What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2024-03-20 compared with 2023-03-17 · 141 added, 159 removed, 93 unchanged (76% of the section changed)

Market for Registrant ’

s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

As of March 12, 2024, 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.

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Selected Financial Data [Reserved]

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

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

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & 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, higher-level assemblies, and other box builds for a wide range of industries.

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.

We serve three major markets within the EMS industry:

Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.

Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.

As of December 31, 2023, we have facilities in Minnesota:

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We also have facilities in Monterrey, Mexico and Suzhou, China.

Our revenue is derived from complex designed products built to the customers’

specifications.

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.

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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.

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.

Generally Accepted Accounting Principles (“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 revenues 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 doubtful accounts, 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 revenue is comprised of product, engineering services and repair services.

All revenue is 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 revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue.

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.

Revenue is 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 Condensed Consolidated Statements of Operations and Comprehensive Income.

Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) 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.

Allowance for Doubtful Accounts

When evaluating the adequacy of the allowance for doubtful accounts, we analyze accounts receivable, historical write-offs of bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms.

We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on outstanding accounts receivable.

An amount of judgment is required when assessing the ability to realize accounts receivable, including assessing the probability of collection and the current credit-worthiness of each customer.

If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for uncollectible accounts may be required.

Inventory Reserves

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs.

We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis.

We evaluate our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers.

Operating Results

The following table presents our statements of operations data as percentages of total net sales for the years indicated:

The following table presents our statements of income data in dollars and as a percentage of total net sales for the years indicated (dollars in millions):

Cost of Goods Sold

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General and Administrative Expenses

Restructuring Expenses

Loss on Abandonment of Intangible Asset

Gain on Sale of Property and Equipment

Research and Development Expenses

Income from Operations

Interest Expense

PPP Loan Forgiveness

Income Before Income Taxes

Income Tax Expense

Our net sales in 2022 were $134.1 million, compared to $115.2 million in 2021, an increase of $18.9 million or 16.4% that was driven by increases in all of our markets.

The industrial market increased by $3.2 million or 9.0% in 2022 as compared to 2021.

The medical market increased by $12.8 million or 20.3% with medical devices accounting for 6% of the increase and medical component products 94% of the increase.

Net sales from the aerospace and defense markets increased by $2.9 million or 17.5% in 2022 as compared to 2021.

These increases were driven by increased demand as well as price increases to counteract higher material and labor cost.

We have also taken actions to scale the direct labor workforce and strengthen the supply chain for parts.

Income Tax (Benefit) Expense

Our net sales in 2023 were $139.3 million, compared with $134.1 million in 2022, an increase of $5.2 million or 3.9%, that was driven by increases in all of our markets.

The industrial market increased by $1.4 million or 3.6% in 2023 as compared with 2022.

The medical market increased year-over-year by $2.8 million or 3.7% with medical devices accounting for the increase.

Net sales from the aerospace and defense markets increased by $1.0 million or 5.1% in 2023 as compared with 2022.

The increase in net sales is due to continued strong demand across our medical, industrial and defense markets, and the impact of pricing actions taken in the second half of 2022 to address increased manufacturing costs.

Net sales by our major EMS industry markets for the years ended December 31, 2023 and 2022 were as follows (in millions):

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Total Net Sales

Net sales by timing of transfer of goods and services for years ended December 31, 2022 and 2021 are as follows (in millions):

Net sales by timing of transfer of goods and services are as follows (in millions):

Year Ended December 31, 2023

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Transferred Over

Transferred at

Consideration 1

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Transferred Over

Transferred at

Consideration 1

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Total Net Sales

Our 90-day order backlog as of December 31, 2022 was $35.9 million as compared to $36.9 million at the end of 2021.Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

Our 90-day order backlog by market has remained relatively constant when compared to the prior year.

90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases.

These variables cause inconsistencies in comparing the backlog from one period to the next.

1 Noncash consideration represents material provided by the customer used in the build of the product.

Our 90-day order backlog as of December 31, 2023 was $35.1 million as compared with $35.9 million at the end of 2022.

Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

Our total order backlog as of December 31, 2023 was $91.7 million, a 11.9% decrease from $104.1 million as of December 31, 2022.

Our total and 90-day order backlog by market has decreased when compared with the prior year.

