) | (1.6 | )% | ||||||||||
| % of Net sales | 1.0 | % | 0.9 | % | ||||||||||||
| Restructuring charges | 266 | 571 | (305 | ) | (53.4 | )% | ||||||||||
| % of Net sales | 0.2 | % | 0.4 | % | ||||||||||||
| Operating income (loss) | 975 | (195 | ) | 1,170 | (600 | )% | ||||||||||
| % of Net sales | 0.8 | % | (0.2 | )% | ||||||||||||
| (1) | Gross margin percentage is defined as gross profit as a percentage of net sales. | |
| (2) | Basis points change in gross margin percentage. |
Gross profit and gross margins. Gross profit as a percentage of net sales was 15.2% and 13.1% for the years ended December 31, 2025, and 2024, respectively. 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, which were previously classified as cost of sales totaling $1,170 in 2024, are now reported as selling expenses to better reflect the nature of the activities performed. In addition, gross profit increased as a percentage of net sales in the comparison period as a 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 4.1% and 2.7% for the year ended December 31, 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, the year-over-year percentage 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 decreased $919 or 7.8% in the year ended December 31, 2025 as compared with 2024 as the result of lower incentive compensation accruals in the current year.
Restructuring charges. Restructuring charges were $266 and $571 in the years ended December 31, 2025 and 2024, respectively. During 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. During 2024, we incurred employee retention bonuses for our facility consolidation and closure of our Blue Earth facility.
Operating income (loss). Operating income was $975 for the year ended December 31, 2025, or 0.8% of net sales, and operating loss was $195, or 0.2% of net sales, for the year ended December 31, 2024. This increase was driven by the improved gross margin and lower incentive compensation expense.
Interest expense. Interest expense was $964 and $744 for the years ended December 31, 2025 and 2024, respectively. This increase was driven by higher borrowings under our line of credit arrangement and an increased interest rate. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Income taxes. Our effective tax rates for the years ended December 31, 2025 and 2024 were (2,391)% and (37.9)%, respectively. The unusually large negative rate in 2025 is primarily driven by the very small amount of pretax book income for the year, which causes normal permanent differences and valuation allowance adjustments to produce a disproportionately large impact on the calculated effective tax rate. The primary drivers of the change in the effective tax rates relate to changes in pretax book income between the years.
Net Loss. Our net loss in 2025 was $252 or $0.09 per diluted and basic common share. Our net loss in 2024 was $1,295 or $0.47 per diluted and basic common share.
| 23 |
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.
Effective as of February 29, 2024, we entered into a credit agreement with Bank of America (the “BOA Revolver”.) This BOA Revolver contained financial and operating covenants based on our earnings and related cash flows. Compliance with these covenants was dependent on our financial results, which are subject to fluctuation as described in the Risk Factors section of this annual report on Form 10-K. As of a result of our restructuring activities in 2024 and early 2025, including the costs incurred to move hundreds of customer production parts between plants, as well as addressing post covid customer pricing headwinds, and reductions in our customer orders, we did not generate sufficient earnings and cash flows to meet certain financial covenants and required multiple amendments and default waivers under the BOA Revolver.
On March 20, 2026, we entered into a new Credit and Security Agreement with Associated Bank, National Association, which provides for a revolving credit facility of up to $15.0 million, subject to a borrowing base based on eligible accounts receivable and inventory, and a $2.2 million term loan (the “Associated Facility”). The Associated Facility includes a sublimit of $1.5 million for letters of credit and is secured by substantially all of our assets in the United States of America, and the Associated Facility matures in March 2029.
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 earnings before interest, tax, depreciation and amortization (“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 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 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 including as described in these risk factors, we may not remain in compliance with our financial covenants under the Associated Facility.
Cash flows for the years ended December 31, 2025 and 2024 are summarized as follows:
| 2025 | 2024 | |||||||
| Cash flows provided by (used in): | ||||||||
| Operating activities | $ | 2,743 | $ | (2,250 | ) | |||
| Investing activities | (157 | ) | (1,263 | ) | ||||
| Financing activities | (1,867 | ) | 2,765 | |||||
| Effect of exchange rate changes on cash | 20 | (11 | ) | |||||
| Net change in cash | $ | 739 | $ | (759 | ) | |||
Cash provided by operating activities for the year ended December 31, 2025 was $2,743, compared with cash used in operating activities of $2,250 for the year ended December 31, 2024. In 2025, operating cash flow was driven by significant non-cash add-backs as well as favorable working-capital movements, as increases in accounts receivable and contract assets were more than offset by a decrease in prepaid expenses and an increase in accounts payable due to timing of payments. In 2024, cash used in operating activities reflected the timing of accounts payable payments and the payment of accrued bonus expenses.
| 24 |
Net cash used in investing activities was $157 and $1,263 for the years ended December 31, 2025 and 2024, respectively. Cash used in investing activities in both years primarily relates to the purchase of property and equipment, partially offset in the year ended December 31, 2025 by proceeds from the sale of the Blue Earth property and equipment.
