NORTECH SYSTEMS INC 10-K

Item 8. Financial Statements and Supplementary Data PAGE Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 23 ) 34 Consolidated Financial Statements: Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2023 and 2022 36 Consolidated Balance Sheets as of December 31, 2023 and 2022 37 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 38 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2023 and 2022 39 Notes to Consolidated Financial Statements 40-58 (The remainder of this page was intentionally left blank.) 33 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, 2023 and 2022, the related consolidated statements of income and comprehensive 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, 2023 and 2022, 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. 34 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 20, 2024 35 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (IN THOUSANDS, EXCEPT SHARE DATA) 2023 2022 Net Sales $ 139,332 $ 134,123 Cost of Goods Sold 116,228 113,643 Gross Profit 23,104 20,480 Operating Expenses Selling Expenses 3,598 3,719 General and Administrative Expenses 12,354 11,425 Research and Development Expenses 1,199 1,463 Gain on Sale of Property and Equipment - ( 15 ) Total Operating Expenses 17,151 16,592 Income from Operations 5,953 3,888 Other Expense Interest Expense ( 487 ) ( 411 ) Total Other Expense ( 487 ) ( 411 ) Income Before Income Taxes 5,466 3,477 Income Tax (Benefit) Expense ( 1,408 ) 1,467 Net Income $ 6,874 $ 2,010 Income Per Common Share: Basic $ 2.53 $ 0.75 Weighted Average Number of Common Shares Outstanding - Basic 2,722,135 2,685,378 Diluted $ 2.38 $ 0.70 Weighted Average Number of Common Shares Outstanding - Dilutive 2,885,879 2,891,285 Other Comprehensive Income Foreign Currency Translation Loss ( 162 ) ( 426 ) Comprehensive Income, Net of Tax $ 6,712 $ 1,584 See accompanying notes to consolidated financial statements. 36 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2023 AND 2022 (IN THOUSANDS, EXCEPT SHARE DATA) 2023 2022 ASSETS Current Assets Cash $ 960 $ 1,027 Restricted Cash 715 1,454 Accounts Receivable, less Allowances of $ 358 and $ 328 19,279 15,975 Employee Retention Credit Receivable - 2,650 Inventories, Net 21,660 22,438 Contract Assets 14,481 9,982 Prepaid Assets and Other Assets 1,698 1,334 Total Current Assets 58,793 54,860 Property and Equipment, Net 6,513 6,408 Operating Lease Assets 6,917 7,850 Deferred Tax Assets 2,641 - Other Intangible Assets, Net 263 422 Total Assets $ 75,127 $ 69,540 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current Portion of Finance Lease Obligations $ 356 $ 390 Current Portion of Operating Leases 1,033 1,155 Accounts Payable 15,924 14,792 Accrued Payroll and Commissions 4,138 4,803 Customer Deposits 4,068 3,515 Other Accrued Liabilities 1,063 1,743 Total Current Liabilities 26,582 26,398 Long-Term Liabilities Long-Term Line of Credit 5,815 6,853 Long-Term Finance Lease Obligations, Net of Current Portion 209 565 Long-Term Operating Lease Obligations, Net of Current Portion 6,763 7,549 Other Long-Term Liabilities 414 95 Total Long-Term Liabilities 13,201 15,062 Total Liabilities 39,783 41,460 Shareholders' Equity Preferred Stock, $ 1 par value; 1,000,000 Shares Authorized; 250,000 Shares Issued and Outstanding 250 250 Common Stock - $ 0.01 par value; 9,000,000 Shares Authorized; 2,690,633 and 2,672,064 Shares Issued and Outstanding, respectively 27 27 Additional Paid-In Capital 16,929 16,347 Accumulated Other Comprehensive Loss ( 532 ) ( 370 ) Retained Earnings 18,670 11,826 Total Shareholders' Equity 35,344 28,080 Total Liabilities and Shareholders' Equity $ 75,127 $ 69,540 See accompanying notes to consolidated financial statements. 37 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (IN THOUSANDS) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 6,874 $ 2,010 Adjustments to Reconcile Net Income to Net Cash Provided By (Used In) Operating Activities: Depreciation 1,891 1,768 Amortization 159 150 Compensation on Stock-Based Awards 423 334 Deferred Taxes ( 2,362 ) - Change in Accounts Receivable Allowance 24 6 Change in Inventory Reserves 26 ( 149 ) Gain on Disposal of Property and Equipment - ( 15 ) Foreign Currency Transaction Gain 2 ( 72 ) Changes in Current Operating Items Accounts Receivable ( 3,432 ) ( 1,746 ) Employee Retention Credit Receivable 2,650 2,574 Inventories 716 ( 2,985 ) Contract Assets ( 4,514 ) ( 1,283 ) Prepaid Expenses ( 147 ) 317 Income Taxes ( 832 ) 643 Accounts Payable 483 2,216 Accrued Payroll and Commissions ( 661 ) 783 Customer Deposits 553 550 Other Accrued Liabilities ( 84 ) 301 Net Cash Provided By Operating Activities 1,769 5,402 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sale of Property and Equipment - 15 Purchase of Intangible Asset - ( 71 ) Purchases of Property and Equipment ( 1,284 ) ( 2,370 ) Net Cash Used In Investing Activities ( 1,284 ) ( 2,426 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Line of Credit 124,552 119,349 Payments to Line of Credit ( 125,602 ) ( 121,468 ) Principal Payments on Financing Leases ( 390 ) ( 599 ) Stock Option Exercises 159 51 Net Cash Used In Financing Activities ( 1,281 ) ( 2,667 ) Effect of Exchange Rate Changes on Cash ( 10 ) ( 53 ) Net Change in Cash and Cash Equivalents ( 806 ) 256 Cash and Cash Equivalents - Beginning of Year 2,481 2,225 Cash and Cash Equivalents - End of Year $ 1,675 $ 2,481 Reconciliation of cash and restricted cash reported within the consolidated balance sheets Cash $ 960 $ 1,027 Restricted Cash 715 1,454 Total Cash and restricted cash reported in the consolidated statements of cash flows $ 1,675 $ 2,481 2023 2022 Supplemental Disclosure of Cash Flow Information: Cash Paid for Interest $ 503 $ 476 Cash Paid for Income Taxes 1,751 237 Supplemental Noncash Investing and Financing Activities: Property and Equipment Purchases in Accounts Payable $ 680 $ 14 Property Acquired under Operating Lease 261 44 Equipment Acquired under Finance Lease - 41 See accompanying notes to consolidated financial statements. 38 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (IN THOUSANDS) Accumulated Additional Other Total Preferred Common Paid-In Comprehensive Retained Shareholders' Stock Stock Capital Income (Loss) Earnings Equity BALANCE DECEMBER 31, 2021 $ 250 $ 27 $ 15,962 $ 56 $ 9,816 $ 26,111 Net Income - - - - 2,010 2,010 Foreign Currency Translation Adjustment - - - ( 426 ) - ( 426 ) Stock Option Exercises - - 51 - - 51 Compensation on Stock-Based Awards - - 334 - - 334 BALANCE DECEMBER 31, 2022 250 27 16,347 ( 370 ) 11,826 28,080 Net Income - - - - 6,874 6,874 Foreign Currency Translation Adjustment - - - ( 162 ) - ( 162 ) Stock Option Exercises - - 159 - - 159 Compensation on Stock-Based Awards - - 423 - - 423 Cumulative Adjustment Related to the Adoption of ASC 326 (CECL) - - - - ( 30 ) ( 30 ) BALANCE DECEMBER 31, 2023 $ 250 $ 27 $ 16,929 $ ( 532 ) $ 18,670 $ 35,344 See accompanying notes to consolidated financial statements. 39 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (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 (“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. As of December 31, 2023, we had outstanding letters of credit for $ 200 . Restricted cash as of December 31, 2023 and December 31, 2022 was $ 715 and $ 1,454 , respectively. The December 31, 2023 and 2022 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. 40 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 $ 358 and $ 334 as of December 31, 2023 and 2022, 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: 2023 2022 Raw Materials $ 20,863 $ 21,673 Work in Process 1,033 1,238 Finished Goods 934 671 Reserves ( 1,170 ) ( 1,144 ) Total $ 21,660 $ 22,438 41 Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows: (in years) Building 39 Leasehold Improvements 3 - 15 Manufacturing Equipment 3 - 7 Office and Other Equipment 3 - 7 Property and equipment as of December 31, 2023 and 2022: 2023 2022 Land $ 148 $ 148 Building and Leasehold Improvements 6,041 5,289 Manufacturing Equipment 19,877 19,128 Office and Other Equipment 7,385 6,822 Accumulated Depreciation and Amortization ( 26,938 ) ( 24,979 ) Total Property and Equipment, Net $ 6,513 $ 6,408 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, 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. No impairment of long-lived assets was recorded during the year ended December 31, 2022. 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 accrued but unpaid. No preferred stock dividends were declared or paid during the years ended December 31, 2023 and 2022. Revenue Recognition Our net sales are comprised of product, engineering services and repair services. All net sales 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 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. 42 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 79 % and 72 % of our net sales for the years ended December 31, 2023 and 2022, 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 Sheet, consist of unbilled amounts related to net sales recognized over time. Changes in the contract assets balance during the years ended December 31, 2023 and 2022 was as follows: Balance Outstanding as of December 31, 2021 $ 8,698 Increase (Decrease) Attributed to: Amounts Transferred Over Time to Contract Assets 96,924 Amounts Invoiced During the Period ( 95,640 ) Balance Outstanding as of December 31, 2022 $ 9,982 Increase (Decrease) Attributed to: Amounts Transferred Over Time to Contract Assets 110,195 Amounts Invoiced During the Period ( 105,696 ) Balance Outstanding as of December 31, 2023 $ 14,481 We expect substantially all the remaining performance obligations for the contract assets recorded as of December 31, 2023, 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. 