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 UNITED
STATES

 SECURITIES
AND EXCHANGE COMMISSION

 Washington,
D. C. 20549

 FORM

 Annual
 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2024

 OR

 Transition
 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________

SYSTEMS INCORPORATED

 (Exact
name of registrant as specified in its charter)

 Commission
file number 0-13257

 State
of Incorporation: Minnesota

 IRS
Employer Identification No. 41-1681094

 Executive
Offices: 7550 Meridian Circle N #150, Maple Grove, MN 55369

 Telephone
number: (952) 345-2244

 Securities
registered pursuant to Section 12(b) of the Act:

 Title
 of each class

 Trading
 Symbol

 Name
 of each exchange on which registered

 Common
 Stock, par value $.01 per share

 NSYS

 NASDAQ
 Capital Market

 Securities
registered pursuant to Section 12(g) of the Act: None

by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No

by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No

by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes No

by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.

 Large
 accelerated filer

 Accelerated
 filer

 Non-accelerated
 filer

 Smaller
 reporting company

 Emerging
 growth company

 If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness
of its internal control over financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.

 If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.

by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).

by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 The
aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of $13.65 per share, was
$ 17,705,142 as of June 30, 2024.

of common stock outstanding as of February 28, 2025: 2,760,793.

 (The
remainder of this page was intentionally left blank.)

 DOCUMENTS
INCORPORATED BY REFERENCE

 Portions
of the registrant's Proxy Statement for Registrant's Annual Meeting of Shareholders to be held on May 14, 2025 have been
incorporated by reference into Part III of this Form 10-K. The Proxy Statement is expected to be filed with the Securities and Exchange
Commission (the SEC) within 120 days after December 31, 2024, the end of our fiscal year.

 (The
remainder of this page was intentionally left blank)

SYSTEMS INCORPORATED

 ANNUAL
REPORT ON FORM 10-K

 TABLE
OF CONTENTS

 PAGE

 Item
 1.

 Business

 3-6

 Item
 1A.

 Risk Factors

 6-16

 Item
 1B.

 Unresolved Staff Comments

 Item
 1C.

 Cybersecurity

 16-17

 Item
 2.

 Properties

 Item
 3.

 Legal Proceedings

 Item
 4.

 Mine Safety Disclosures

 Item
 5.

 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Item
 6.

 Selected Financial Data

 Item
 7.

 Management's Discussion and Analysis of Financial Condition and Results of Operations

 19-26

 Item
 7A.

 Quantitative and Qualitative Disclosures About Market Risk

 Item
 8.

 Financial Statements and Supplementary Data

 27-49

 Item
 9.

 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 Item
 9A.

 Controls and Procedures

 Item
 9B.

 Other Information

 Item
 10.

 Directors, Executive Officers and Corporate Governance

 Item
 11.

 Executive Compensation

 Item
 12.

 Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters

 51-52

 Item
 13.

 Certain Relationships and Related Transactions, and Director Independence

 Item
 14.

 Principal Accountant Fees and Services

 Item
 15.

 Exhibits and Financial Statement Schedules

 Signatures

 Index to Exhibits

SYSTEMS INCORPORATED

 FORM

 For
the Year Ended December 31, 2024

 PART
I

 Item
1. Business

 General

 Nortech
Systems Incorporated, ("the Company", "we", "our") 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.

 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. 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 a China
National Medical Imaging Administration certified facility. 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. 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 accounting functions. Our financial information is evaluated regularly on a consolidated basis
by the chief operating decision maker in assessing performance and allocating resources.

 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 also 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 attempt to overcome these changes through advanced supply chain solutions
we develop in partnership with our customers, a commitment to strong supplier partnerships and risk management tools.

 Major
Customers

 One
customer individually, accounted for at 27.7% of net sales for the year ended December 31, 2024, and two customers, individually, accounted
for 25.7% and 10.3%, respectively, of net sales for the year ended December 31, 2023.

 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 product 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 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 approximately $1.2 million on product
research and development in each of the years ended December 31, 2024 and 2023. We continue to explore opportunities
for developing proprietary manufacturing methods or products, particularly in complex wire and cable interconnect
technologies.

 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. To support the quality requirements of our Aerospace and Defense market customers,
all our US locations are International Traffic in Arms Regulations ("ITAR") compliant.

 Human
Capital Resources

 We
have 701 full-time and 43 part-time/temporary employees as of December 31, 2024, none which are covered by union agreements. Manufacturing
personnel, including direct, indirect support and sales functions, comprise 657 employees, while general administrative employees total
44.

Operations and Export Sales from Our Domestic Operations

 We
have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China. Monterrey, Mexico has approximately $687,000 and $747,000
in long-term assets, and $1,758,000 and $2,123,000 of net operating lease assets as of December 31, 2024 and 2023, respectively. Suzhou,
China has approximately $812,000 and $861,000 in long-term assets, and $685,000 and $278,000 of net operating lease assets as of December
31, 2024 and 2023, respectively. Export sales from our U.S. domestic operations represented 3.4% and 4.1% of net sales for the years
ended December 31, 2024 and 2023, respectively.

 Available

 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
and on the SEC's website at  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 27.7% of net sales for the year ended December 31, 2024, and two customers, individually, accounted for 25.7%
and 10.3%, respectively, of net sales for the year ended December 31, 2023. 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 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 and financial results.

 Our
customers cancel orders, change order quantity, timing and 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, product
changes and contract termination could have an adverse effect on our operations. 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.

 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.

 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
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.

 Competitive
factors in our targeted markets are believed to be 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.

 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 and financial position. 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.

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 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.

 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, changing the number and location of our production
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 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 and production management, financial reporting, communications
and other functions. If our information systems fail or experience major interruptions due to physical damage or loss of power on our
business and our financial results could be adversely affected.

 We
rely on our information technology systems to effectively manage our operational 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.

 Disruptions
to our information systems, including security breaches, losses of data or outages, cyber attacks and other security issues, have and
could in the future adversely affect our operations and/or financial results.

 We
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 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 research and development
("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 capital
generated from operations, and we incurred R&D expenses of approximately $1.2 million in each of the years ended December 31, 2024
and 2023. 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.

 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. Effective as of February 29, 2024, we entered
into a new credit agreement with Bank of America (the "Revolver".) Our Revolver contains financial and operating
covenants with which we must comply. Our compliance with these covenants is dependent on our financial results, which are subject to
fluctuation as described elsewhere in these risk factors. We were not in compliance with financial covenants related to the maximum
operating expense contributions to our Mexican operations in the first and second quarters of 2024. We received a waiver of the
Mexican operating expenses event of default from the bank in August 2024. On March 27, 2025, we amended the Revolver
agreement to waive the leverage ratio and minimum charge coverage ratio events of default as of December 31, 2024 and March 31, 2025
and to further defer the Company's compliance with these ratios until the third quarter of 2025, and reset compliance
thresholds for our covenant ratios for 2025. We have included the Amendment
No. 1 to Credit Agreement, Waiver, and Consent as an exhibit to this filing and any description of that document contained in this
risk factor is only a summary and is qualified by its entirety by the Amendment No. 1 to Credit Agreement, Waiver, and Consent.
If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be
unable to borrow funds and any outstanding indebtedness could become immediately due and payable, which could materially harm our
business.

 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.

 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 function 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, 2024 and 2023, we recorded translation losses of $137 thousand and $54 thousand,
respectively. The majority of these losses were related to the translation of value added tax receivables denominated in Mexican
Pesos.

 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.

 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 finance these purchases initially. 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 an increase in inventory in the short term 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 may be held at a customer's facility or warehouse, or elsewhere
in a location 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.

 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.

 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.

 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, 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.

 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. We are working to comply with CMMC requirements with the intention of seeking CMMC level 2 compliance in 2025.
If we are unsuccessful in our efforts to timely comply with CMMC requirements, our ability to maintain contracts with customers that
are defense contractors and 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

 We
recognize the critical importance of maintaining the safety and security of our systems and data and have a process for overseeing and
managing cybersecurity and related risks. This process is supported by both management, as well as our Board of Directors and our Science
and Technology Committee. The current chair of our Science and Technology Committee is a National Association of Corporate Directors
("NACD") certified cybersecurity expert.

 Our
 Board of Directors is responsible for overseeing our enterprise risk management activities in general, and each of our Board committees
assists the Board in the role of risk oversight. The full Board receives an update on the Company's risk management process and
the risk trends related to cybersecurity at least annually.

