Financial Analysis

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 4. FINANCING ARRANGEMENTS On February 29, 2024, we closed on a $ 15,000 Senior Secured Revolving Line of Credit with Bank of America (the BOA Revolver). The BOA Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as SOFR, plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the BOA Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the BOA Revolver. 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 Companys assets and expires on February 28, 2027. We were not in compliance with financial covenants related to the maximum operating expense contribution …

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The following tables summarize our net sales by market for the years ended December 31, 2025 and 2024: SCHEDULE OF NET SALES BY MARKET 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 $ 22,361 $ 7,387 $ 2,182 $ 31,930 Medical Imaging 31,908 7,996 95 39,999 Industrial 22,152 8,153 635 30,940 Aerospace and Defense 13,109 2,124 263 15,496 Total net sales $ 89,530 $ 25,660 $ 3,175 $ 118,365 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 $ 24,085 $ 7,487 $ 3,064 $ 34,636 Medical Imaging 29,362 8,104 26 37,492 Industrial 25,652 8,620 1,245 35,517 Aerospace and Defense 18,625 1,658 205 20,488 Total net sales $ 97,724 $ 25,869 $ 4,540 $ 128,133

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NOTE 8. INCENTIVE PLANS In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. An additional 50,000 , 175,000 , 100,000 and 100,000 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. 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 ins …

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NOTE 3. OTHER INTANGIBLE ASSETS Finite life intangible assets as of December 31, 2025 and 2024 are as follows: SCHEDULE OF INTANGIBLE ASSETS Customer Relationships Patents Total Balance as of January 1, 2024 $ 72 $ 191 $ 263 Amortization 72 18 89 Balance as of December 31, 2024 $ - $ 174 $ 174 Balance $ - $ 174 $ 174 Amortization - 18 18 Balance as of December 31, 2025 $ - $ 156 $ 156 Balance $ - $ 156 $ 156 Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is 4.1 years. Of the patents value as of December 31, 2025, $ 71 are being amortized and $ 85 are in process as patents have not yet been issued. Amortization expense of finite life intangible assets was $ 18 and $ 89 for the years ended December 31, 2025 and 2024, respectively. Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows: SCHEDULE OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE Year Amount 2026 $ 18 2027 18 2028 18 2029 12 2030 5 Thereafter - Total $ 71

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NOTE 6. INCOME TAXES The income tax expense consists of the following for the years ended December 31: SCHEDULE OF INCOME TAX EXPENSE 2025 2024 Current Federal $ 43 $ (287 ) State 26 22 Foreign 752 633 Deferred Federal (581 ) 127 State (117 ) (119 ) Foreign 140 (20 ) Income tax expense $ 263 $ 356 The statutory rate reconciliation is as follows for the years ended December 31: SCHEDULE OF INCOME TAX STATUTORY RATE RECONCILIATION 2025 2024 Statutory rate $ 2 $ (200 ) State income tax (97 ) (101 ) Effect of foreign operations 88 (63 ) Maquiladora tax 128 187 Cross-border tax laws 147 492 Research and development (73 ) 13 Nontaxble and nondeductable items 28 (21 ) US permanent differences 14 (46 ) Other 26 95 Income tax expense (benefit) $ 263 $ 356 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 …

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NOTE 5. LEASES We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one 1 to five 5 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: SCHEDULE OF COMPONENTS OF LEASE EXPENSE Lease Cost 2025 2024 Operating lease cost $ 2,364 $ 2,318 Finance lease interest cost 42 25 Finance lease amortization expense 212 451 Total lease cost $ 2,618 $ 2,794 Supplemental balance sheets information related to leases was as follows as of December 31: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS INFORMATION RELATED TO LEASES Balance Sheets Location 2025 2024 Assets Operating lease assets Operating lease assets $ 7,016 $ 8,139 Finance lease assets Property, plant and equipment 714 411 Total leased assets $ 7,730 $ 8,550 Liabilities Current Current operating lease liabilities Current portion …

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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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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 18 . Employees are allowed to contribute up to 60 % of their wages to the 401(k) Plan. We match 50 % of the employees contributions up to 6 % of covered compensation. We made contributions, net of forfeitures, of approximately $ 640 and $ 725 during the years ended December 31, 2025 and 2024, respectively. …

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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 $ 226 as of December 31, 2023. Payments of $ 33 were received during the year ended December 31, 2024 and we wrote off the remaining receivables during 2024. Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable. The Company believes that transactions with Abilitech were on terms comparable to those that the Company could reasonably expect in an arms length transaction with an unrelated third party. David Kunin, our Chairman, is a minority owner (less than 10 %) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (BIRD Foundation). The parties were successful in receiving approval for a $ 1,000 conditional grant. The Company and Marpe Technologies will each receive $ 500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $ 500 to match grant fun …

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NOTE 11. RESTUCTURING CHARGES During the year ended December 31, 2024, we incurred restructuring charges of $ 571 related to the closure and consolidation of our Blue Earth, Minnesota production facility, which was substantially completed in the fourth quarter of 2024. During the year ended December 31, 2025, the Company incurred $ 266 of restructuring charges, in connection with activities related to the Blue Earth facility and additional staff reductions in the first quarter of 2025. The following table summarizes the related activity for the twelve months ended December 31, 2025 and 2024: SCHEDULE OF RESTRUCTURING CHARGES Facility Consolidation Workforce Reductions Total January 1, 2024 $ - $ - $ - Charges 571 - 571 Cash payments (417 ) - (417 ) December 31, 2024 $ 154 $ - $ 154 Charges 31 235 266 Cash payments (185 ) (235 ) (420 ) December 31, 2025 $ - $ - $ -

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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 Companys 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 Companys single operating segment for the years ended December 31, 2025 and 2024: SCHEDULE OF SEGMENT INFORMATION 2025 2024 Net sales $ 118,365 $ 128,133 Cost of goods sold 100,359 111,411 Gross profit 18,006 16,722 Operating expenses: Selling 4,803 3,446 General and administrative 10,790 11,709 Research and development 1,172 1,191 Restructuring charges 266 571 Total operating expenses 17,031 16,917 Income (loss) fro …

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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 asse …

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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 Companys 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 $ 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, plus 2.00% in the case …

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