Net cash used in financing activities in 2025 of $1,867 consisted primarily of net payments on the line of credit. The cash provided by financing activities in 2024 of $2,765 consisted primarily of net proceeds from the line of credit of $2,849 and proceeds from notes payable of $345.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, the reported amounts of net sales and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, valuation allowance for inventories, allowance for credit losses, realizability of deferred tax assets and long-lived asset impairment testing.
We base our estimates and assumptions on our historical experience and on various other information available to us at the time that these estimates and assumptions are made. We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from our estimates primarily due to incorrect sales forecasting. We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions. If, for any reason, those estimates, and assumptions vary substantially it would also impact our financial results.
Our accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements.
Revenue Recognition
Our net sales are comprised of product, engineering services and repair services. All net sales are recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales, when we have an enforceable right to payment for performance completed to date.. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. Most of our contracts have a single performance obligation and require that we provide services and products that are unique to each customer’s designed products and have no alternative usage. As of December 31, 2025, the Company has recorded a contract asset of $15,184 for unbilled customer net sales included in net sales. Net sales are recorded net of returns, allowances and customer discounts.
Long-Lived Assets Impairment
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 December 31, 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 December 31, 2025.
| 25 |
Inventory Valuation
Inventory is recorded at the lower of cost or net realizable value for inventory that may have a lower net realizable value than cost or quantities in excess of future production needs. Certain raw material inventories are purchased solely to meet a customer’s unique manufacturing requirements. We seek to require our customers to prepay for end of life or certain inventory in excess of current customer order quantities. We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis. This process includes an evaluation of our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers. We periodically review the underlying inventory reserve assumptions based on recent trends. As of December 31, 2025, we had an inventory reserve of $1,853.
Income Taxes
Significant judgment is required in evaluating our tax positions and in determining income tax expense, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. We evaluate the recoverability of deferred tax assets based on available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. We establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of the deferred tax assets will not be realized. In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period. Future adjustments (either increases or decreases) to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets. During 2025 and 2024, we concluded that it was more likely than not we would realize our recorded net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income or tax liability in either the carryback or carry-forward periods under the tax law.
We establish reserves for uncertain tax positions when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may or may not prevail. If we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We regularly monitor our tax positions and tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the applicable statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our results of operations. Our reserve for uncertain tax positions aggregated $110 as of December 31, 2025.
| 26 |
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Discussion of these factors is incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
| 27 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024
Item 8. Financial Statements and Supplementary Data
(The remainder of this page was intentionally left blank.)
| 28 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Nortech Systems Incorporated and Subsidiaries:
Opinion on the Financial Statements
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of Impairment of Long-Lived Assets
Critical Audit Matter Description
As described in Note 1 to the consolidated financial statements, the Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Management identified triggering events during the year ended December 31, 2025, that indicated that the property, plant and equipment could be impaired and performed an impairment test.
While the impairment test did not result in the recording of any impairment loss, the impairment test is complex and judgmental due to management’s use of subjective assumptions when determining the asset groups to be evaluated for impairment, estimating expected future cash flows to be provided by operating activities of the identified asset groups, and estimating fair values of the assets or asset groups when applicable.
How We Addressed the Matter in Our Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to the assessment of impairment of long-lived assets included the following, among others:
| ● | Evaluated the appropriateness of the asset groups used in performing management’s impairment analysis. | |
| ● | Tested management’s assumptions used in estimating the cash flows expected to be provided by operating activities of the asset groups, including the completeness and accuracy of the underlying data supporting the assumptions. | |
| ● | Performed a sensitivity analysis over the growth rates, operating margin, and other assumptions used in management’s analysis compared to historical performance. | |
| ● | Compared previously forecasted financial information to historical results to assess the reasonableness of future forecasted financial information used in the analysis. | |
| ● | Evaluated audit evidence from events and transactions occurring after the measurement date. |
/s/
March 26, 2026
We have served as the Company’s auditor since 2017.
| 29 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024
(IN THOUSANDS, EXCEPT SHARE DATA)
| 2025 | 2024 | |||||||
| 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 | ( | ) | ( | ) | ||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net 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 consolidated financial statements.
| 30 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2025 AND 2024
(IN THOUSANDS, EXCEPT SHARE DATA)
| 2025 | 2024 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, less allowances of $ | ||||||||
| Inventories, net | ||||||||
| Contract assets | ||||||||
| Prepaid assets and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets | ||||||||
| Deferred tax assets | ||||||||
| Other intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Line of credit | $ | $ | ||||||
| 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: | ||||||||
| Long-term line of credit | ||||||||
| Long-term operating lease obligations, net of current portion | ||||||||
| Long-term finance lease obligations, net of current portion | ||||||||
| 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 consolidated financial statements.
| 31 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024
(IN THOUSANDS)
| 2025 | 2024 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Compensation on stock-based awards | ||||||||
| Deferred taxes | ( | ) | ( | ) | ||||
| Change in accounts receivable allowance | ( | ) | ( | ) | ||||
| Change in inventory reserves | ||||||||
| Gain on disposal of property and equipment | ( | ) | ||||||
| Changes in current operating items | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Income taxes | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued payroll and commissions | ( | ) | ( | ) | ||||
| Customer deposits | ||||||||
| Other accrued liabilities | ( | ) | ||||||
| Net cash provided by (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 line of credit | ||||||||
| Payments to line of credit | ( | ) | ( | ) | ||||
| Proceeds from notes payable | ||||||||
| Principal payments on financing leases | ( | ) | ( | ) | ||||
| Share repurchases | ( | ) | ||||||
| Stock award exercises | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net change in cash | ( | ) | ||||||
| Cash - beginning of year | ||||||||
| Cash - end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Supplemental noncash investing and financing activities: | ||||||||
| Property and equipment purchases in accounts payable | $ | $ | ||||||
| Property acquired under operating leases | ||||||||
| Equipment acquired under finance leases | ||||||||
See accompanying notes to consolidated financial statements.
| 32 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024
(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 December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Stock repurchases | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock award exercises | - | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Compensation on stock-based awards | - | - | ||||||||||||||||||||||||||||||
| Stock award exercises | - | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2025 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 33 |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Nortech Systems Incorporated and Subsidiaries (“the Company”, “we”, “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Nature of Business
The Company, organized in December 1990, is a provider of engineering design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou, China.
Principles of Consolidation
The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc. and Nortech Systems Hong Kong Company, Limited as well as its wholly-owned subsidiary, Nortech Systems Suzhou Company, Limited. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements. Estimates also affect the reported amounts of net sales and expense during the reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, the measurement of revenue recognized over time, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.
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Accounts Receivable and Allowance for Expected Losses
We
grant credit to customers in the normal course of business. Accounts receivable is unsecured and presented net of an allowance for doubtful
accounts. The allowance for expected losses was $
When we record customer receivables and contract assets arising from net sales transactions, we record an allowance for credit losses for the current expected credit losses inherent in the asset over its expected life. The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.
We estimate expected credit losses based on relevant information about past events, including historical write-offs of bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms that affect the collectability of the reported amount. When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics. Changes in the relevant information may significantly affect the estimates of expected credit losses.
Assets are written off when we determine them to be uncollectible. Write-offs are recognized as a deduction from the allowance for credit losses.
Inventories
Inventories consist of finished goods, raw materials and work-in-process and are stated at the lower of average cost (which approximates first-in, first-out) or net realizable value. Costs include material, labor, and overhead required in the production of our products. Inventory reserves are maintained for inventories that may have a lower value than stated or quantities in excess of future production needs.
We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions.
Inventories are as follows as of December 31,
| 2025 | 2024 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Reserves | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
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Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows:
| (in years) | ||||
| Building | ||||
| Leasehold improvements | ||||
| Manufacturing equipment | ||||
| Office and other equipment | ||||
Property and equipment are as follows as of December 31,
| 2025 | 2024 | |||||||
| Land | $ | $ | ||||||
| Building and leasehold improvements | ||||||||
| Manufacturing equipment | ||||||||
| Office and other equipment | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Long-Lived Asset Impairment
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 December 31, 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 December 31, 2025.
Preferred Stock
Preferred
stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of
Revenue Recognition
Our net sales are comprised of product, engineering services and repair services. All net sales are recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Net sales are measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, net sales are recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from net sales) basis. Shipping and handling costs are included in cost of goods sold. We pay sales commissions on new business generated. Because the related amortization period for these incremental contract acquisition costs is one year or less, the Company has elected the practical expedient and therefore expenses these costs as incurred. Additionally, the Company has elected the practical expedient related to significant financing components and does not assess whether a contract includes a significant financing component when the period between the transfer of the promised goods or services and customer payment is one year or less.
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The
majority of our net sales are derived from the transfer of goods produced under contract manufacturing agreements which have no alternative
use, and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract
manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an
enforceable right to payment for the goods produced. If these requirements are not met, the net sales are recognized at a point in time,
generally upon shipment. Net sales under contract manufacturing agreements that was recognized over time accounted for approximately
Accounting for contract manufacturing agreements involves the use of various techniques to estimate total net sales and costs. We estimate profit on these agreements as the difference between total estimated net sales and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on contractual selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of net sales recognized with a resulting impact on the timing and amount of associated profit.
On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in net sales as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.
Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the consolidated statements of operations and comprehensive income (loss).
Contract Assets
Contract assets, recorded as such in the consolidated balance sheets, consist of unbilled amounts related to net sales recognized over time. Changes in the contract assets balance during the years ended December 31, 2025 and 2024 were as follows:
| Balance outstanding as of December 31, 2023 | $ | |||
| Increase (decrease) attributed to: | ||||
| Amounts transferred over time to contract assets | ||||
| Reversal of allowance for current expected credit losses | ||||
| Amounts invoiced during the period | ( | ) | ||
| Balance outstanding as of December 31, 2024 | $ | |||
| 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 December 31, 2025 | $ |
We expect substantially all the remaining performance obligations for the contract assets recorded as of December 31, 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.
Accounts receivables are presented separately on the consolidated balance sheets.
Contract Liabilities
Contract
liabilities, recorded as customer deposits, were $
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The following tables summarize our net sales by market for the years ended December 31, 2025 and 2024:
| Year Ended December 31, 2025 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | $ | $ | $ | ||||||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| Year Ended December 31, 2024 | ||||||||||||||||
| Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
| Medical Device | $ | $ | $ | $ | ||||||||||||
| Medical Imaging | ||||||||||||||||
| Industrial | ||||||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
Noncash consideration represents material provided by the customer used in the build of the product.
Product Warranties
We provide limited warranty for the replacement or repair of defective product within a specified time period after the sale at no cost to our customers. We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including, without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred under our limited warranty and provide a reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claim costs are not material given the nature of our products and services.
Advertising
Advertising
costs are charged to operations as incurred and aggregated to $
Income Taxes
We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize interest and penalties accrued on any unrecognized tax benefits as a component on income tax expense.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management must also assess whether uncertain tax positions as filed could result in the recognition of a liability for possible interest and penalties if any. Our estimates are based on the information available to us at the time we prepare the income tax provisions. Our income tax returns are subject to audit by federal, state, and local governments, generally three years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
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We use a Black-Scholes option-pricing model to determine the grant date fair value of our service-based incentive awards and recognize the expense on a straight-line basis over the vesting period. We determine the grant date fair value of our market-based incentive awards using a lattice simulation model and recognize the expense on a straight-line basis over the vesting period. The grant date fair value of restricted stock units is determined based on the closing market price of the Company’s common stock on the date of grant, with compensation expense recognized ratably over the applicable vesting period. See Note 8 – “Incentive Plans” for additional information.
Basic net loss per common share is computed by dividing net loss 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:
Years Ended December 31, | ||||||||
| 2025 | 2024 | |||||||
| 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 year ended December 31, 2025, restricted stock units and stock options totaling . | |
| b. | For
the year ended December 31, 2024, restricted stock units and stock options totaling |
Fair Value of Financial Instruments
The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash, accounts receivable, accounts payable, and other assets and liabilities approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt and line of credit approximates its fair value.
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Foreign Currency Transactions
The
functional currency for our Mexico subsidiary is the US dollar. Foreign exchange transaction gains and losses attributable to exchange
rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a
long-term investment nature are recorded in general and administrative expense. The functional currency for our China subsidiary is the
Renminbi (“RMB”). Assets and liabilities of the China subsidiary are translated from RMB into U.S. dollars at period-end
rates, while income and expense are translated at the weighted-average exchange rates for the period. The related translation adjustments
are reflected as a foreign currency translation adjustment in accumulated other comprehensive loss within shareholders’ equity.
Foreign currency translation gains (losses) increased consolidated shareholders’ equity by $
Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency
are included in the consolidated statements of operations and comprehensive income (loss). Net foreign currency transaction gains or
losses included in the determination of net loss was a gain of $
Adoption of 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 has adopted this ASU and the additional income tax disclosures are noted in Note 6, Income Taxes.
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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 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.
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
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 years ended December 31, 2025 and 2024 are as follows:
Year Ended December 31, | ||||||||
| 2025 | 2024 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | |||||||
| Total | % | % | ||||||
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Customers who represent 10% or more of accounts receivable and contract assets as of December 31, 2025 and 2024 are as follows:
| Accounts Receivable as of December 31, | ||||||||
| 2025 | 2024 | |||||||
| Customer A | % | % | ||||||
| Customer C | % | % | ||||||
| Total | % | % | ||||||
Contract Assets as of December 31, | ||||||||
| 2025 | 2024 | |||||||
| Customer A | % | % | ||||||
| Customer D | % | % | ||||||
| Total | % | % | ||||||
Export
sales from the U.S. represented approximately
NOTE 3. OTHER INTANGIBLE ASSETS
Finite life intangible assets as of December 31, 2025 and 2024 are as follows:
| Customer Relationships | Patents | Total | ||||||||||
| Balance as of January 1, 2024 | $ | $ | $ | |||||||||
| Amortization | ||||||||||||
| Balance as of December 31, 2024 | $ | $ | $ | |||||||||
| Amortization | ||||||||||||
| Balance as of December 31, 2025 | $ | $ | $ | |||||||||
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 was $
Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows:
| Year | Amount | |||
| 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter | ||||
| Total | $ | |||
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NOTE 4. FINANCING ARRANGEMENTS
On
February 29, 2024, we closed on a $
The BOA 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 BOA Revolver agreement. These ratios are calculated based on trailing twelve-month results. There are no subjective acceleration clauses under the BOA Revolver that would accelerate the maturity of outstanding borrowings. The BOA 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 BOA 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.
Amendments to the BOA Revolver
On March 27, 2025, we amended (the “First Amendment”) the BOA 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 BOA 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 increases the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the BOA 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 BOA 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
On July 29, 2025, we amended the BOA Revolver (the “Third Amendment”) to extend the expiration of the BOA Revolver to August 31, 2026.
On February 27, 2026, we entered into a Waiver and Amendment No. 4 to its Credit Agreement with Bank of America, N.A. (“Waiver and Amendment”). See footnote 13, Subsequent Events.
Outstanding Borrowings
The
BOA Revolver, as amended, bears interest at a weighted-average interest rate of
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 December 31, 2025, we have no amounts outstanding on the interim funding agreement for equipment.
On March 20, 2026, the Company repaid the BOA Revolver and entered into a new asset-backed line of credit. See footnote 13, Subsequent Events.
| 43 |
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. As of December 31, 2025, we do not have material lease commitments that have not commenced. We have financing leases for certain property and equipment used in the normal course of business.
The components of lease expense were as follows for the years ended December 31:
| Lease Cost | 2025 | 2024 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease interest cost | ||||||||
| Finance lease amortization expense | ||||||||
| Total lease cost | $ | $ | ||||||
Supplemental balance sheets information related to leases was as follows as of December 31:
| Balance Sheets Location | 2025 | 2024 | ||||||||
| Assets | ||||||||||
| Operating lease assets | Operating lease assets | $ | $ | |||||||
| Finance lease assets | Property, plant and equipment | |||||||||
| Total leased assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Current operating lease liabilities | Current portion of operating lease obligations | $ | $ | |||||||
| Current finance lease liabilities | Current portion of finance lease obligations | |||||||||
| Noncurrent | ||||||||||
| Long-term operating lease liabilities | Long-term operating lease liabilities, net | |||||||||
| Long-term finance lease liabilities | Long-term finance lease obligations, net | |||||||||
| Total lease liabilities | $ | $ | ||||||||
Supplemental cash flow information related to leases was as follows for the years ended December 31:
| 2025 | 2024 | |||||||
| Operating Leases | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Operating lease assets obtained in exchange for lease obligations | $ | $ | ||||||
The operating lease assets obtained in exchange for lease obligations in the year ended December 31, 2024 was largely due to the renewal of our lease in Maple Grove and Milaca, Minnesota, as well as leasing of additional space in our Suzhou, China facility.
Future maturities of lease liabilities were as follows:
Operating Leases | Finance Leases | Total | ||||||||||
| 2026 | $ | $ | $ | |||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| 2029 | ||||||||||||
| 2030 | ||||||||||||
| Thereafter | ||||||||||||
| Total lease payments | $ | $ | $ | |||||||||
| Less: interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
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The lease term and discount rate as of December 31, 2025 were as follows:
| Weighted-average remaining lease term (years) | ||||
| Operating leases | ||||
| Finance leases | ||||
| Weighted-average discount rate | ||||
| Operating leases | % | |||
| Finance leases | % | |||
NOTE 6. INCOME TAXES
The income tax expense consists of the following for the years ended December 31:
| 2025 | 2024 | |||||||
| Current | ||||||||
| Federal | $ | $ | ( | ) | ||||
| State | ||||||||
| Foreign | ||||||||
| Deferred | ||||||||
| Federal | ( | ) | ||||||
| State | ( | ) | ( | ) | ||||
| Foreign | ( | ) | ||||||
| Income tax expense | $ | $ | ||||||
The statutory rate reconciliation is as follows for the years ended December 31:
| 2025 | 2024 | |||||||
| Statutory rate | $ | $ | ( | ) | ||||
| State income tax | ( | ) | ( | ) | ||||
| Effect of foreign operations | ( | ) | ||||||
Maquiladora tax | ||||||||
| Cross-border tax laws | ||||||||
| Research and development | ( | ) | ||||||
| Nontaxble and nondeductable items | ( | ) | ||||||
| US permanent differences | ( | ) | ||||||
| Other | ||||||||
| Income tax expense (benefit) | $ | $ | ||||||
On July 4, 2025, H.R. 1, the One Big Beautiful Bill Act (the “OBBB Act”), was enacted in the United States. The OBBB Act introduced several tax law changes relevant to the manufacturing industry. Key provisions include the restoration of 100% bonus depreciation for qualified property, expanded interest deductibility under Internal Revenue Code Section 163(j) and other international tax reforms affecting global supply chains and cross-border operations. The OBBB Act also reinstates immediate expensing for domestic research and development expenditures for tax years beginning after December 31, 2024, reversing prior rules that required capitalization and amortization of such costs. Due to the impact on GILTI provisions, the Company does not intend to take 100% bonus depreciation. It also does not intend to immediately expense R&D expenditures for 2025 or accelerate the deduction of previously capitalized R&D expenditures.
Income and loss from operations before income taxes was derived from the following jurisdictions for the years ended December 31:
| 2025 | 2024 | |||||||
| United States | $ | ( | ) | $ | ( | ) | ||
| Foreign | ||||||||
| $ | $ | ( | ) | |||||
| 45 |
Deferred tax assets (liabilities) consist of the following as of December 31:
| 2025 | 2024 | |||||||
| Deferred tax assets | ||||||||
| Inventory | $ | $ | ||||||
| Net operating losses | ||||||||
| Stock-based compensation | ||||||||
| Other accruals | ||||||||
| Lease accounting lease liability | ||||||||
| Capitalized research expenses | ||||||||
| Tax credit carryforwards | ||||||||
| Intangibles | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities | ||||||||
| Lease accounting lease asset | ( | ) | ( | ) | ||||
| Withholding tax | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Property and equipment | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
The
Company regularly assesses the need for a valuation allowance related to our deferred income tax assets to determine, based on the weight
of the available positive and negative evidence, whether it is more likely than not that some or all of such deferred assets will not
be realized. In our assessments, the Company considers recent financial operating results, potential sources of taxable income, the reversal
of existing taxable differences, taxable income in prior carryback years, if permitted under tax law, and tax planning strategies. Based
on our most recent assessment, for the year ended December 31, 2025, we have concluded that our deferred income tax assets are more likely
than not to be realized. Our consolidated balance sheets as of December 31, 2025 and 2024 have a deferred tax asset of $
As
of December 31, 2025, we have no US Federal net operating loss carryforward and a Minnesota net operating loss carryforward (pre-tax,
post-apportionment) of approximately $
As
of December 31, 2025, the Company has US Federal and Minnesota R&D tax credits of approximately $
| 46 |
The tax effects from uncertain tax positions can be recognized in our consolidated financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The following tables set forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for the years ended December 31, 2025 and 2024:
| Balance as of January 1, 2024 | $ | |||
| Tax positions - additions | ||||
| Tax positions - reductions | ( | ) | ||
| Balance as of December 31, 2024 | ||||
| Tax positions - additions | ||||
| Tax positions - reductions | ||||
| Balance as of December 31, 2025 | $ | |||
Our policy is to accrue interest related to potential underpayment of income taxes with a corresponding increase in income tax expense. The liability for accrued interest as of December 31, 2025 and 2024 was not significant. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our filed tax returns.
We are subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to federal and state and local income tax examinations for years before 2021.
NOTE 7. 401(K) RETIREMENT PLAN
We
have a 401(k) profit sharing plan (the “401(k) Plan”), a defined contribution plan, covering substantially all of our U.S.
employees. Employees are eligible to participate in the Plan after completing three months of service and attaining the age of
In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of shares. An additional , , and shares were authorized by the shareholders in March 2020, May 2022, May 2023 and May 2024, respectively.
Stock Options
We estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the consolidated statements of operations and comprehensive (loss) income over the requisite service periods. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
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We used the Black-Scholes option-pricing model to calculate the fair value of option-based awards. Our determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding several subjective variables. These variables include, but are not limited to, our expected stock price, volatility over the term of the awards, risk-free interest rate, and the expected life of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The expected volatility and holding period are based on our historical experience. For all grants, the amount of compensation expense recognized has been adjusted for an estimated forfeiture rate, which is based on historical data. 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 | - | % | - | % | ||||
| 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 years ended December 31, 2025 and 2024, respectively. As of December 31, 2025, there was $ of unrecognized compensation which will vest and expense over the next years.
| Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – January 1, 2024 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – December 31, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Forfeited | ) | |||||||||||||||
| Outstanding – December 31, 2025 | $ | $ | ||||||||||||||
| Exercisable on December 31, 2025 | $ | $ | ||||||||||||||
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Restricted Stock Units (“RSUs”)
Total compensation expense related to the RSUs were $ and $ for the years ended December 31, 2025 and 2024, respectively. Total unrecognized compensation expense related to the RSUs was $, which will vest over the next years.
| Shares | Weighted- Average Remaining Vesting Term (in years) | Aggregate Intrinsic Value | ||||||||||
| Outstanding – January 1, 2024 | ||||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ) | |||||||||||
| Outstanding – December 31, 2024 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ) | |||||||||||
| Forfeited | ||||||||||||
| Outstanding – December 31, 2025 | $ | |||||||||||
NOTE 9. SEGMENT INFORMATION
Our results of operations for the years ended December 31, 2025 and 2024 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. The Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets with over 50% of its net sales coming from the medical-related markets. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Our chief operating decision maker (the “CODM”) is the Company’s President and Chief Executive Officer. The CODM regularly evaluates financial information on a consolidated basis to assess performance and allocate resources.
The following table presents selected financial information with respect to the Company’s single operating segment for the years ended December 31, 2025 and 2024:
| 2025 | 2024 | |||||||
| 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 | ( | ) | ( | ) | ||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
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The Company’s long-lived tangible assets, including the Company’s operating lease assets recognized on the consolidated balance sheets were geographically located as follows as of December 31:
| 2025 | 2024 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| China | ||||||||
| Total long-lived tangible assets | $ | $ | ||||||
Export
net from our U.S. domestic operations represent approximately
| 2025 | 2024 | |||||||
| Medical Device | $ | $ | ||||||
| Medical Imaging | ||||||||
| Industrial | ||||||||
| Aerospace and Defense | ||||||||
| Total net sales | $ | $ | ||||||
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with respect to these actions will not materially affect our consolidated financial statements or results of operations.
Change of Control Agreements
Since 2002, we entered into Change of Control Agreements (the Agreement(s)) with certain key executives (the Executive(s)). The Agreements provide an inducement for each Executive to remain as an employee in the event of any proposed or anticipated change of control in the organization, including facilitating an orderly transition, and to provide economic security for the Executive after a change in control has occurred.
In the event of an involuntary termination in connection with a change of control as defined in the agreements, each Executive would receive their base salary, annual bonus at time of termination, and continued participation in health, disability and life insurance plans for a period of three years for officers and two years for all other participants.
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NOTE 11. RESTUCTURING CHARGES
During
the year ended December 31, 2024, we incurred restructuring charges of $
The following table summarizes the related activity for the twelve months ended December 31, 2025 and 2024:
| Facility Consolidation | Workforce Reductions | Total | ||||||||||
| January 1, 2024 | $ | $ | $ | |||||||||
| Charges | ||||||||||||
| Cash payments | ( | ) | ( | ) | ||||||||
| December 31, 2024 | $ | $ | $ | |||||||||
| Charges | ||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ||||||
| December 31, 2025 | $ | $ | $ | |||||||||
NOTE 12. RELATED PARTY TRANSACTIONS
David
Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We had accounts receivable related to Abilitech of $
David
Kunin, our Chairman, is a minority owner (less than
NOTE 13. SUBSEQUENT EVENTS
Financing Arrangement Waiver and Amendment
On February 27, 2026, the Company entered into a Waiver and Amendment. Under the Waiver and Amendment, Bank of America waived certain financial covenant defaults related to the Company’s Consolidated Leverage Ratio, Fixed Charge Coverage Ratio, and Consolidated EBITDA for the quarter ended December 31, 2025. The Waiver and Amendment also modified multiple provisions of the Credit Agreement, including revised definitions, updated borrowing base mechanics, revised financial covenants (including new EBITDA thresholds), adjustments to the revolving commitment levels, an increase in applicable borrowing rate, and updates limitations on foreign subsidiary investments and transfers.
New Financing Arrangement
On
March 20, 2026, we entered into a new Credit and Security Agreement with Associated Bank, National Association, which provides for a
revolving credit facility of up to $
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 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 agreement, the lender may accelerate all obligations, terminate the commitments, and exercise its full rights and remedies against the collateral.
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Equity Incentive Plan
In March 2026, the Company’s Board of Directors approved the 2026 Equity Incentive Plan (the “2026 Plan”), subject to shareholder approval at the upcoming annual meeting in May 2026. The 2026 Plan would succeed the Company’s 2017 Stock Incentive Plan and authorize shares for various equity- and cash-based awards. No awards have been granted under the Plan, and shareholder approval is pending.
Tarriff 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.
These new tariffs apply broadly to manufactured goods and component parts. Because the legislation was enacted after December 31, 2025, its effects are not reflected in our consolidated financial statements. The Company is evaluating the potential impact of these tariff actions on future material costs and sourcing decisions.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-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.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to management and the board of directors regarding the effectiveness of our internal control processes over the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2025. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework of 2013. Based on our assessment, we concluded that, as of December 31, 2025, our internal control over financial reporting was effective.
Changes in Internal Controls
There was no change in the Company’s internal control over financial reporting that occurred during our most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Rule 10b5-1 Trading Plans
During
the three months ended December 31, 2025, none of the Company’s directors or Section 16 officers
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the directors and executive officers of the Registrant will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 13, 2026 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2025, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Our Board has adopted a Code of Business Conduct and Ethics (“Code of Conduct”) that applies to all of our officers, directors and employees. We have posted a copy of our Code of Conduct on our website at www.nortechsys.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the Code of Conduct by posting such information on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report.
Item 11. Executive Compensation
Information regarding executive compensation of the Registrant will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 13, 2026 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2025, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management of the Registrant will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 13, 2026 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2025, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Information regarding executive compensation plans (including individual compensation arrangements) as of the end of the last fiscal year, on two categories of equity compensation plans (that is, plans that have been approved by security holders and plans that have not been approved by security holders) will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 13, 2026 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2025, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
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The following table provides information about our equity compensation plans (including individual compensation arrangements) as of December 31, 2025.
| Plan category | Number of securities to be issued upon the exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) (2) | |||||||||
| Equity compensation plans approved by security holders | 34,000 | $ | 6.91 | 65,136 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 34,000 | $ | 6.91 | 65,136 | ||||||||
| (1) | Represents common shares issuable upon the exercise of outstanding options granted under the 2017 Incentive Compensation Plan (the 2017 Plan). |
| (2) | Represents common shares remaining available for issuance under the 2017 Plan of 65,136. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 13, 2026 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2025, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be included in the Registrant’s proxy statement relating to its Annual Meeting of Shareholders to be held May 13, 2026 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2025, the end of our fiscal year, and said portions of the proxy statement are incorporated herein by reference.
| 54 |
PART IV
Item 15. Exhibits and Financial Statements Schedules
| 1. | Consolidated Financial Statements - Consolidated Financial Statements and related Notes are included in Part II, Item 8, and are identified in the Index on Page 25. |
| 2. | Consolidated Financial Statement Schedule - The following financial statement schedule and the Auditors’ report thereon is included in this Annual Report on Form 10-K: |
| All schedules are omitted because it is not required information, or the information is presented in the consolidated financial statements or related notes. | |
| 3. | The following exhibits are incorporated herein by reference: |
| 55 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Registrant
| By: | /s/ Jay D. Miller | March 26, 2026 |
| Jay D. Miller | ||
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Jay D. Miller | March 26, 2026 |
| Jay D. Miller | ||
| President and Chief Executive Officer (principal executive officer) and Director | ||
| By: | /s/ Andrew D. C. LaFrence | March 26, 2026 |
| Andrew D. C. LaFrence | ||
| Chief Financial Officer (principal financial and accounting officer) | ||
| By: | /s/ David B. Kunin | March 26, 2026 |
| David B. Kunin, Chairman and Director | ||
| By: | /s/ Stacy A. Kruse | March 26, 2026 |
| Stacy A. Kruse, Director | ||
| By: | /s/ Ryan P. McManus | March 26, 2026 |
| Ryan P. McManus, Director | ||
| By: | /s/ Debarati Sen | March 26, 2026 |
| Debarati Sen, Director | ||
| By: | /s/ Amy Fredregill | March 26, 2026 |
| Amy Fredregill, Director | ||
| By: | /s/ Jose A. Peris | March 26, 2026 |
| Jose A. Peris, Director | ||
| 56 |
INDEX TO EXHIBITS
DESCRIPTIONS OF EXHIBITS
| 57 |