 Our
Science and Technology Committee specifically assists the Board in its oversight of risks related to cybersecurity. To help ensure effective
oversight, the Science and Technology Committee receives reports on information security and cybersecurity from the Company's information
technology managers at least four times a year.

 Our
approach to cybersecurity risk management includes the following key elements:

 Multi-Layered
 Defense and Continuous Monitoring – We work to protect our computing environments and products from cybersecurity threats
 through multi-layered defenses and apply lessons learned from our defense and monitoring efforts to help prevent future attacks.
 We utilize data analytics to detect anomalies and search for cyber threats. We engage third-party consultants or other advisors to
 assist in assessing, identifying and/or managing cybersecurity threats.

 Third-Party
 Risk Assessments – We conduct information security assessments before sharing or allowing the hosting of sensitive data
 in computing environments managed by third parties.

 Training
 and Awareness – We provide awareness training to our employees to help identify, avoid and mitigate cybersecurity threats.
 Our employees with network access participate periodically in required training, including phishing, spear phishing and other security
 and awareness training.

 Supplier
 Engagement – We review critical third-party systems at least annually, including the various System and Organizational
 Controls ("SOC") reports or perform risk assessments.

 While
we have experienced cybersecurity incidents in the past, to date none have materially affected the Company or our financial
position, results of operations and/or cash flows. We continue to invest in the cybersecurity and resiliency of our networks and to enhance
our internal controls and processes, which are designed to help protect our systems and infrastructure, and the information they contain.
For more information regarding the risks we face from cybersecurity threats, please see Item 1A. "Risk Factors. "

 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, 2024:

 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

 Blue Earth, MN (1)

 Own

 92,000

 48,000

 140,000

 Milaca, MN

 Lease

 June 30, 2030

 5,000

 20,000

 Mankato, MN

 Lease

 August 31, 2035

 43,000

 58,000

 Monterrey, Mexico

 Lease

 January 24, 2029

 67,000

 10,000

 77,000

 Suzhou, China

 Lease

 February 28, 2024

 27,000

 3,000

 30,000

 Suzhou, China

 Lease

 January 20, 2027

 -

 Suzhou, China

 Lease

 October 17, 2026

 -

 Suzhou, China

 Lease

 November 22, 2028

 2,000

 -

 2,000

 (1)

 In
 December 2024 we ceased manufacturing at our Blue Earth, MN facility and are currently seeking to sell this facility and underlying
 land.

 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.

 PART
II

 Item
5. Market for Registrant ' s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 As
of March 12, 2025, there were 590 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 2024 or 2023. 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, 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

 March 31, 2023

 $
 10.37

 $
 16.52

 June 30, 2023

 $
 9.00

 $
 11.26

 September 30, 2023

 $
 8.76

 $
 10.89

 December 31, 2023

 $
 7.45

 $
 10.27

 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 $100,000 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]

 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, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca
and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and are currently seeking to sell this facility. 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.

Results

 Net
Sales. Net sales for the year ended December 31, 2024 and 2023 were $128,133 and $139,332, respectively, a year over year decrease
of $11,199 or 8.0%. The following is a summary of net sales by our major industry markets:

 Year
 Ended
 December
 31,

 2024

 2023

 Increase
 (Decrease)

 $
 34,636

 $
 38,758

 $
 (4,122
)

 (10.6
)%

 37,492

 39,908

 (2,416
)

 (6.1
)%

 35,517

 40,113

 (4,596
)

 (11.5
)%

 20,488

 20,553

 (65
)

 (0.3
)%

 Total
 net sales

 $

 $

 $
 (11,199
)

 (8.0
)%

 Medical
 Device: Net sales to our Medical Device customers decreased $4,122, or 10.6%, in the year ended December 31, 2024 as compared with
 the same period in 2023. The decrease was primarily due to inventory re-balancing with existing customers and timing of customer
 product launches.

 Medical
Imaging: Net sales to our Medical Imaging customers decreased $2,416, or 6.1%, in the year ended December 31, 2024 as compared with the
same period in 2023. The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches
and lower average sales prices as we moved several programs to our Monterrey, Mexico facility.

 Industrial:
 Net sales to our Industrial customers decreased $4,596, or 11.5%, in the year ended December 31, 2024 as compared with the same period
 in 2023. The decrease in net sales was primarily due to Industrial customers' efforts to reduce their inventory investments,
 delayed program launches with several customers as well as sales headwinds in several markets for which we provide products for these
 customers.

 Aerospace
 and Defense: Net sales to our Aerospace and Defense customers decreased $65, or 0.3%, in the year ended December 31, 2024, as
 compared with the same period in 2023. Growth in this market was negatively impacted by the closure of Blue Earth facility in
 December 2024 and the movement of these customers programs to our Bemidji facility as well as the timing of customer approvals to approve
 this move. As a result, fourth quarter net sales in this market decreased from $6,055 in 2023 to $2,609 in 2024.

 Backlog.
 Our 90-day shipment backlog as of December 31, 2024 was $26,451, down 24.8% from December 31, 2023. 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, 2024 was $65,852, a 28.2% decrease from December 31, 2023. As the supply chain lead times have
normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. We continue
to experience reduced visibility to net sales in the next several quarters as customers are rebalancing their inventories and, therefore,
deferring the placement of some orders, as well as shortening their order to fulfilment lead teams.

 90-day
and total shipment backlog by our major industry markets are as follows:

 December
 31, 2024

 December
 31, 2023

 %
 Change

 Day

 Total

 Day

 Total

 Day

 Total

 $
 6,953

 $
 21,706

 $
 10,350

 $
 34,471

 (32.8
)%

 (37.0
)%

 7,168

 10,353

 7,757

 13,122

 (7.6
)%

 (21.1
)%

 5,173

 7,306

 8,644

 13,857

 (40.2
)%

 (47.3
)%

 7,157

 26,487

 8,416

 30,234

 (15.0
)%

 (12.4
)%

 Total
 backlog

 $
 26,451

 $
 65,852

 $
 35,167

 $
 91,684

 (24.8
)%

 (28.2
)%

 The
90-day and total backlog as of December 31, 2024 includes orders already recognized in net sales and included in the contract asset value
of $13,792.

Costs and Expenses.

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

 Year Ended
 December 31,

 2024

 2023

 Increase/(Decrease)

 Net sales

 $

 $

 $
 (11,199
)

 (8.0
)%

 Cost of goods sold

 111,411

 116,228

 (4,817
)

 (4.1
)%

 Gross profit

 16,722

 23,104

 (6,382
)

 (27.6
)%

 Gross
 margin percentage (1)

 13.1
 %

 16.6
 %

 (353
)
 bpc (2)

 Selling

 3,446

 3,598

 (152
)

 (4.2
)%

 2.7
 %

 2.6
 %

 General and administrative

 11,709

 12,354

 (645
)

 (5.2
)%

 9.1
 %

 8.9
 %

 Research and development

 1,191

 1,199

 (8
)

 (0.7
)%

 0.9
 %

 0.9
 %

 Restructuring charges

 -

 -
 %

 0.4
 %

 -
 %

 Operating (loss) income

 (195
)

 5,953

 (6,148
)

 (103.3
)%

 (0.2
)%

 4.3
 %

 (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 percent of net sales was 13.1% and 16.6% for the years ended December 31, 2024 and 2023,
respectively. The decrease in gross profit as a percentage of net sales in 2024 as compared with the same prior-year periods was the
result of lower net sales, as discussed above, and corresponding lower operating leverage from reduced production at a number of our
manufacturing facilities, as well as incremental costs associated included in costs of goods sold related to the closure of our Blue
Earth facility and moving production to our Bemidji facility.

 Selling
expenses. Selling expenses decreased slightly in the year ended December 31, 2024 as compared with 2023 as the result of lower incentive
compensation expense in 2024.

 General
and administrative expenses. General and administrative expenses decreased $645, or 5.2% in the year ended December 31, 2024 as compared
with the 2023 as the result of lower incentive compensation expense in 2024.

 Restructuring
charges. Restructuring charges were $571 in the year ended December 31, 2024 for employee retention bonuses, disposal and moving
costs associated with the closure of our Blue Earth facility.

(loss) income. Operating (loss) income for the years ended December 31, 2024 and 2023 were $(195), or (0.2)% of net sales, and
as compared with $5,953, or 4.3% of net sales, respectively. The decreases were driven by lower in net sales and resulting gross
margin, incremental costs associated with the closure of the Blue Earth facility included in costs of sales as well as restructuring
expense, offset by lower incentive compensation of $1,643 in 2024 as we did not meet our bonus objectives.