43 The following tables summarize our net sales by market for the years ended December 31, 2023 and 2022: Year Ending December 31, 2023 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 60,506 $ 15,799 $ 2,361 $ 78,666 Aerospace and Defense 18,305 1,847 401 20,553 Industrial 31,384 7,403 1,326 40,113 Total Net Sales $ 110,195 $ 25,049 $ 4,088 $ 139,332 Year Ending December 31, 2022 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 51,473 $ 22,288 $ 2,146 $ 75,907 Aerospace and Defense 16,745 1,859 875 19,479 Industrial 28,706 8,541 1,490 38,737 Total Net Sales $ 96,924 $ 32,688 $ 4,511 $ 134,123 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. The total amount charged to expense was $ 84 and $ 63 for the years ended December 31, 2023 and 2022, 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. 44 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 for additional information. Net Income Per Common Share Basic net income per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net income per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding using the treasury stock method, unless their effect is antidilutive. For the year ended December 31, 2023, treasury stock equivalent stock options of 163,744 were included in the computation of diluted net income per common share as their impact were dilutive. For the year ended December 31, 2022, treasury stock equivalent stock options of 205,907 were included in the computation of diluted net income per common share as their impact were dilutive. 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 4, Other Intangible Assets, for more detail. Enterprise-Wide Disclosures Our results of operations for the years ended December 31, 2023 and 2022 represent a single operating and reporting segment referred to as Contract Manufacturing within the EMS industry. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources. 45 Export net from our U.S. domestic operations represent approximately 4.1 % and 4.0 % of consolidated net sales for the years ended December 31, 2023 and 2022, respectively. Net sales by our major EMS industry markets for the years ended December 31, 2023 and 2022 are as follows: 2023 2022 Medical $ 78,666 $ 75,907 Aerospace and Defense 20,553 19,479 Industrial 40,113 38,737 Total Net Sales $ 139,332 $ 134,123 Noncurrent assets by country are as follows: United States Mexico China Total December 31, 2023 Property and Equipment, Net $ 4,905 $ 747 $ 861 $ 6,513 Operating Lease Assets $ 4,794 2,123 - $ 6,917 Deferred Tax Assets $ 2,641 - - $ 2,641 Other Assets $ 263 - - $ 263 December 31, 2022 Property and Equipment, Net $ 5,109 $ 494 $ 805 $ 6,408 Operating Lease Assets $ 5,381 2,469 - $ 7,850 Other Assets $ 422 - - $ 422 Foreign Currency Transactions The functional currency for our Mexico subsidiary is the US dollar. Foreign exchange transaction gains and losses attributable to exchange rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income (expense). The functional currency for our China subsidiary is the Renminbi (“RMB”). Assets and liabilities of the China operation 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 $ 162 and $ 426 for the years ended December 31, 2023 and 2022, 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. Net foreign currency transaction losses included in the determination of net income was $ 54 and $ 42 for the years ended December 31, 2023 and 2022, 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. 46 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 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. We have not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023. At adoption, we 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. Recently Issued New Accounting Standards 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. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures. 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. 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. Two customers, individually, accounted for at 25.7 % and 10.3 %, respectively, of net sales for the year ended December 31, 2023, and one customer accounted for 26.9 % of net sales for the year ended December 31, 2022. Two customers, individually, accounted 22.1 % and 12.7 %, respectively, of accounts receivable as of December 31, 2023 and 21.3 % and 13.8 % of accounts receivable as of December 31, 2022. 47 NOTE 3. OTHER INTANGIBLE ASSETS Finite life intangible assets as of December 31, 2023 and 2022 are as follows: Customer Relationships Patents Total Balance as of January 1, 2022 $ 360 $ 141 $ 501 Additions - 71 71 Amortization 144 6 150 Balance as of December 31, 2022 $ 216 $ 206 $ 422 Additions - - - Amortization 144 15 159 Balance as of December 31, 2023 $ 72 $ 191 $ 263 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 3.2 years. Of the patents value as of December 31, 2023, $ 80 are being amortized and $ 111 are in process and a patent has not yet been issued. Amortization expense of finite life intangible assets was $ 159 and $ 150 for the years ended December 31, 2023 and 2022, respectively. Estimated future annual amortization expense (except projects in process) related to these assets is approximately as follows: Year Amount 2024 $ 87 2025 14 2026 14 2027 14 Thereafter 23 Total $ 152 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 % and 5.2 % as of December 31, 2023 and 2022, respectively. We had borrowings on our line of credit of $ 5,815 and $ 6,853 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 $ 9,400 and $ 8,400 , 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. The line of credit is shown net of debt issuance costs of $ 31 on the consolidated balance sheet for the year ended December 31, 2023. Subsequent to December 31, 2023, we replaced our asset back line of credit agreement with a $ 15,000 Senior Secured Revolving Line of Credit with Bank of America. See Note 12. 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 1,400 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 12/31/23 was approximately 4 %. 48 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, 2023, 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: December 31, December 31, Lease Cost 2023 2022 Operating Lease Cost $ 2,290 $ 2,309 Finance Lease Interest Cost 39 63 Finance Lease Amortization Expense 727 730 Total Lease Cost $ 3,056 $ 3,102 49 Supplemental balance sheet information related to leases was as follows: Balance Sheet Location December 31, 2023 December 31, 2022 Assets Operating Lease Assets Operating Lease Assets $ 6,917 $ 7,850 Finance Lease Assets Property, Plant and Equipment 636 1,363 Total Leased Assets $ 7,553 $ 9,213 Liabilities Current Current Operating Lease Liabilities Current Portion of Operating Lease Obligations $ 1,033 $ 1,155 Current Finance Lease Liabilities Current Portion of Finance Lease Obligations 356 390 Noncurrent Long-Term Operating Lease Liabilities Long Term Operating Lease Liabilities, Net 6,763 7,549 Long Term Finance Lease Liabilities Long Term Finance Lease Obligations, Net 209 565 Total Lease Liabilities $ 8,361 $ 9,659 Supplemental cash flow information related to leases was as follows as of December 31, 2023: December 31, December 31, 2023 2022 Operating Leases Cash Paid for Amounts Included in the Measurement of Lease Liabilities $ 1,792 $ 1,721 Operating Lease Assets Obtained in Exchange for Lease Obligations $ 261 $ 44 The operating lease assets obtained in exchange in for lease obligations in the years ended December 31, 2023 and 2022 was largely due to leasing of additional space in our Suzhou, China facility. Maturities of lease liabilities were as follows: Operating Leases Finance Leases Total 2024 $ 1,611 $ 378 $ 1,989 2025 1,361 108 1,469 2026 1,307 109 1,416 2027 1,256 - 1,256 2028 1,279 - 1,279 Thereafter 4,539 - 4,539 Total Lease Payments $ 11,353 $ 595 $ 11,948 Less: Interest ( 3,557 ) ( 30 ) ( 3,587 ) Present Value of Lease Liabilities $ 7,796 $ 565 $ 8,361 50 The lease term and discount rate as of December 31, 2023 were as follows: Weighted-average remaining lease term (years) Operating leases 8.5 % Finance leases 1.8 % Weighted-average discount rate Operating leases 7.9 % Finance leases 5.3 % NOTE 6. INCOME TAXES The income tax expense for the years ended December 31, 2023 and 2022 consists of the following: 2023 2022 Current Federal $ 388 $ 855 State 75 55 Foreign 491 557 Deferred Federal ( 2,360 ) - State ( 241 ) - Foreign 239 - Income Tax Expense $ ( 1,408 ) $ 1,467 51 The statutory rate reconciliation for the years ended December 31, 2023 and 2022 is as follows: 2023 2022 Statutory Rate $ 1,148 $ 572 State Income Tax 79 41 Effect of Foreign Operations ( 124 ) ( 82 ) Research and Development ( 316 ) - Change in State Deferred Rate - 29 Valuation Allowance ( 2,563 ) 587 Maquiladora Tax 158 153 US Permanent Differences ( 44 ) ( 28 ) Federal Tax Credits - ( 272 ) Global Intangible Low-Taxed Income Effect 7 301 Withholding Tax 318 122 IRS Payable - 17 Other ( 71 ) 27 $ ( 1,408 ) $ 1,467 Income and loss from operations before income taxes was derived from the following sources: 2023 2022 Domestic $ 3,307 $ 990 Foreign 2,159 2,487 $ 5,466 $ 3,477 52 Deferred tax (liabilities) assets as of December 31, 2023 and 2022, consist of the following: 2023 2022 Deferred Tax Inventory $ 423 $ 391 Accrued Bonus 440 462 Stock-Based Compensation and Equity Appreciation Rights 206 159 Other Accruals 415 675 Lease Accounting Lease Liability 1,229 1,351 Capitalized Research Expenses 1,007 318 Tax Credit Carryforwards 94 156 Intangibles 477 515 Other 139 208 Total 4,430 4,235 Valuation Allowance - ( 2,563 ) Deferred Tax Assets 4,430 1,672 Lease Accounting Lease Asset ( 1,168 ) ( 1,301 ) Withholding Tax ( 239 ) - Prepaid Expenses ( 213 ) ( 143 ) Property and Equipment ( 276 ) ( 161 ) Other ( 133 ) ( 67 ) Deferred Tax Liabilities ( 2,029 ) ( 1,672 ) Net Deferred Tax Assets $ 2,401 $ - We recorded a valuation allowance of $ 2,563 against our net deferred tax assets as of December 31, 2022. 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, 2023, we released $ 2,563 of the valuation allowance on our domestic deferred income tax assets as it more likely than not we will realize them, based on our ability to demonstrate an estimate of objectively verifiable future income. This estimate of future income, along with our assessments of the other positive and negative evidence considered, supports the release of the valuation allowance. Our consolidated balance sheet as of December 31, 2023 has a deferred tax asset of $ 2,641 related to our US taxable operations and a $ 240 deferred tax liability included other long-term liabilities related to our Chinese taxes, for a net deferred tax asset of $ 2,401 . As of December 31, 2023, for U.S. state purposes, we have a Minnesota R&D credit carry forward of $ 120 , which will begin to expire in 2027. 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. Prior to 2022, we expensed these costs as incurred for tax purposes. The capitalization of the research and experimental expenditures resulted in a deferred tax asset of $ 318 , which was fully offset by a valuation allowance, resulting in no significant impact to income tax expense as of December 31, 2022. As of December 31, 2023 the deferred tax asset associated with capitalized research and experimental expenditures was $ 1,007 . 53 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, 2023 and 2022: Balance as of December 31, 2022 $ 50 Tax Positions - Additions 81 Tax Positions - Reductions - Balance as of December 31, 2023 $ 131 Our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. The liability for accrued interest as of December 31, 2023 and 2022 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 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 2019. 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 37.5 % of the employees’ contributions up to 6 % of covered compensation. We made contributions, net of forfeitures, of approximately $ 465 and $ 301 during the years ended December 31, 2023 and 2022, 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 and 100,000 shares were authorized by the shareholders in March 2020,May 2022 and May 2023, respectively. There were 116,500 options and restricted stock units and 115,000 options and restricted stock units granted during the years ended December 31, 2023 and 2022, 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 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. 54 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: 2023 2022 Stock option fair value assumptions: Risk-free interest rate 3.45 - 4.34 % 2.00 - 4.24 % Expected life (years) 6.5 6.5 Dividend yield 0 % 0 % Expected volatility 60 % 60 % Weighted average grant date fair value of stock options granted $ 5.73 $ 6.67 We granted 94,000 service-based options during the twelve months ended December 31, 2023. There were 73,000 service-based options granted during the year ended December 31, 2022. We granted 21,000 market condition options to our Chief Executive Officer during the year ended December 31, 2022. The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028. The vesting schedule for the market condition options is as follows: 1. 5,000 Shares to vest if the closing price of the Company’s common stock exceeds $20 per share on average over 20 consecutive trading days after February 27, 2024; 2. 5,000 Shares to vest if the closing price of the Company’s common stock exceeds $24 per share on average over 20 consecutive trading days after February 27, 2025; 3. 5,000 Shares to vest if the closing price of the Company’s common stock exceeds $28.80 per share on average over 20 consecutive trading days after February 27, 2026; 4. 3,000 Shares to vest if the closing price of the Company’s common stock exceeds $34.56 per share on average over 20 consecutive trading days after February 27, 2027; and 5. 3,000 Shares to vest if the closing price of the Company’s common stock exceeds $41.47 per share on average over 20 consecutive trading days after February 27, 2028. Total compensation expense related to stock options was $ 256 for the year ended December 31, 2023. Total compensation expense related to stock options was $ 237 for the year ended December 31, 2022. As of December 31, 2023, there was $ 873 of unrecognized compensation which will vest and expense over the next 3.96 years. 55 A summary of option activity as of and for the years ended December 31, 2023 and 2022 as follows: Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding – January 1, 2022 387,500 $ 4.57 Granted 94,000 11.18 Exercised ( 19,800 ) 3.40 Forfeited ( 9,000 ) 4.19 Outstanding – December 31, 2022 452,700 $ 5.97 6.87 $ 2,855 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 Exercisable on December 31, 2023 245,200 $ 4.51 4.94 $ 1,235 Restricted Stock Units During the years ended December 31, 2023 and 2022, we granted 22,500 and 21,000 restricted stock units (“RSUs”), respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. Total compensation expense related to the RSUs were $ 167 and $ 97 for the years ended December 31, 2023 and 2022, respectively. Total unrecognized compensation expense related to the RSUs was $ 206 , which will vest over the next 1.11 years. The RSUs granted in the years ended December 31, 2023 and 2022 had an average grant price of $ 9.11 and $ 12.00 per share, respectively. As of December 31, 2023, we had 27,000 RSUs outstanding with a weighted average remaining contractual term of 9.12 years. During the twelve months ended December 31, 2023 and 2022, 10,500 and 0 RSUs vested, respectively. NOTE 9. 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 involuntarily 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. 56 NOTE 10. 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 providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. We qualified for ERC on qualified wages paid in the first and second quarters of 2021. During the year ended December 31, 2022, the Company received the ERC related to the first quarter of 2021 of $ 2,559 . During the year ended December 31, 2023, the Company received the ERC related to the second quarter of 2021 of $ 2,650 . The CARES Act allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As of December 31, 2022, there was $ 1,158 of social security tax payments deferred. We remitted this amount due during the year ended December 31, 2023 upon receipt of the remining credits under the ERC that exceeded the deferral amount as allowed under IRS Notices 2020-22 and 2021-2024. As of December 31, 2023, we recorded a receivable due from the IRS for $ 785 of the above $1,158 payment as it is being refunded to us; we have recorded an offsetting liability due to the IRS under the tax ID of our former professional employer organization (“PEO”). NOTE 11. RELATED PARTY TRANSACTIONS David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Abilitech paid the Company $ 0 and $ 247 in the years ended December 31, 2023 and 2022, respectively, for delivery of medical products. As of December 31, 2023, we have fully reserved our accounts receivable and inventory, aggregating $ 226 , related to Abilitech. Abilitech has ceased operations and therefore we do not believe that Abilitech will fully pay the Company for outstanding accounts receivable or for inventory and we have recorded a full reserve against the gross amounts. In January 2024, we received a payment of $ 28 from Abilitech for partial payment of previously fully reserved accounts receivable balances. The Company believes that transactions with Abilitech are 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 will meet 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 twelve months ended December 31, 2023 and 2022, we recognized net sales to Marpe Technologies of $ 163 and $ 440 , respectively. As of December 31, 2023, we have recorded an unbilled receivable of $ 39 related to expected reimbursement from the BIRD Foundation and have outstanding accounts receivable of $ 20 . In March 2024, we received a payment of $ 50 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. 57 NOTE 12. SUBSEQUENT EVENTS Credit Facility On February 29, 2024, the replaced its asset back line of credit agreement with $ 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. 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. Lease Renewal In January 2024, we extended the lease in our China facility that expired on January 20, 2024. The new lease now expires on January 20, 2027. 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.