As the supply chain continues to normalize, customer order lead times are reducing and are starting to return to their pre-pandemic ordering practices.

Our 90-day backlog varies each reporting period end due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases.

90-day shipment backlog by our major industry markets are as follows (in millions):

90 Day Backlog as of the

Year Ended December 31,

90 Day Backlog as of

Aerospace and Defense

Total Backlog

Our total order backlog as of December 31, 2022 was $104.1 million, a 9.6% increase from $95.0 million at December 31, 2021.

Our total backlog remains strong as our biggest customers are placing orders into the future to secure supply of critical components, in particular for those with long lead times.

Total order backlog by our major industry markets are as follows (in millions):

Total Backlog as of the

Year Ended December 31,

Total Backlog as of

Aerospace and Defense

Total Backlog

The 90-day and total backlog at December 31, 2022 contain the contract asset value of $10.0 million which has been recognized as revenue.

Our gross profit as a percentage of net sales was 15.3% and 13.8% for the years ended December 31, 2022 and 2021, respectively.

The gross profit improvement relates primarily to price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.

The prior year gross profit as a percentage of net sales benefited from the $4.7 million reduction in payroll and medical expenses related to the Employee Retention Credit (“ERC”).

Selling expenses were $3.7 million, or 2.8% of net sales, for the year ended December 31, 2022 and $2.4 million, or 2.0% of net sales, for the year ended December 31, 2021.

The increase in selling expense is driven by an increase in sales engineering expenses to support the increased sales.

The 90-day and total backlog as of December 31, 2023 contain the contract asset value of $14.5 million, which has been recognized as net sales.

Our gross profit was $23.1 million and $20.5 million, and as a percentage of net sales 16.6% and 15.3%, for the years ended December 31, 2023 and 2022, respectively.

The gross profit improvement relates primarily to price increases in response to material and labor cost inflation.

Selling expenses were marginally lower at $3.6 million, or 2.6% of net sales, for the year ended December 31, 2023 compared with $3.7 million, or 2.8% of net sales, for the year ended December 31, 2022.

General and Administrative

General and administrative expenses were $12.3 million, or 8.9% of net sales, for the year ended December 31, 2023 and $11.4 million, or 8.5% of net sales, for the year ended 2022.

General and administrative expenses for the twelve months ended December 31, 2022 were up $1.4 million mainly due to higher professional fees and higher cost of labor;

the twelve months ended December 31, 2021 includes a $0.4 million reduction in payroll and medical expenses related to the ERC.

Restructuring Charges

There were no restructuring charges for the year ended December 31, 2022.

Restructuring charges related to the closure of the Merrifield facility were $0.3 million or 0.3% of net sales for year ended December 31, 2021.

General and administrative expenses for the year ended December 31, 2023 were up $0.9 million mainly due to higher wages of $0.7 due to merit increases and one-time higher professional fees related to a system implementation of $0.2 million.

Research and Development Expense

Research and development expenses were $1.5 million or 1.1% of sales for the year ended December 31, 2022 and $0.5 million or 0.4% of sales for the year ended 2021.

We have several projects in process with estimated completion dates within the next two to five years. 

Loss on Abandonment of Intangible Asset

There were no abandonment charges for the year ended December 31, 2022.

Abandonment charges were approximately $0.6 million or 0.5% of net sales for the year ended December 31, 2021.

The charges relate to the abandonment of the Devicix tradename.

Research and development expenses were $1.2 million or 0.9% of net sales for the year ended December 31, 2023 and $1.5 million or 1.1% of net sales for the year ended 2022.

Income from Operations

Our income from operations for the 2022 fiscal year was $3.9 million, an increase of $1.6 million from the 2021 fiscal year income of $2.3 million.

Our income from operations for 2023 was $6.0 million, an increase of $2.1 million from the income of $3.9 million in 2022.

The increase in income from operations was driven by the increase in gross profit.

Income from operations in the 2021 fiscal year was positively affected by the 2021 employee retention credits of $5.2 million.

Interest Expense

Interest expense for the year ended December 31, 2022 and December 31, 2021 was $0.4 million in each period.

Paycheck Protection Program (PPP) Loan Forgiveness

In the fourth quarter of 2021, we received forgiveness from the Small Business Association (SBA) for the $6.1 million Promissory Note under the PPP.