 Other
expense

 Interest
expense. Interest expense was $744 and $487 for the years ended December 31, 2024 and 2023, respectively. This increase was driven
by higher borrowings under our line of credit arrangement. Refer to "Liquidity and Capital Resources" for further discussion
of financing arrangements.

 Income
taxes. Our effective tax rates for the years ended December 31, 2024 and 2023 were (37.9)% and 25.8%, respectively. The primary
drivers of the change in the effective tax rates relate to changes in pretax book income between the years and the 2023 recording of
a $2.6 million tax benefit from the reduction of our valuation allowance for deferred tax assets.

 Net
(Loss) Income. Our net loss in 2024 was $1,295 or $0.47 per diluted and basic common share. Our net income in 2023 was $6,874 or
$2.38 per diluted and $2.53 per basic common share.

 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.

 Credit
Facilities

 On
February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with
Bank of America (the "Revolver"). The Revolver allows for borrowings at a defined base rate, or at the one, three or six
month Secured Overnight Finance Rate, also known as "SOFR," plus a defined margin. If the Company prepays SOFR borrowings
before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement.
The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

 The
Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges
coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month
results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding
borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting
requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual
capital expenditures. The Revolver is secured by substantially all the Company's assets and expires on February 28, 2027. We
were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in
the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we
amended (the "Amendment") the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge
ratio as of December 31, 2024, and March 31, 2025. Further, the Amendment defers the Company's compliance with these ratios
until the third quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 3.5 times or less in the third
quarter of 2025, and 2.5 times or less for each subsequent quarter; and (b) a minimum fixed charge coverage ratio to 1.25
times for the third quarter of 2025 and each quarter thereafter. The Company must also maintain EBITDA (earnings before
interest, taxes depreciation and amortization) as of the end of the second quarter and third quarter of at least $1,600. In
addition, the Amendment requires the Company to maintain unrestricted cash and Revolver availability of at least $2.5 million at
each month end in the second quarter of 2025, $2.75 million at month end July 2025 and $3.0 million at the end of August and
September 2025. The Amendment also requires the Company to provide incremental monthly reporting and increased the
Company's borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. We have included the Amendment No. 1 to
Credit Agreement, Waiver, and Consent as an exhibit to this filing and any description of that document contained in this risk factor
is only a summary and is qualified by its entirety by the Amendment No. 1 to Credit Agreement, Waiver, and Consent.

 Under
the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index
rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset
borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears
interest at a weighted-average interest rate of 7.7% and 8.3% as of December 31, 2024 and 2023, respectively. We had borrowings on our
line of credit of $8,695 and $5,846 outstanding as of December 31, 2024 and 2023, respectively. As of December 31, 2024 we had unused
availability on the line of credit of $6,305.

 The
Company has an interim funding agreement as of December 31, 2024 with a bank related to $345 of deposits made on equipment purchases
that will be funded through a finance lease when the equipment is received and operational. As of December 31, we have $345 outstanding
on the interim funding agreement for equipment.

 The
line of credit is shown net of debt issuance costs of $61 and $31 on the consolidated balance sheets as of December 31, 2024
and December 31, 2023, respectively.

 Our
China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000
Renminbi (RMB) (approximately 1.4 million USD) that expires on September 9, 2025. No amounts were outstanding under this financing arrangement
as of December 31, 2024 or 2023. The interest rate as of December 31, 2024 was approximately 4%.

 Cash
flows for the years ended December 31, 2024 and 2023 are summarized as follows:

 2024

 2023

 Cash flows provided by (used in):

 Operating activities

 $
 (2,250
)

 $
 1,769

 Investing activities

 (1,263
)

 (1,284
)

 Financing activities

 2,765

 (1,281
)

 Effect of exchange rate
 changes on cash

 (11
)

 (10
)

 Net change in cash and
 cash equivalents

 $
 (759
)

 $
 (806
)

 Cash
used in operating activities for the year ended December 31, 2024 was $2,250 compared with cash provided by operations of $1,769 for
the year ended December 31, 2023. In 2024, the cash used in operating activities was driven by the timing of accounts payable payments
and the payment of accrued bonus expenses. In 2023, the cash provided by operating activities was driven by net income.

 Net
cash used in investing activities was $1,263 for the year ended December 31, 2024 and net cash used in investing activities was $1,284
for the year ended December 31, 2023. Cash used in investing activities in both years primarily relates to the purchase of property and
equipment.

 Net
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. The cash used by financing activities in 2023 of $1,281 consisted primarily of net payments on the line of
credit of $1,050 and capital lease payments of $390.

 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. 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, 2024, the Company has recorded a contract asset
of $13,792 for unbilled customer net sales included in net sales. Net sales are recorded net of returns, allowances and customer discounts.
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 (loss) income. Sales, value added, 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 charged
to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

 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, 2024, 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, 2024.

 Inventory
Valuation

 Inventory
are 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, 2024, we had an inventory reserve of $1,446.

 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. In 2023, we recorded a $2,600 tax benefit as we reversed a previously established valuation allowance against our
net U.S. deferred tax assets. During 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. Due to significant estimates used to establish the
valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record
additional adjustments to the valuation allowance in future reporting periods that could have a material effect on our results of operations.

 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 $97 as of December 31, 2024.

 New
Accounting Pronouncements

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.

 TABLE
OF CONTENTS

 FOR
THE YEARS ENDED DECEMBER 31, 2024 AND 2023

 Item
8. Financial Statements and Supplementary Data

 PAGE

 Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 23)

 Consolidated
 Financial Statements:

 Consolidated
 Statements of Operations and Comprehensive (Loss) Income for the years ended December 31, 2024 and 2023

 Consolidated Balance Sheets as of December 31, 2024 and 2023

 Consolidated Statements of Cash Flows for the years ended December 31, 2024 and 2023

 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2024 and 2023

 Notes to Consolidated Financial Statements

 33-49

 (The
remainder of this page was intentionally left blank.)

 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

 We
have audited the accompanying consolidated balance sheets of Nortech Systems Incorporated and Subsidiaries (the
"Company") as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive (loss)
income, shareholders' equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the
"consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its
cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of
America.

 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 that 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 Matters

 Critical
audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and
(2) involved or are especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 /s/
 Baker Tilly US, LLP

 We
have served as the Company's auditor since 2017.

 Minneapolis,
Minnesota

 March
31, 2025

 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

 FOR
THE YEARS ENDED DECEMBER 31, 2024 AND 2023

 (IN
THOUSANDS, EXCEPT SHARE DATA)

 2024

 2023

 Net sales

 $

 $

 Cost of goods sold

 111,411

 116,228

 Gross profit

 16,722

 23,104

 Operating expenses

 Selling

 3,446

 3,598

 General and administrative

 11,709

 12,354

 Research and development

 1,191

 1,199

 Restructuring charges

 -

 Total operating expenses

 16,917

 17,151

 (Loss) income from operations

 ( 195
)

 5,953

 Other expense

 Interest expense

 ( 744
)

 ( 487
)

 (Loss) income before income taxes

 ( 939
)

 5,466

 Income tax expense (benefit)

 ( 1,408
)

 Net (loss) income

 $
)

 $
 6,874

 Net (loss) income per common share:

 Basic (in dollars per share)

 $
 ( 0.47
)

 $
 2.53

 Weighted average number of common shares outstanding - basic (in shares)

 2,755,041

 2,722,135

 Diluted (in dollars per share)

 $
 ( 0.47
)

 $
 2.38

 Weighted average number of common shares outstanding – diluted (in shares)

 2,755,041

 2,885,879

 Other comprehensive (loss) income

 Foreign currency translation

 ( 445
)

 ( 162
)

 Comprehensive (loss) income, net of tax

 $
 ( 1,740
)

 $
 6,712

 See
accompanying notes to consolidated financial statements.

 CONSOLIDATED
BALANCE SHEETS

 AS
OF DECEMBER 31, 2024 AND 2023

 (IN
THOUSANDS, EXCEPT SHARE DATA)

 2024

 2023

 ASSETS

 Current assets:

 Cash

 $

 $

 Restricted cash

 -

 Accounts receivable, less allowances of $ 196 and $ 358

 14,875

 19,279

 Inventories, net

 21,638

 21,660

 Contract assets

 13,792

 14,481

 Prepaid assets and other assets

 4,094

 1,698

 Total current assets

 55,315

 58,793

 Property and equipment, net

 6,232

 6,513

 Operating lease assets

 8,139

 6,917

 Deferred tax assets

 2,575

 2,641

 Other intangible assets, net

 Total assets

 $
 72,435

 $
 75,127

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities:

 Accounts payable

 $
 11,582

 $
 15,924

 Accrued payroll and commissions

 1,841

 4,138

 Customer deposits

 5,140

 4,068

 Current portion of operating leases

 1,175

 1,033

 Current portion of finance lease obligations

 Other accrued liabilities

 1,547

 1,063

 Total current liabilities

 21,428

 26,582

 Long-term liabilities:

 Long-term line of credit

 8,634

 5,815

 Long-term operating lease obligations, net of current portion

 7,773

 6,763

 Long-term finance lease obligations, net of current portion

 Other long-term liabilities

 Total long-term liabilities

 17,002

 13,201

 Total liabilities

 38,430

 39,783

 Shareholders' equity:

 Preferred stock, $ 1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding

 Common stock - $ 0.01 par value; 9,000,000 shares authorized; 2,760,793 and 2,740,178 shares issued and outstanding, respectively

 Additional paid-in capital

 17,329

 16,929

 Accumulated other comprehensive loss

 ( 977
)

 ( 532
)

 Retained earnings

 17,375

 18,670

 Total shareholders' equity

 34,005

 35,344

 Total liabilities and shareholders' equity

 $
 72,435

 $
 75,127

 See
accompanying notes to consolidated financial statements.

 CONSOLIDATED
STATEMENTS OF CASH FLOWS

 FOR
THE YEARS ENDED DECEMBER 31, 2024 AND 2023

 (IN
THOUSANDS)

 2024

 2023

 CASH FLOWS FROM OPERATING ACTIVITIES

 Net (loss) income

 $
)

 $
 6,874

 Adjustments to reconcile net (loss) income to net cash (used in) provided by
 operating activities:

 Depreciation

 1,649

 1,891

 Amortization

 Compensation on stock-based awards

 Deferred taxes

 ( 12
)

 ( 2,362
)

 Change in accounts receivable allowance

 ( 162
)

 Change in inventory reserves

 Gain on disposal of property and equipment

 ( 23
)

 -

 Changes in current operating items

 Accounts receivable

 4,405

 ( 3,432
)

 Employee retention credit receivable

 -

 2,650

 Inventories

 ( 400
)

 Contract assets

 ( 4,514
)

 Prepaid expenses

 ( 2,049
)

 ( 147
)

 Income taxes

 ( 333
)

 ( 832
)

 Accounts payable

 ( 3,956
)

 Accrued payroll and commissions

 ( 2,289
)

 ( 661
)

 Customer deposits

 1,071

 Other accrued liabilities

 ( 375
)

 ( 82
)

 Net cash (used in) provided by operating activities

 ( 2,250
)

 1,769

 CASH FLOWS FROM INVESTING ACTIVITIES

 Proceeds from sale of property and equipment

 -

 Purchases of property and equipment

 ( 1,270
)

 ( 1,284
)

 Net cash used in investing activities

 ( 1,263
)

 ( 1,284
)

 CASH FLOWS FROM FINANCING ACTIVITIES

 Proceeds from line of credit

 129,793

 124,552

 Payments to line of credit

 ( 126,944
)

 ( 125,602
)

 Proceeds from notes payable

 -

 Principal payments on financing leases

 ( 367
)

 ( 390
)

 Share repurchases

 ( 100
)

 -

 Stock option exercises

 Net cash provided by (used in) financing activities

 2,765

 ( 1,281
)

 Effect of exchange rate changes on cash

 ( 11
)

 ( 10
)

 Net change in cash and cash equivalents

 ( 759
)

 ( 806
)

 Cash and cash equivalents - beginning of year

 1,675

 2,481

 Cash and cash equivalents - end of year

 $

 $
 1,675

 Reconciliation of cash and restricted cash reported within the consolidated balance sheets:

 Cash

 $

 $

 Restricted cash

 -

 Total cash and restricted cash reported in the consolidated statements of cash flows

 $

 $
 1,675

 Supplemental disclosure of cash flow information:

 Cash paid for interest

 $

 $

 Cash paid for income taxes

 1,751

 Supplemental noncash investing and financing activities:

 Property and equipment purchases in accounts payable

 $

 $

 Property acquired under operating leases

 2,336

 Equipment acquired under finance leases

 -

 See
accompanying notes to consolidated financial statements.

 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY

 FOR
THE YEARS ENDED DECEMBER 31, 2024 AND 2023

 (IN
THOUSANDS)

 Accumulated

 Additional

 Other

 Total

 Preferred Stock

 Common Stock

 Paid-In

 Comprehensive

 Retained

 Shareholders'

 Amount

 Amount

 Capital

 Loss

 Earnings

 Equity

 Balance as of December 31, 2022

 $

 2,691

 $

 -

 $
 16,347

 $
 ( 370
)

 $
 11,826

 $
 28,080

 Net income

 -

 -

 -

 -

 -

 -

 -

 6,874

 6,874

 Foreign currency translation adjustment

 -

 -

 -

 -

 -

 ( 162
)

 -

 ( 162
)

 Compensation on stock-based awards

 -

 -

 -

 -

 -

 -

 Stock option exercises

 -

 -

 -

 -

 -

 Cumulative adjustment related to adoption of ASC 326 (current expected credit loss)

 -

 -

 -

 -

 ( 30)

 -

 -

 ( 30
)

 ( 30
)

 Balance as of December 31, 2023

 $

 2,740

 $

 ( 30)

 $
 16,929

 $
 ( 532
)

 $
 18,670

 $
 35,344

 Balance

 $

 2,740

 $

 ( 30)

 $
 16,929

 $
 ( 532
)

 $
 18,670

 $
 35,344

 Net loss

 -

 -

 -

 -

 -

 -

 -

)

)

 Net income (loss)

 -

 -

 -

 -

 -

 -

 -

)

)

 Foreign currency translation adjustment

 -

 -

 -

 -

 -

 ( 445
)

 -

 ( 445
)

 Compensation on stock-based awards

 -

 -

 -

 -

 -

 -

 Stock option exercises

 -

 -

 -

 -

 Stock repurchases

 -

 -

 ( 8
)

 ( 1
)

 ( 99
)

 -

 -

 ( 100
)

 Balance as of December 31, 2024

 $

 2,761

 $

 -

 $
 17,329

 $
 ( 977
)

 $
 17,375

 $
 34,005

 Balance

 $

 2,761

 $

 -

 $
 17,329

 $
 ( 977
)

 $
 17,375

 $
 34,005

 See
accompanying notes to consolidated financial statements.

 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

 AS
OF AND FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

 (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,
allowance for doubtful accounts, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from
those estimates.

 Restricted
Cash

 Cash
and cash equivalents classified as restricted cash on our consolidated balance sheets are restricted as to withdrawal or use under the
terms of certain contractual agreements. Restricted cash as of December 31, 2023 was $ 715. The December 31, 2023 restricted cash balance
included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our
line of credit the next business day.

 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 $ 196
 and $ 358
 as of December 31, 2024 and 2023, respectively.

 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 ("CECL") 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:

OF INVENTORIES

 2024

 2023

 Raw materials

 $
 21,122

 $
 20,863

 Work in process

 1,033

 Finished goods

 1,070

 Reserves

 ( 1,446
)

 ( 1,170
)

 Total

 $
 21,638

 $
 21,660

 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:

OF ESTIMATED USEFUL LIVES

 (in
 years)

 Building

 Leasehold
 improvements

 3 - 15

 Manufacturing
 equipment

 3 - 7

 Office
 and other equipment

 3 - 7

 Property
and equipment as of December 31, 2024 and 2023:

OF PROPERTY AND EQUIPMENT

 2024

 2023

 Land

 $

 $

 Building and leasehold improvements

 6,027

 6,041

 Manufacturing equipment

 20,807

 19,877

 Office and other equipment

 6,523

 7,385

 Accumulated depreciation and amortization

 ( 27,273
)

 ( 26,938
)

 Total property and equipment, net

 $
 6,232

 $
 6,513

 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, 2024, 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, 2024. No impairment of long-lived assets was recorded during the years ended December 31, 2024 or 2023.