We recorded a PPP loan forgiveness gain of $6.2 million, including interest forgiven, which is included in other income (expense) on the consolidated statement of operations and other comprehensive income (loss) for the year ended December 31, 2021.

Income tax expense was $1.5 million and $0.9 million for the years ended December 31, 2022 and 2021, respectively.

The effective tax rate for fiscal 2022 and 2021 was 42% and 12%, respectively.

Our 2022 tax rate was driven by the increase in the valuation allowance from the Tax Cuts and Jobs Act requirement to capitalize and amortize research and experimental expenditures in 2022.

Our 2021 tax rate was driven by the nontaxable PPP loan forgiveness.

The statutory reconciliation for the years ended December 31, 2022 and 2021 is as follows (in thousands):

Interest expense for the year ended December 31, 2023 and December 31, 2022 was $0.5 and $0.4 million, respectively.

We realized an income tax benefit of $1.4 million resulting in an effective tax rate of 26% for the year ended December 31, 2023.

This benefit was largely driven by the $2.6 million valuation allowance reversal as we concluded it was more likely than not that we will realize our net deferred tax assets.

Income tax expense was $1.5 million for the year ended December 31, 2022 with an effective tax rate of 42%.

Our 2022 tax rate was driven by the increase in deferred tax assets and corresponding valuation allowance from research and development expenses which were no longer tax deductible pursuant to the Tax Cuts and Jobs Act which requires the Company to capitalize and amortize research and experimental expenditures for tax return purposes starting in 2022.

The statutory rate reconciliation for the years ended December 31, 2023 and 2022 is as follows, (in thousands):

Statutory Rate

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Effect of Foreign Operations

Withholding Tax

Research and Development

Change in State Deferred Rate

Valuation Allowance

PPP Loan Forgiveness

Maquiladora Tax

US Permanent Differences

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Return to Provision - Credits, Perm Diffs

Withholding Tax

Our net income in 2023 was $6.9 million or $2.38 per diluted common share and $2.53 per basic common share.

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Liquidity and Capital Resources

We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months.

Credit Facility

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16 million that was to expire on June 15, 2022.

On December 31, 2021, we renewed the credit agreement through June 15, 2026.

Under the Bank of America credit agreement, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears interest at a weighted-average interest rate of 5.2% and 3.5% as of December 31, 2022 and 2021, respectively.

We had borrowings on our line of credit of $6.9 million and $9.0 million outstanding as of December 31, 2022 and December 31, 2021, respectively.

There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

In addition, the credit agreement does not expire within one year, the Company is not in violation of the covenants and the Company expects Bank of America to be capable of honoring the financing arrangement.

The line of credit with Bank of America contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2022 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2.0 million until availability is above that amount for 30 days.

The Company met the covenants for the period ended December 31, 2022.

At December 31, 2022 and 2021, we had unused availability under our line of credit of $8.4 million and $3.5 million, respectively, supported by our borrowing base.

The line is secured by substantially all of our assets.

During 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improves our unused availability which expired on January 15, 2023.

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A., which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which funds were received on April 22, 2020.

The loan was accounted for as debt until November 3, 2021 when the $6.1 million loan and $0.1 million accrued interest was fully forgiven by the SBA.

As a result, we recorded a PPP loan forgiveness gain of $6.2 which is included in other income (expense) on the consolidated statements of operations and other comprehensive income for the year ended December 31, 2021.

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 1.5 million USD) that will expire on August 18, 2023.

We had no amounts outstanding as of December 31, 2022 and 2021.

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 twelve months.

Credit Facilities

We had a $16 million 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% and 5.2% as of December 31, 2023 and 2022, respectively.

We had borrowings on our line of credit of $5.8 million and $6.9 million as of December 31, 2023 and December 31, 2022, respectively.

As of December 31, 2023 and 2022, we had unused availability under our line of credit of $9.4 million and $8.4 million, respectively, supported by our borrowing base.

We were in compliance with all the financial covenants related to this agreement as of and for the year ended December 31, 2023.

On February 29, 2024, we replaced our asset back line of credit agreement with $15 million 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 we prepay SOFR borrowings before their contractual maturity, we have agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

We are required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

The Revolver requires us 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.

There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of our outstanding borrowings.

The Revolver contains certain covenants which, among other things, require us 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.