 Assets
Held for Sale

 We
classify long-lived assets as held-for-sale when the criteria for such classification are met. These criteria include management's commitment
to a plan to sell the asset, the asset being available for immediate sale in its present condition, an active program to locate a buyer,
the sale being probable and expected to be completed within one year, and the asset being actively marketed for sale at a price that
is reasonable in relation to its current fair value.

 Preferred
Stock

 Preferred
stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of 12 %
when and if declared. In liquidation, holders of preferred stock have preference to the extent of $ 1.00 per share plus dividends declared
but unpaid. No preferred stock dividends were declared or paid during the years ended December 31, 2024 and 2023.

 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.

 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
 76 % and 79 % of our net sales for the years ended December 31, 2024 and 2023, respectively. Net sales under these agreements are generally
recognized over time using an input measure based upon the proportion of actual costs incurred.

 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.

 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, 2024 and 2023 were as follows:

OF CONTRACT ASSETS

 Balance outstanding as of December 31, 2022

 $
 9,982

 Increase (decrease) attributed to:

 Amounts transferred over time to contract assets

 110,195

 Allowance for current expected credit losses

 ( 12
)

 Amounts invoiced during the period

 ( 105,684
)

 Balance outstanding as of December 31, 2023

 $
 14,481

 Increase (decrease) attributed to:

 Amounts transferred over time to contract assets

 97,724

 Allowance for current expected credit losses

 Amounts invoiced during the period

 ( 98,417
)

 Balance outstanding as of December 31, 2024

 $
 13,792

 We
expect substantially all the remaining performance obligations for the contract assets recorded as of December 31, 2024, 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.

 The
following tables summarize our net sales by market for the years ended December 31, 2024 and 2023:

OF NET SALES BY MARKET

 Product/ Service Transferred
Over Time

 Product Transferred at Point in Time

 Noncash Consideration

 Total Net Sales by Market

 Year Ended December 31, 2024

 Product/ Service Transferred
Over Time

 Product Transferred at Point in Time

 Noncash Consideration

 Total Net Sales by Market

 $
 24,085

 $
 7,487

 $
 3,064

 $
 34,636

 29,362

 8,104

 37,492

 25,652

 8,620

 1,245

 35,517

 18,625

 1,658

 20,488

 Total net sales

 $
 97,724

 $
 25,869

 $
 4,540

 $

 Product/ Service Transferred
Over Time

 Product Transferred at Point in Time

 Noncash Consideration

 Total Net Sales by Market

 Year Ended December 31, 2023

 Product/ Service Transferred
Over Time

 Product Transferred at Point in Time

 Noncash Consideration

 Total Net Sales by Market

 $
 28,359

 $
 8,095

 $
 2,304

 $
 38,758

 32,147

 7,704

 39,908

 31,384

 7,403

 1,326

 40,113

 18,305

 1,847

 20,553

 Total net sales

 $
 110,195

 $
 25,049

 $
 4,088

 $

 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 $ 83
 and $ 84
 for the years ended December 31, 2024 and 2023,
respectively.

 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.

 Stock-Based
Compensation

 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.

 Net
(Loss) Income Per Common Share

 Basic net (loss) income per common share
is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net (loss) 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 antidilutive. For the years ended December 31,
2024 and 2023, there were restricted stock units and stock options totaling 477,541
and 81,445, respectively, excluded from the computation of diluted weighted-average shares outstanding as their inclusion would be anti-dilutive.
For the year ended December 31, 2023, the dilutive effect of outstanding stock options and non-vested restricted stock units were 163,744
equivalent common shares and were included in the computation of diluted net income per common share.

 Fair
Value of Financial Instruments

 The
carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash, accounts receivable, ERC
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.

 Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and
minimize the use of unobservable inputs.

 The
fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs)
used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant
management judgment. The three levels are defined as follows:

 Level
1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 Level
2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 Level
3: Unobservable inputs for the asset or liability, reflecting the reporting entity's own assumptions about the assumptions that
market participants would use in pricing.

 Our
assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of
the assets and liabilities being measured and their placement within the fair value hierarchy. We endeavor to use the best available
information in measuring fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that
is significant to the fair value measurement. See Note 3 – "Other Intangible Assets", for more detail.

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 losses decreased consolidated shareholders' equity by $ 445 and $ 162 for the years ended December 31, 2024
and 2023, respectively.

 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 (loss) income. Net foreign currency
transaction losses included in the determination of net (loss) income was $ 137
and $ 54
for the years ended December 31, 2024 and 2023, respectively.

 Adoption
of New Accounting Standards

 In
June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU")
2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected
Credit Losses ("CECL"), which requires earlier recognition of credit losses, while also providing additional
transparency about credit risk. The CECL methodology utilizes a lifetime "expected credit loss" measurement objective
for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial assets
are originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The
methodology replaces the multiple existing impairment methods in current U.S. GAAP, which generally require that a loss be incurred
before it is recognized. On January 1, 2023, we adopted the guidance prospectively with a cumulative adjustment to retained earnings
and recognized an allowance for credit losses related to accounts receivable and contract assets of $ 30,
net of tax, and a decrease in retained earnings of $ 30 associated
with the increased estimated credit losses.

 In
November 2023, the FASB issued ASU 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure. The
ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment
expenses We adopted ASU 2023-07 during the year ended December 31, 2024. See Note 9 – "Segment Information" in the
accompanying notes to these consolidated financial statements.

 Recently
Issued New Accounting Standards

 In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances
the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024
on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial
statements and related disclosures.

 In
November 2024, the FASB issued ASU No. 2024-03 (Subtopic 220-40), Disaggregation of Income Statement Expenses. The ASU requires public
entities to disaggregate, in a tabular presentation, certain income statement expenses into different categories, such as purchases of
inventory, employee compensation, depreciation, and intangible asset amortization. The guidance is effective for fiscal years beginning
after December 15, 2026, with early adoption permitted, and may be applied retrospectively. The Company is currently evaluating the impact
of adopting the new ASU on its consolidated financial statements and related 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 and accounts receivable. We maintain
our excess cash balances in checking accounts at two high-credit quality financial institutions. These accounts may at times exceed federally
insured limits. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

 We
have certain customers whose net sales individually represented 10% or more of net sales, or whose accounts receivable balances individually
represented 10% or more of total accounts receivable. One customer accounted for at 27.7 % of net sales for the year ended December 31,
2024, and two customers, individually, accounted for 25.7 % and 10.3 %, respectively, of net sales for the year ended December 31, 2023.
Two customers, individually, accounted 23.2 % and 12.5 %, respectively, of accounts receivable as of December 31, 2024 and 22.1 % and 12.7 %
of accounts receivable as of December 31, 2023.

 NOTE
3. OTHER INTANGIBLE ASSETS

 Finite
life intangible assets as of December 31, 2024 and 2023 are as follows:

OF INTANGIBLE ASSETS

 Customer
Relationships

 Patents

 Total

 Balance as of January 1, 2023

 $

 $

 $

 Amortization

 Balance as of December 31, 2023

 $

 $

 $

 Balance

 $

 $

 $

 Amortization

 Balance as of December 31, 2024

 $
 -

 $

 $

 Balance

 $
 -

 $

 $

 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 5.1 years. Of the patents value as of December 31, 2024, $ 89 are being amortized and $ 85 are in process as
 patents have not yet been issued.

 Amortization
expense of finite life intangible assets was $ 89 and $ 159 for the years ended December 31, 2024 and 2023, respectively.

 Estimated
future annual amortization expense (except projects in process) related to these assets is approximately as follows:

OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE

 Year

 Amount

 2025

 $

 2026

 2027

 2028

 2029

 Thereafter

 Total

 $

 NOTE
4. FINANCING ARRANGEMENTS

 We
had a $ 16,000 asset backed line of credit agreement with Bank of America which, as amended, was to expire on June 15, 2026. Under this
credit agreement, line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations
in the Bloomberg Short-Term Bank Yield (BSBY) index rate. This line of credit weighted-average interest rate was 8.3 % as of December
31, 2023. We had borrowings on our line of credit of $ 5,815 as of December 31, 2023 and we had unused availability under our line of
credit of $ 9,400 supported by our borrowing base. The line of credit is shown net of debt issuance costs of $ 31 on the consolidated balance
sheets for the year ended December 31, 2023.

 On
February 29, 2024, we replaced the asset backed line of credit agreement with a $ 15,000 Senior Secured Revolving Line of Credit with
Bank of America (the "Revolver"). The Revolver allows for borrowings at a defined base rate, or at the one, three or six
month Secured Overnight Finance Rate, also known as "SOFR," plus a defined margin. If the Company prepays SOFR borrowings
before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement.
The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

 The
Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges
coverage ratio, both of which are defined in the Revolver agreement. These ratios are calculated based on trailing twelve-month
results. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding
borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting
requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual
capital expenditures. The Revolver is secured by substantially all the Company's assets and expires on February 28, 2027. We
were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in
the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we
amended (the "Amendment") the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge
ratio as of December 31, 2024, and March 31, 2025. Further, the Amendment defers the Company's compliance with these ratios
until the third quarter of 2025 at which time the Company must maintain (a)
 a leverage ratio of 3.5 times or less in the third quarter of 2025, and 2.5 times or less for each subsequent quarter; and (b)
 a minimum fixed charge coverage ratio to 1.25 times for the third quarter of 2025 and each quarter thereafter. The Company must also maintain EBITDA (earnings before interest, taxes
depreciation and amortization) as of the end of the second quarter and third quarter of at least $1,600. In
addition, the Amendment requires the Company to maintain unrestricted cash and Revolver availability of at least $2.5 million at
each month end in the second quarter of 2025, $2.75 million at month end July 2025 and $3.0 million at the end of August and
September 2025. The Amendment also requires the Company to provide incremental monthly reporting and increased the
Company's borrowing rate by one percent until the Company is in compliance with the original terms of the
Revolver. We have included the Amendment No. 1 to Credit Agreement, Waiver, and Consent
as an exhibit to this filing and any description of that document contained herein is only a summary and is qualified by its entirety
by the Amendment No. 1 to Credit Agreement, Waiver, and Consent.

 Under
the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index
rate. Under the prior asset backed line of credit agreement with Bank of America, the line of credit borrowing availability was
restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY)
index rate. Our line of credit bears interest at a weighted-average interest rate of 7.7 %
and 8.3 %
as of December 31, 2024 and 2023, respectively. We had borrowings on our line of credit of $ 8,695 and
$ 5,846 outstanding
as of December 31, 2024 and 2023, respectively. As of December 31, 2024, we had unused availability on the line of credit of $ 6,305.
The line of credit is shown net of debt issuance costs of $ 61 and
$ 31 on
the consolidated balance sheets as of December 31, 2024 and December 31, 2023, respectively.

 The
Company has an interim funding agreement as of December 31, 2024 with a bank related to $ 345 of deposits made on equipment purchases
that will be funded through a finance lease when the equipment is received and operational. As of December 31, we have $ 345 outstanding
on the interim funding agreement for equipment.

 Our
China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000
Renminbi (RMB) (approximately 1.4 million USD) that expires on September 9, 2025. No amounts were outstanding under this financing arrangement
as of December 31, 2024 or 2023. The interest rate as of December 31, 2024 was approximately 4 %.

 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, 2024, 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

 2024

 2023

 Operating lease cost

 $
 2,318

 $
 2,290

 Finance lease interest cost

 Finance lease amortization expense

 Total lease cost

 $
 2,794

 $
 3,056

 Supplemental balance sheets information related to leases was as follows as of December 31:

OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS INFORMATION RELATED TO LEASES

 Balance Sheets Location

 2024

 2023

 Assets

 Operating lease assets

 Operating lease assets

 $
 8,139

 $
 6,917

 Finance lease assets

 Property, plant and equipment

 Total leased assets

 $
 8,550

 $
 7,553

 Liabilities

 Current

 Current operating lease liabilities

 Current portion of operating lease obligations

 $
 1,175

 $
 1,033

 Current finance lease liabilities

 Current portion of finance lease obligations

 Noncurrent

 Long-term operating lease liabilities

 Long term operating lease liabilities, net

 7,773

 6,763

 Long term finance lease liabilities

 Long term finance lease obligations, net

 Total lease liabilities

 $
 9,402

 $
 8,361

 Supplemental
cash flow information related to leases was as follows for the years ended December 31:

OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION

 2024

 2023

 Operating Leases

 Cash paid for amounts included in the measurement of lease liabilities

 $
 1,821

 $
 1,792

 Operating lease assets obtained in exchange for lease obligations

 $
 2,336

 $

 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:

OF FUTURE PAYMENTS OF LEASE LIABILITIES

 Operating Leases

 Finance Leases

 Total

 Leases

 Finance

 Leases

 Total

 2025

 $
 1,842

 $

 $
 2,007

 2026

 1,857

 2,025

 2027

 1,570

 1,630

 2028

 1569

 1,629

 2029

 1,030

 Thereafter

 4,670

 -

 4,670

 Total lease payments

 $
 12,494

 $

 $
 12,991

 Less: interest

 ( 3,546
)

 ( 43
)

 ( 3,589
)

 Present value of lease liabilities

 $
 8,948

 $

 $
 9,402

 The
lease term and discount rate as of December 31, 2024 were as follows:

OF LEASE TERM AND DISCOUNT RATE

 Weighted-average remaining lease term (years)

 Operating leases

 7.7

 Finance leases

 3.4

 Weighted-average discount rate

 Operating leases

 7.7
 %

 Finance leases

 5.7
 %

 NOTE
6. INCOME TAXES

 The
income tax expense consists of the following for the years ended December 31:

 SCHEDULE OF INCOME TAX EXPENSE

 2024

 2023

 Current

 Federal

 $
 ( 287
)

 $

 State

 Deferred

 Federal

 ( 2,360
)

 State

 ( 119
)

 ( 241
)

 ( 20
)

 Income tax expense (benefit)

 $

 $
 ( 1,408
)

 The
statutory rate reconciliation is as follows for the years ended December 31:

 SCHEDULE OF INCOME TAX STATUTORY RATE RECONCILIATION

 2024

 2023

 Statutory rate

 $
 ( 200
)

 $
 1,148

 State income tax

 ( 101
)

 Effect of foreign operations

 ( 126
)

 ( 124
)

 Research and development

 ( 121
)

 ( 316
)

 Valuation allowance

 -

 ( 2,563
)

 Maquiladora tax

 US permanent differences

 ( 48
)

 ( 44
)

 Global intangible low-taxed income effect

 Withholding tax

 Other

 ( 71
)

 Income tax expense (benefit)

 $

 $
 ( 1,408
)

 Income
and loss from operations before income taxes was derived from the following jurisdictions for the years ended December 31:

 SCHEDULE OF INCOME AND LOSS FROM OPERATIONS BEFORE INCOME TAX

 2024

 2023

 United States

 $
 ( 3,284
)

 $
 3,307

 2,345

 2,159

 Total

 $
 ( 939
)

 $
 5,466

 Deferred
tax assets (liabilities) consist of the following for the years ended December 31:

OF DEFERRED TAX ASSETS (LIABILITIES)

 2024

 2023

 Deferred tax assets

 Inventory

 $

 $

 Net operating losses

 -

 Accrued bonus

 -

 Stock-based compensation

 Other accruals

 Lease accounting lease liability

 1,624

 1,229

 Capitalized research expenses

 1,007

 Tax credit carryforwards

 Intangibles

 Other

 Total deferred tax assets

 4,814

 4,430

 Deferred tax liabilities

 Lease accounting lease asset

 ( 1,562
)

 ( 1,168
)

 Withholding tax

 ( 219
)

 ( 239
)

 Prepaid expenses

 ( 186
)

 ( 213
)

 Property and equipment

 ( 278
)

 ( 276
)

 Other

 ( 213
)

 ( 133
)

 Total deferred tax liabilities

 ( 2,458
)

 ( 2,029
)

 Net deferred tax assets

 $
 2,356

 $
 2,401

 We regularly assess 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, 2024, 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, 2024 have a deferred tax asset of $ 2,575 related to our US taxable operations
and a $ 219 deferred tax liability included other long-term liabilities related to our Chinese taxes, for a net deferred tax asset of
$ 2,356.

 As
of December 31, 2024, for U.S. state purposes, we have a Minnesota research and development credit carry forward of $ 123, which will begin to expire in
2029.

 The
Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017 and includes the requirement to capitalize and amortize
over years research and experimental expenditures beginning in 2022. As of December 31, 2024 and 2023 the deferred tax asset
associated with capitalized research and experimental expenditures was $ 928 and $ 1,007, respectively.

 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,
2024 and 2023:

 SCHEDULE OF UNRECOGNIZED TAX BENEFIT LIABILITIES

 Balance as of January 1, 2023

 $

 Tax positions - additions

 Tax positions - reductions

 -

 Balance as of December 31, 2023

 Tax positions - additions

 Tax positions - reductions

 ( 47
)

 Balance as of December 31, 2024

 $

 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, 2024 and 2023 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 2020.

 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 $ 725
 and $ 465
 during the years ended December 31, 2024 and
2023, respectively.

 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 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:

OF WEIGHTED AVERAGE GRANT DATE FAIR VALUE OF STOCK OPTIONS GRANTED

 2024

 2023

 Stock option fair value assumptions:

 Risk-free interest rate

 3.83 - 4.40
 %

 3.45 - 4.34
 %

 Expected life (years)

 6.0

 6.5

 Dividend yield

 %

 %

 Expected volatility

 %

 %

 Weighted average grant date fair value of stock options granted

 $
 6.49

 $
 5.73

 Total
compensation expense related to stock options was $ 243 and $ 256 for the years ended December 31, 2024 and 2023, respectively. As of December
31, 2024, there was $ 781 of unrecognized compensation which will vest and expense over the next 3.4 years.

 Following
is the status of option activity as of and for the years ended December 31, 2024 and 2023 as follows:

OF OPTION ACTIVITY

 Weighted-
Average
Exercise Price
Per Share

 Weighted-
Average
Remaining
Contractual
Term
(in years)

 Aggregate
Intrinsic Value

 Outstanding – January 1, 2023

 452,700

 $
 5.97

 Granted

 94,000

 9.36

 Exercised

 ( 39,044
)

 4.09

 Forfeited

 ( 48,956
)

 7.77

 Outstanding – December 31, 2023

 458,700

 $
 6.63

 6.53

 $
 1,432

 Granted

 23,000

 11.08

 Exercised

 ( 12,300
)

 4.55

 Forfeited

 ( 16,000
)

 10.23

 Outstanding – December 31, 2024

 453,400

 $
 6.79

 5.70

 $
 1,654

 Exercisable on December 31, 2024

 291,100

 $
 5.01

 4.38

 $
 1,559

 Restricted
Stock Units ("RSUs")

 Total
compensation expense related to the RSUs were $ 218 and $ 167 for the years ended December 31, 2024 and 2023, respectively. Total unrecognized
compensation expense related to the RSUs was $ 87, which will vest over the next 0.3 years.

 Following
is the status of restricted stock activity as of and for the years ended December 31, 2024 and 2023 as follows:

OF RESTRICTED STOCK ACTIVITY

 Weighted-
 Average
 Remaining
 Vesting
 Term
 (in years)

 Aggregate
 Intrinsic Value

 Outstanding – January 1, 2023

 21,000

 Granted

 22,500

 Vested

 ( 10,500
)

 Forfeited

 ( 6,000
)

 Outstanding – December 31, 2023

 27,000

 1.0

 $

 Granted

 15,141

 Vested

 ( 16,500
)

 Forfeited

 ( 1,500
)

 Outstanding – December 31, 2024

 24,141

 0.3

 $

 NOTE
9. SEGMENT INFORMATION

 Our results of operations for the years ended December 31, 2024 and 2023 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 servers. 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, 2024 and 2023:

OF SEGMENT INFORMATION

 2024

 2023

 Net sales

 $

 $

 Cost of goods sold

 111,411

 116,228

 Gross profit

 16,722

 23,104

 Operating expenses:

 Selling

 3,446

 3,598

 General and administrative

 11,709

 12,354

 Research and development

 1,191

 1,199

 Restructuring charges

 Total operating expenses

 16,917

 17,151

 (Loss) income from operations

 ( 195
)

 5,953

 Other expense:

 Interest expense

 ( 744
)

 ( 487
)

 (Loss) income before income taxes

 ( 939
)

 5,466

 Income tax expense (benefit)

 ( 1,408
)

 Net (loss) income

 $
)

 $
 6,874

 The
Company's long-lived tangible assets, including the Company's operating lease assets recognized on the consolidated balance
sheets were located as follows:

OF LONG LIVED TANGIBLE ASSETS

 2024

 2023

 United States

 $
 10,429

 $
 9,421

 Mexico

 2,445

 2,870

 China

 1,497

 1,139

 Total long-lived tangible assets

 $
 14,371

 $
 13,430

 Export net from our U.S. domestic operations
represent approximately 3.4 % and 4.1 % of consolidated net sales for the years ended December 31, 2024 and 2023, respectively. Net sales
by our major EMS industry markets for the years ended December 31, 2024 and 2023 are as follows:

 SCHEDULE OF NET SALES BY EMS INDUSTRY MARKETS

 2024

 2023

 $
 34,636

 $
 38,758

 37,492

 39,908

 35,517

 40,113

 20,488

 20,553

 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.

 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. There were no restructuring charges or amounts accrued or incurred in the year ended December 31,
2023.

 NOTE
12. EMPLOYEE RETENTION CREDIT AND PAYROLL TAX DEFERRAL

 On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law which allowed for
the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. During the year ended December
31, 2023, the Company remitted $ 1,158 to the Internal Revenue Service ("IRS") related to the deferral of payroll taxes, of
which $ 785 was recorded as a refund receivable as of December 31, 2023, with a corresponding liability due. These amounts were settled
during the first quarter of 2024.

 NOTE
13. 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 twelve months ended December 31, 2024 and we wrote off the remaining receivables during 2024. Abilitech has ceased operations and
therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable. The
Company believes that transactions with Abilitech were on terms comparable to those that the Company could reasonably expect in an arm's
length transaction with an unrelated third party.

 David
Kunin, our Chairman, is a minority owner (less than 10 %) of Marpe Technologies, LTD an early-stage medical device company dedicated to
the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies.
The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development
Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States
of America ("BIRD Foundation"). The parties were successful in receiving approval for a $ 1,000 conditional grant. The Company
and Marpe Technologies will each receive $ 500 from the BIRD Foundation and, among other obligations under the grant, each is required
to contribute $ 500 to match grant funds from the BIRD Foundation. The Company met its obligation by providing certain services
at cost or with respect to administrative services at no cost to Marpe Technologies. The total value of the Company's contribution
will not exceed $ 500. Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company's
services beyond its contribution. The Company will receive a 10 -year exclusive right to manufacture the products of Marpe Technologies.
There can be no assurances that Marpe Technologies' medical device operations will be commercially successful, that Marpe Technologies
will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recover the
value of services provided to Marpe if not paid when the services are provided. The transactions between the Company and Marpe Technologies
have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the years ended December
31, 2024 and 2023, we recognized net sales to Marpe Technologies of $ 8 and $ 163, respectively. As of December 31, 2024, we have outstanding
accounts receivable of $ 20. In January 2025, we received a payment of $ 20 from the BIRD Foundation. The Company believes that transactions
with Marpe are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated
third party.

 NOTE
14. SUBSEQUENT EVENTS

 On
March 27, 2025, the Company amended its Revolver line of credit agreement as discussed in Note 4 – "Financing Arrangements."

 During February 2025, the Company determined its intent to sell the Blue Earth, Minnesota facility and classified the net book value of
the property as held for sale. We are currently seeking to sell this facility in 2025.

 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, 2024. 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, 2024, 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, 2024, none of the Company's directors or Section 16 officers adopted, modified or terminated
any "Rule 10b5-1 trading arrangements" or any "non-Rule 10b5-1 trading arrangements" (in each case, as defined
in Item 408 of Regulation S-K).

 PART
III

 Item
10. Directors, Executive Officers and Corporate Governance

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 14, 2025 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 2024, 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

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 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December
31, 2024, 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

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 14, 2025 to be filed with the Securities and Exchange Commission
within 120 days after December 31, 2024, the end of our fiscal year, and said portions of the proxy statement are incorporated herein
by reference.

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 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our fiscal
year, and said portions of the proxy statement are incorporated herein by reference.

 The
following table provides information about our equity compensation plans (including individual compensation arrangements) as of December
31, 2024.

 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

 154,000

 $
 6.79

 146,782

 Equity compensation plans not approved by security holders

 -

 -

 -

 Total

 154,000

 $
 6.79

 146,782

 (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 146,782.

 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 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, 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 14, 2025 to be filed with the Securities and Exchange Commission within 120 days after December 31, 2024, the end of our
fiscal year, and said portions of the proxy statement are incorporated herein by reference.

 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:

 3.1

 Articles
 of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form S-1 filed July 16, 1996 (File No. 333-00888)

 3.2

 Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K filed on April 1, 2019)

 10.1

 Lease Agreement dated April 1, 2015 between the Company and LSOP 3 MN 3, LLC (incorporated by reference to Form 8-K filed April 9, 2015)

 10.2

 Lease Agreement dated November 12, 2015 between the Company and Suzhou Industrial Park Biotech Development Co., Ltd. (incorporated by reference to Form 10-K filed March 22, 2016).

 10.3

 2017 Stock Incentive Plan approved by shareholders May 3, 2017 (incorporated by reference to Exhibit A to the Definitive Proxy Statement filed March 22, 2017).**

 10.4

 Lease Agreement dated February 21, 2018 by and between Manufacturing Assembly Solutions of Monterrey, Inc., a wholly owned Mexican subsidiary of the Company, and OPERADORA STIVA, S.A. DE C.V. (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 27, 2018)

 10.5

 Employment Agreement with John Lindeen dated September 9, 2019 (incorporated by reference to Exhibit 10.2 to Form 8-K filed September 11, 2019).**

 10.6

 First Amendment to Lease Agreement dated September 17, 2018 between the Company and AR Meridian Circle Owner, LLC, as successor to LSOP 3 MN 3, LLC. (incorporated by reference to Exhibit 10.21 to Form 10-K filed March 19, 2020).

 10.7

 Lease Agreement between the Company and Essjay Investment Company, LLC dated August 27, 2020 relating to the Company's Bemidji facility (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 1, 2020)

 10.8

 Lease Agreement between the Company and Essjay Investment Company, LLC dated August 27, 2020 relating to the Company's Mankato facility (incorporated by reference to Exhibit 10.2 to Form 8-K filed September 1, 2020)

 10.9

 Employment Agreement with Jay D. Miller dated February 27, 2022 (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 3, 2022).**

 10.10

 Credit Agreement dated as of February 29, 2024, by and between Nortech Systems Incorporated and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 5, 2024).

 10.11

 Employment Agreement with Andrew D. C. LaFrence dated December 1, 2023 (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 5, 2023).**

 10.12

 Amendment No. 1 to Credit Agreement, Waiver, and Consent by and between Nortech Systems Incorporated and Bank of America, N.A. dated March 27, 2025.*

 10.13

 First Amendment to Employment Agreement with Jay D. Miller dated March 27, 2025.*

 10.14

 First Amendment to Employment Agreement with Andrew D. C. LaFrence dated March 28, 2025.*

 10.15

 First Amendment to Employment Agreement with John Lindeen dated March 28, 2025.*

 19.1

 Policy on Insider Trading*

 Subsidiaries of Nortech Systems Incorporated*

 Consent of Baker Tilly US, LLP*

 31.1

 Certification of the Chief Executive Officer and President pursuant to Rule 13a-20(a) and Rule 15d-20(a), promulgated under the Securities Exchange Act of 1934, as amended.*

 31.2

 Certification of the Chief Financial Officer pursuant to Rule 13a-20(a) and Rule 15d-20(a), promulgated under the Securities Exchange Act of 1934, as amended.*

 32.1

 Certification of the Chief Executive Officer and President and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 97.1

 Nortech Systems Incorporated Clawback Policy (incorporated by reference to Exhibit 97.1 to Form 10-K filed March 20, 2024)

 Financial
 Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Cash Flows,
 and (iv) the Notes to Consolidated Financial Statements.*

 Cover

 *

 Filed
 electronically herewith.

 **

 Management
 contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate

 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
31, 2025

 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

 Jay
 D. Miller

 President
 and Chief Executive Officer (principal executive officer) and Director

 By:

 /s/
 Andrew D. C. LaFrence

 Andrew
 D. C. LaFrence

 Chief
 Financial Officer (principal financial and accounting officer)

 By:

 /s/
 David B. Kunin

 David
 B. Kunin, Chairman and Director

 By:

 /s/
 Stacy A. Kruse

 Stacy
 A. Kruse, Director

 By:

 /s/
 Ryan P. McManus

 Ryan
 P. McManus, Director

 By:

 /s/
 Debarati Sen

 Debarati
 Sen, Director

 By:

 /s/
 Amy Fredregill

 Amy
 Fredregill, Director

 By:

 /s/
 Dan Sachs

 Dan
 Sachs, Director

 By:

 /s/
 Jose A. Peris

 Jose
 A. Peris, Director

TO EXHIBITS

 DESCRIPTIONS
OF EXHIBITS

 3.1

 Articles
 of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form S-1 filed July 16, 1996 (File No. 333-00888)

 3.2

 Bylaws
 (incorporated by reference to Exhibit 3.2 to Form 10-K filed on April 1, 2019)

 10.1

 Lease
 Agreement dated April 1, 2015 between the Company and LSOP 3 MN 3, LLC (incorporated by reference to Form 8-K filed April 9, 2015)

 10.2

 Lease
 Agreement dated November 12, 2015 between the Company and Suzhou Industrial Park Biotech Development Co., Ltd. (incorporated by reference
 to Form 10-K filed March 22, 2016).

 10.3

 2017
 Stock Incentive Plan approved by shareholders May 3, 2017 (incorporated by reference to Exhibit A to the Definitive Proxy Statement
 filed March 22, 2017).**

 10.4

 Lease
 Agreement dated February 21, 2018 by and between Manufacturing Assembly Solutions of Monterrey, Inc., a wholly owned Mexican subsidiary
 of the Company, and OPERADORA STIVA, S.A. DE C.V. (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 27, 2018)

 10.5

 Employment
 Agreement with John Lindeen dated September 9, 2019 (incorporated by reference to Exhibit 10.2 to Form 8-K filed September 11, 2019).**

 10.6

 First
 Amendment to Lease Agreement dated September 17, 2018 between the Company and AR Meridian Circle Owner, LLC, as successor to LSOP
 3 MN 3, LLC (incorporated by reference to Exhibit 10.21 to Form 10-K filed March 19, 2020).

 10.7

 Lease
 Agreement between the Company and Essjay Investment Company, LLC dated August 27, 2020 relating to the Company's Bemidji facility
 (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 1, 2020)

 10.8

 Lease
 Agreement between the Company and Essjay Investment Company, LLC dated August 27, 2020 relating to the Company's Mankato facility
 (incorporated by reference to Exhibit 10.2 to Form 8-K filed September 1, 2020)

 10.9

 Employment Agreement with Jay D. Miller dated February 27, 2022 (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 3, 2022).**

 10.10

 Credit
 Agreement dated as of February 29, 2024, by and between Nortech Systems Incorporated and Bank of America, N.A. (incorporated by reference
 to Exhibit 10.1 to Form 8-K filed March 5, 2024).

 10.11

 Employment
 Agreement with Andrew D. C. LaFrence dated December 1, 2023 (incorporated by reference to Exhibit 10.1 to Form 8-K filed December
 5, 2023).**

 10.12

 Amendment No. 1 to Credit Agreement, Waiver, and Consent by and between Nortech Systems Incorporated and Bank of America, N.A. dated March 27, 2025.*

 10.13

 First Amendment to Employment Agreement with Jay D. Miller dated March 27, 2025.*

 10.14

 First Amendment to Employment Agreement with Andrew D. C. LaFrence dated March 28, 2025.*

 10.15

 First Amendment to Employment Agreement with John Lindeen dated March 28, 2025.*

 19.1

 Policy on Insider Trading*

 Subsidiaries
 of Nortech Systems Incorporated*

 Consent
 of Baker Tilly US, LLP*

 31.1

 Certification
 of the Chief Executive Officer and President pursuant to Rule 13a-20(a) and Rule 15d-20(a), promulgated under the Securities Exchange
 Act of 1934, as amended.*

 31.2

 Certification
 of the Chief Financial Officer pursuant to Rule 13a-20(a) and Rule 15d-20(a), promulgated under the Securities Exchange Act of 1934,
 as amended.*

 32.1

 Certification
 of the Chief Executive Officer and President and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley
 Act of 2002.*

 97.1

 Nortech
 Systems Incorporated Clawback Policy (incorporated by reference to Exhibit 97.1 to Form 10-K filed March 20, 2024)

 Financial
 Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Cash Flows,
 and (iv) the Notes to Consolidated Financial Statements.*

 Cover

 *

 Filed
 electronically herewith.

 **

 Management
 contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.