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 August 18, 2024.

No amounts were outstanding under this financing arrangement as of December 31, 2023 or 2022.

The interest rate as of December 31, 2023 was approximately 4%.

Cash flows for the years ended December 31, 2023 and 2022 are summarized as follows:

(in thousands)

(in millions)

Cash Flows Provided By (Used In):

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Net Change in Cash

Cash provided by operating activities for the year ended December 31, 2022 was $5.4 million compared to cash used in operations of $4.6 million for the year ended December 31, 2021.

Cash provided by operating activities for the year ended December 31, 2023 was $1.8 million compared with cash provided by operations of $5.4 million for the year ended December 31, 2022.

In 2023, the cash provided by operating activities was driven by $6.9 million in net income offset by a $2.2 million non-cash tax benefit from the reduction in our valuation allowance, and increased uses of working capital largely from accounts receivable and contract assets due to the increase in net sales and longer payment terms with several customers.

In 2022, the cash provided by operating activities was driven by results from operations.

In 2021, increases in working capital due to higher sales backlog as well as actions taken to address the global supply chain shortages drove the use of cash from operating activities, primarily increased inventories of $4.6 million.

Net cash used in investing activities was $1.3 million for the year ended December 31, 2023 and net cash used in investing activities was $2.4 million for the year ended December 31, 2022.

Cash used in investing activities in 2022 relates primarily to the purchase of $2.4 million of property and equipment.

Cash used in investing activities in 2021 relates primarily to the purchase of $1.3 million of property and equipment offset by the proceeds from the sale of $0.6 million of property and equipment related to the Merrifield plant closure.

Net cash used in financing activities in 2022 of $2.7 million consisted primarily of net payments on the line of credit of $2.1 million and capital lease payments of $0.6 million.

The cash provided by financing activities in 2021 of $3.9 million consisted primarily of increased borrowing on the line of credit of $5.7 million offset by payments on long-term debt and capital leases of $1.7 million.

Cash used in investing activities in both years primarily relates to the purchase of property and equipment.

Net cash used in financing activities in 2023 of $1.3 million consisted primarily of net payments on the line of credit of $1.0 million and capital lease payments of $0.4 million, partially offset by cash receipts of $0.1 million from stock option exercises.

The cash used by financing activities in 2022 of $2.7 million consisted primarily of net payments on the line of credit of $2.1 million and capital lease payments of $0.6 million.

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.

Generally Accepted Accounting Principles (“U.S.

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 doubtful accounts, 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.

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, 2023, the Company has recorded a contract asset of $14.5 million 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 Condensed Consolidated Statements of Income and Comprehensive 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

Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.

As of December 31, 2023, 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, 2023.

Allowance for Credit Losses

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 adopted CECL as of January 1, 2023 with a $30 thousand adjustment to retained earnings.

As of December 31, 2023, we held an allowance for credit losses of $0.4 million.

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.

Inventory Reserves

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated 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.

On at least an annual basis we review the underlying inventory reserve assumptions based on recent trends.

As of December 31, 2023, we had an inventory reserve of $1.2 million.

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.

As of December 31, 2022, we had recorded a valuation allowance of $2.6 million that resulted from the establishment of a full valuation allowance against U.S.

net deferred tax assets as of that date.

In 2023, we recorded a $2.6 million tax benefit as we reversed our valuation allowance against our net U.S.

deferred tax assets.

During the fourth quarter of 2023 concluded that it was more likely than not it would realize it net deferred tax assets given its recent three-year cumulative losses were insignificant as well as the Company’s forecasted pre-tax income in 2024 and beyond.

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 $131 thousand as of December 31, 2023.

New Accounting Pronouncements

Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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.

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.

Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;

♦ 

Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;

♦ 

Changes in the reliability and efficiency of our operating facilities or those of third parties;

♦ 

Risks related to availability of labor;

♦ 

Increases in certain raw material costs such as copper and oil;

Commodity and energy cost instability;

Risks related to FDA noncompliance;

The loss of a major customer;

General economic, financial and business conditions that could affect our financial condition and results of operations;

Increased or unanticipated costs related to compliance with securities and environmental regulation;

Disruption of global or local information management systems due to natural disaster or cyber-security incident;

Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us.

Discussion of these factors is also 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.

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.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity