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Item 1. Financial Statements

2024-08-08 compared with 2024-05-14 · 332 added, 320 removed, 166 unchanged (80% of the section changed)

FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT SHARE DATA)

SYSTEMS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

THOUSANDS, EXCEPT SHARE DATA)

THREE MONTHS ENDED

SIX MONTHS ENDED

Cost of goods sold

Operating expenses:

Selling expenses

General and administrative expenses

Research and development expenses

General and administrative

Research and development

Restructuring charges

Total operating expenses

2 unchanged sentences

Interest expense

Total other expense

Income before income taxes

Income tax expense

Income per common share:

Weighted average number of common shares outstanding - basic

Weighted average number of common shares outstanding - dilutive

Other comprehensive income

Foreign currency translation (loss) gain

Comprehensive income, net of tax

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2024 AND DECMEBER 31, 2023

(IN THOUSANDS, EXCEPT SHARE DATA)

Net income per common share:

Basic (in dollars per share)

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

Diluted (in dollars per share)

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

Other comprehensive income (loss)

Foreign currency translation

Comprehensive income (loss), net of tax

Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

SYSTEMS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

OF JUNE 30, 2024 AND DECMEBER 31, 2023

THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31, 2023 (1)

20 unchanged sentences

Long-term liabilities:

Long-term line of credit

Long-term line of credit, net of issuance costs

Long-term finance lease obligations, net of current portion

15 unchanged sentences

Total liabilities and shareholders’ equity

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

(1) The balance sheet as of December 31, 2023 has been derived from the consolidated audited financial statements at that date.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

THREE MONTHS ENDED

(1) The balance sheet

as of December 31, 2023 has been derived from the consolidated audited financial statements at that date.

Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

SYSTEMS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED

CASH FLOWS FROM OPERATING ACTIVITIES

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

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

Depreciation and amortization

4 unchanged sentences

Accounts receivable

Employee Retention Credit Receivable

Contract assets

4 unchanged sentences

Other accrued liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

6 unchanged sentences

Principal payments on financing leases

Stock option exercises

Net cash provided by (used in) financing activities

Proceeds from stock option exercises

Net cash provided by financing activities

Effect of exchange rate changes on cash

5 unchanged sentences

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

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

THREE MONTHS ENDED

SYSTEMS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED

Supplemental disclosure of cash flow information:

3 unchanged sentences

Property and equipment purchases in accounts payable

Operating lease assets acquired under operating lease

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

Operating lease assets acquired under operating leases

Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN THOUSANDS)

Preferred Stock

1 unchanged sentence

Shareholders’

Balance as of December 31, 2022

Balance as of March 31, 2023

Foreign currency translation adjustment

1 unchanged sentence

Compensation on stock-based awards

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

Balance as of June 30, 2023

Balance as of March 31, 2024

Foreign currency translation adjustment

Issuance for stock-based awards

Compensation on stock-based awards

Balance as of June 30, 2024

Balance as of December 31, 2022

2 unchanged sentences

Issuance for stock-based awards

Balance as of March 31, 2024

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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

Balance as of June 30, 2023

Balance as of December 31, 2023

Foreign currency translation adjustment

Compensation on stock-based awards

Issuance for stock-based awards

Balance as of June 30, 2024

Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.

Accordingly, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements.

These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2023, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries.

All significant intercompany accounts and transactions have been eliminated.

of Presentation and Principles of Consolidation

accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally

Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to

the rules and regulations of the Securities and Exchange Commission.

Accordingly, the Company has omitted footnote disclosures that would

substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements.

These unaudited condensed

consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December

31, 2023, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.

condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries.

significant intercompany accounts and transactions have been eliminated.

All dollar amounts are stated in thousands of U.S.

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 expenses during each reporting period.

Significant items subject to estimates and assumptions include the valuation allowance for inventories, accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery.

Actual results could differ from those estimates.

Recently Issued New Accounting Standards

In November 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting Topic (280):

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 expenses

during each reporting period.

Significant items subject to estimates and assumptions include the valuation allowance for inventories,

accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery.

Actual results could differ from

those estimates.

Issued New Accounting Standards

November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting

Standards Update (“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.

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):

The Company is currently evaluating the impact

of this ASU on its Consolidated Financial Statements and related disclosures.

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.

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.

Out‐of‐Period Correction

During the first quarter of 2024, we identified an error that understated our accrued liabilities by approximately $ 178 as of December 31, 2023.

We corrected the error on a prospective basis during the first quarter of 2024 through an out of period adjustment lowering our net income by $ 178 .

We assessed the materiality of the error and concluded that the error was not material to the results of operations or financial condition or for the prior annual and interim periods, and the correction is not expected to be material to the full year results for fiscal year 2024.

Inventories are as follows:

The Company is currently evaluating the impact of this ASU on its Consolidated Financial

Statements and related disclosures.

Out-of-Period

the first quarter of 2024, we identified an error that understated our accrued liabilities by approximately $ 178 as of December 31, 2023.

We corrected the error on a prospective basis during the first quarter of 2024 through an out of period adjustment lowering our net income

by $ 178 in both the three and six months ended June 30, 2024.

We assessed the materiality of the error and concluded that the error was

not material to the results of operations or financial condition or for the prior annual and interim periods, and the correction is not

expected to be material to the full year results for fiscal year 2024.

are as follows:

OF INVENTORIES

Raw materials

1 unchanged sentence

Finished goods

Total inventories

Other Intangible Assets

Other intangible assets as of March 31, 2024 and December 31, 2023 are as follows:

Inventories, net

Intangible Assets

intangible assets as of June 30, 2024 and December 31, 2023 are as follows:

OF OTHER INTANGIBLE ASSETS

Relationships

1 unchanged sentence

Balances as of December 31, 2023

Balances as of March 31, 2024

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 2.4 years.

Of the patents value as of March 31, 2024, $ 77 are being amortized and $ 110 are in process and a patent has not yet been issued.

Amortization expense of finite life intangible assets for both the three months ended March 31, 2024 and 2023 was $ 40 .

As of March 31, 2024, estimated future annual amortization expense (except projects in process) related to these assets is as follows:

Balances as of June 30, 2024

assets are amortized on a straight-line basis over their estimated useful lives.

The weighted average remaining amortization period of

our intangible assets is 5.5 years.

Of the patents value as of June 30, 2024, $ 98 are being amortized and $ 85 are in process and a patent

has not yet been issued.

expense of finite life intangible assets for both the three months ended June 30, 2024 and 2023 was $ 40 .

Amortization expense of finite

life intangible assets for both the six months ended June 30, 2024 and 2023 was $ 80 .

of June 30, 2024, estimated future annual amortization expense (except projects in process) related to these assets is as follows:

OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract assets.

With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China.

instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract

With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in

the United States and one in China.

The account in the United States may at times exceed federally insured limits.

The Company’s $ 4,028 cash balance as of March 31, 2024, included approximately $ 930 and $ 7 was held at banks located in China and Mexico, respectively.

The Company’s

$ 1,542 cash balance as of June 30, 2024 included approximately $ 1,141 and $ 32 that was held at banks located in China and Mexico, respectively.

We grant credit to customers in the normal course of business and generally do not require collateral on our accounts receivable.

We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of gross accounts receivable.

Two customers accounted for 35 % of net sales for the three months ended March 31, 2024.

One customer accounted for 29 % of net sales for the three months ended March 31, 2023.

As of March 31, 2024, two customers represented approximately 37 % of our gross accounts receivable.

As of December 31, 2023, two customers represented approximately 35 % of our gross accounts receivable.

Contract assets for three customers accounted for 41 % of gross contract assets as of March 31, 2024.

Contract assets for two customers accounted for 34 % of gross contract assets as of December 31, 2023.

Export sales from the U.S.

represented approximately 3 % and 4 % of net sales for the three months ended March 31, 2024 and 2023, respectively.

Revenue Recognition

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 74 % of net sales for both the three months ended March 31, 2024 and 2023.

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time.

Significant changes in the contract assets balance during the three months ended March 31, 2024 were as follows:

Balances as of January 1, 2024

Increase (decrease) attributed to:

Amounts transferred over time to contract assets

Amounts invoiced during the period

Balance outstanding as of March 31, 2024

We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2024, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days.

We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the three months ended March 31, 2024 and 2023, respectively:

Three Months Ended March 31, 2024

Transferred at

Point in Time

Consideration 1

have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually

represented 10% or more of gross accounts receivable.

One customer accounted for 26 % and 25 % of net sales for the three and six months

ended June 30, 2024, respectively.

Two customers accounted for 39 % of net sales for both the three and six months ended June 30, 2023.

of June 30, 2024, three customers represented approximately 39 % of our gross accounts receivable.

As of December 31, 2023, two customers

represented approximately 35 % of our gross accounts receivable.

assets for three customers accounted for 43 % of gross contract assets as of June 30, 2024.

Contract assets for two customers accounted

for 34 % of gross contract assets as of December 31, 2023.

sales from the U.S.

represented approximately 3 % and 2 % of net sales for the three and six months ended June 30, 2024, respectively.

Export sales represented approximately 3 % of net sales for both three and six month ended June 30, 2023.

under contract manufacturing agreements that was recognized over time accounted for approximately 74 % of net sales for both the three and six months ended June 30, 2024 and approximately 73 % and 74 % of net sales for the three and six months ended June 30,

2023, respectively.

following tables summarize our net sales by market for the three months ended June 30, 2024 and 2023, respectively:

OF NET SALES BY MARKET

Three Months Ended June 30, 2024

Product/ Service Transferred

Product Transferred at Point in Time

Noncash Consideration 1

Total Net Sales by Market

Aerospace and defense

Total net sales

Three Months Ended March 31, 2023

Transferred at

Point in Time

Consideration 1

Three Months Ended June 30, 2023

Product/ Service Transferred

Product Transferred at Point in Time

Noncash Consideration 1

Total Net Sales by Market

Aerospace and defense

Total net sales

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

Noncash consideration

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

following tables summarize our net sales by market for the six months ended June 30, 2024 and 2023, respectively:

Six Months Ended June 30, 2024

Product/ Service Transferred

Product Transferred at Point in Time

Noncash Consideration 1

Total Net Sales by Market

Aerospace and defense

Total net sales

Six Months Ended June 30, 2023

Product/ Service Transferred

Product Transferred at Point in Time

Noncash Consideration 1

Total Net Sales by Market

Aerospace and defense

Total net sales

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

assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over

Significant changes in the contract assets balance during the six months ended June 30, 2024 were as follows:

OF CONTRACT ASSETS

Balances as of January 1, 2024

Increase (decrease) attributed to:

Amounts transferred over time to contract assets

Allowance for current expected credit losses

Amounts invoiced during the period

Balance outstanding as of June 30, 2024

expect substantially all of the remaining performance obligations for the contract assets recorded as of June 30, 2024 to be transferred

to receivables within 90 days, with any remaining amounts to be transferred within 180 days.

We bill our customers upon shipment with

payment terms of up to 120 days.

FINANCING ARRANGEMENTS

We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of $ 16,000 that was to expire on June 15, 2026.

On February 29, 2024, we replaced the asset backed line of credit agreement with a $ 15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”).

The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR”, plus a defined margin.

If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of

$ 16,000 that was to expire on June 15, 2026.

February 29, 2024, we replaced the asset backed line of credit agreement with a $ 15,000 Senior Secured Revolving Line of Credit with

Bank of America (the “Revolver”).

The Revolver allows for borrowings at a defined base rate, or at the one, three or six

month Secured Overnight Finance Rate, also known as “SOFR”, plus a defined margin.

If the Company prepays SOFR borrowings

before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement.

The Company met the covenants for the period ended March 31, 2024.

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.

The Company met the covenants for the period ended June 30,

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 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.

Amounts borrowed on the Revolver are subject to variations in the SOFR index rate.

Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears interest at a weighted-average interest rate of 9.4 % and 8.3 % as of March 31, 2024 and December 31, 2023, respectively.

We had borrowings on our line of credit of $ 6,220 and $ 5,846 outstanding as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024 we had unused availability on the line of credit of $ 8,780 .

The line of credit is shown net of debt issuance costs of $ 50 and $ 31 on the condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.

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.

compliance with all the financial covenants related to this agreement as of and for the period ended June 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in excess of the amounts allowed under the

We have received a waiver of this event of default from the bank.

the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index

Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset

borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears

interest at a weighted-average interest rate of 8.0 % and 8.3 % as of June 30, 2024 and December 31, 2023, respectively.

We had borrowings

on our line of credit of $ 8,360 and $ 5,846 outstanding as of June 30, 2024 and December 31, 2023, respectively.

As of June 30, 2024 we

had unused availability on the line of credit of $ 6,440 .

line of credit is shown net of debt issuance costs of $ 46 and $ 31 on the condensed consolidated balance sheet as of June 30, 2024 and

December 31, 2023, respectively.

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 March 31, 2024, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

As of June 30, 2024, we do not have material lease commitments that have not commenced.

We extended our operating leases for part of

our manufacturing facility in China and our corporate office in Maple Grove, MN during the first six months of 2024 which extended the

lease through August of 2033 with monthly lease payments of $ 14 to $ 18 .

components of lease expense were as follows:

SCHEDULE OF COMPONENTS OF LEASE EXPENSE

Three Months Ended June 30,

Operating lease cost

2 unchanged sentences

Total lease cost

Supplemental condensed consolidated balance sheet information related to leases was as follows:

Six Months Ended June 30,

Operating lease cost

Finance lease interest cost

Finance lease amortization expense

Total lease cost

condensed consolidated balance sheet information related to leases was as follows:

OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION RELATED TO LEASES

Balance Sheet Location

December 31, 2023

Finance lease assets

12 unchanged sentences

Total lease liabilities

Supplemental condensed consolidated statement of cash flows information related to leases was as follows:

condensed consolidated statement of cash flows information for the six months ended June 30, 2024 related to leases was as follows:

OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION

Operating Leases

1 unchanged sentence

Property acquired under operating lease

Future payments of lease liabilities as of March 31, 2024 were as follows:

payments of lease liabilities as of June 30, 2024 were as follows:

OF FUTURE PAYMENTS OF LEASE LIABILITIES

Total lease payments

1 unchanged sentence

Present value of lease liabilities

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

lease term and discount rate as of June 30, 2024 were as follows:

OF LEASE TERM AND DISCOUNT RATE

Weighted-average remaining lease term (years)

5 unchanged sentences

STOCK BASED AWARDS

Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations within General and Administration expenses of $ 80 and $ 99 for the three months ended March 31, 2024 and 2023, respectively.

Stock Options

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 in March 2020, May 2022, and May 2023, respectively.

There were no stock options granted during both the three months ended March 31, 2024 and 2023.

Total compensation expense related to stock options was $ 56 and $ 68 for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, there was $ 776 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 3.3 years.

Following is the status of option activity for the three months ended and as of March 31, 2024:

compensation expense was reported as follows in the condensed consolidated statements of income within general and administrative expenses

of $ 126 and $ 93 for the three months ended June 30, 2024 and 2023, respectively and $ 206 and $ 192 for the six months ended June 30, 2024

and 2023, respectively.

May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares.

An additional 50,000 ,

175,000 100,000 and 100,000 shares were authorized in March 2020, May 2022, May 2023 and May 2024, respectively.

granted 22,000 service-based stock options during the three and six months ended June 30, 2024.

The weighted-average grant-date fair

value of options granted during the six months ended June 30, 2024 was $ 8.22 .

We granted 29,000 service-based stock options during the

three and six months ended June 30, 2023.

Weighted average stock option fair value assumptions and the weighted average grant date fair

value of stock options granted were as follows:

OF WEIGHTED AVERAGE GRANT DATE FAIR VALUE OF STOCK OPTIONS GRANTED

Stock option fair value assumptions:

Risk-free interest rate

Expected life (years)

Dividend yield

Expected volatility

Weighted average grant date fair value of stock options granted

compensation expense related to stock options was $ 65 and $ 121 for the three and six months ended June 30, 2024, respectively.

compensation expense related to stock options was $ 55 and $ 123 for the three and six months ended June 30, 2023, respectively.

June 30, 2024, there was $ 844 of unrecognized compensation related to stock options which will be recognized over a weighted average

period of 3.8 years.

is the status of option activity for the six months ended and as of June 30, 2024:

OF OPTION ACTIVITY

Exercise Price

1 unchanged sentence

Outstanding – December 31, 2023

Outstanding – March 31, 2024

Exercisable on March 31, 2024

Restricted Stock Units

During the periods ended March 31, 2024 and 2023, we granted 0 restricted stock units (“RSUs”).

Total compensation expense related to the RSUs was $ 24 and $ 31 for the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, total unrecognized compensation expense related to the RSUs was $ 109 , which will vest over a weighted average period of 1.0 years.

Following is the status of restricted stock activity for the three months ended and as of March 31, 2024:

Outstanding – June 30, 2024

Exercisable on June 30, 2024

the three and six month periods ended June 30, 2024 and 2023, we granted 15,141 and 18,000 restricted stock units (“RSUs”),

respectively, at an average grant price per share of $ 11.06 and $ 9.37 , respectively, under our 2017 Stock Incentive Plan to non-employee

directors which vest over two years .

Total compensation expense related to the RSUs was $ 61 and $ 85 for the three and six months ended

June 30, 2024 and 2023, respectively.

Total compensation expense related to the RSUs was $ 38 and $ 69 for the three and six months ended

June 30, 2023, respectively.

As of June 30, 2024, total unrecognized compensation expense related to the RSUs was $ 220 , which will vest

over a weighted average period of 0.9 years.

is the status of restricted stock activity for the six months ended and as of June 30, 2024:

OF RESTRICTED STOCK ACTIVITY

Intrinsic Value

Outstanding – December 31, 2023

Outstanding – March 31, 2024

Outstanding – June 30, 2024

NET INCOME PER SHARE DATA

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding using the treasury stock method during the period.

The Company’s potentially dilutive common shares are those that result from dilutive common stock options and non-vested stock relating to restricted stock units.

The calculation of diluted income per share excluded 38,405 and 28,637 in weighted average shares for the three months ended March 31, 2024 and 2023, respectively, as their effect was anti-dilutive.

net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the

Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding

using the treasury stock method during the period.

The Company’s potentially dilutive common shares are those that result from

dilutive common stock options and non-vested stock relating to restricted stock units.

calculation of diluted income per shared excluded 31,611 and 45,453 in weighted average shares for the three and six months ended June

30, 2024, respectively, and 60,728 and 47,182 in weighted average shares for the three and six months ended June 30, 2023, respectively,

as their effect was anti-dilutive.

Basic and diluted weighted average shares outstanding were as follows:

Three Months Ended March 31,

(In thousands)

OF BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING

Three Months Ended

Six Months Ended

Basic weighted average shares outstanding

1 unchanged sentence

Diluted weighted average shares outstanding

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.

As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events.

Our effective tax rate for the three months ended March 31, 2024 was 22.6 %.

Our effective tax rate for the three months ended March 31, 2023 was 27.8 %.

The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three-month period ended March 31, 2023 and inclusion of estimated research and development tax credits in the three months ended March 31, 2024, partially offset by increased taxes on foreign entities.

a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision

based on the anticipated rate.

As the year progresses, we refine our estimate based on the facts and circumstances, including discrete

effective tax rate for the three and six months ended June 30, 2024 was 12 % and 21 %, respectively.

Our effective tax rate for the three

and six months ended June 30, 2023 was 35 % and 31 %.

The decrease in the effective tax rate is attributable to the application of a valuation

allowance during the three and six month periods ended June 30, 2023 and inclusion of estimated research and development tax credits

in the three and six months ended June 30, 2024, partially offset by increased taxes on foreign entities.

RESTRUCTURING CHARGES

the first six months of 2024, we accrued restructuring charges of $ 91 related to the closure and consolidation of our Blue Earth, Minnesota

production facility, which is planned to be completed in the fourth quarter of 2024.

There were no restructuring charges or amounts accrued

in the six months ended June 30, 2023.

PAYROLL TAX DEFERRAL

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020.

During the year ended December 31, 2023, the Company remitted $ 1,158 to the Internal Revenue Service (“IRS”) related to the deferral of payroll taxes, of which $ 785 was recorded as a refund receivable as of December 31, 2023, with a corresponding liability due.

These amounts were settled during the three months ended March 31, 2024.

March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for

the deferral of the employer portion of social security taxes incurred through the end of calendar 2020.

During the year ended December

31, 2023, the Company remitted $ 1,158 to the Internal Revenue Service (“IRS”) related to the deferral of payroll taxes, of

which $ 785 was recorded as a refund receivable as of December 31, 2023, with a corresponding liability due.

These amounts were settled

during the first quarter of 2024.

RELATED PARTY TRANSACTIONS

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc.

Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc.

We have accounts receivable related to Abilitech of $ 85 .

Payments of $ 28 were received during the three months ended March 31, 2024.

Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable, and we have recorded a full allowance against the gross amount.

The Company believes that transactions with Abilitech were on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

David Kunin, our Chairman, is a minority owner (less than 10 %) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners.

has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable, and we

have recorded a full allowance against the gross amount.

The Company believes that transactions with Abilitech were on terms comparable

to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.

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.

Kunin is also a member of the Board of Directors of Marpe Technologies.

The Company has an agreement 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 has met its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies.

The total value of the Company’s contribution will not exceed $500.

Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s services beyond its contribution.

The Company has an agreement 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

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 has met its obligation by providing certain

services at cost or with respect to administrative services at no cost to Marpe Technologies.

The total value of the Company’s

contribution will not exceed $ 500 .

Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s

services beyond its contribution.

The Company will receive a 10 -year exclusive right to manufacture the products of Marpe Technologies.

There can be no assurances that Marpe Technologies’ medical device operations will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recover the value of services provided to Marpe if not paid when the services are provided.

The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy.

During the three months ended March 31, 2024 and 2023, we recognized net sales to Marpe Technologies of $ 0 and $ 67 , respectively.

As of March 31, 2024 and December 31, 2023, we have recorded an unbilled receivable of $ 21 and $ 39 , respectively, related to expected reimbursement from the BIRD Foundation and have outstanding accounts receivable of $ 0 and $ 20 , respectively.

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.

Management ’ s Discussion and Analysis of Financial Conditions 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, complex higher-level assemblies and other box builds for a wide range of industries.

We serve three major markets within the EMS industry:

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

As of March 31, 2024, we have facilities in Minnesota:

Bemidji, Blue Earth, Mankato, Milaca and Maple Grove.

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

Results of Operations

Net sales for the three months ended March 31, 2024 and 2023 were $34,215 thousand and $34,888 thousand, respectively, a decrease of $673 thousand or 2%.

The following is a summary of net sales by our major industry markets:

Three Months Ended March 31,

(in thousands)

Increase (Decrease)

Aerospace and defense

Total net sales

Net sales to our medical customers were $20,282 thousand in the first quarter of 2024, a 5.1% decrease from $21,372 thousand in the prior-year quarter.

The decrease in net sales relates to demand fluctuations as customers work through inventory.

Net sales to our industrial customers were $8,073 thousand in the first quarter of 2024, a 14.8% decrease from $9,472 thousand in the prior-year quarter.

The decrease in net sales relates to demand fluctuations as customers work through inventory.

Net sales to our aerospace and defense customers were $5,860 thousand in the first quarter of 2024, a 44.9% increase from $4,044 thousand in the prior-year quarter.

The increase in net sales relates to increasing demand in the aerospace and defense market and improved access to component parts which allowed increased manufacturing production.

Our 90-day shipment backlog as of March 31, 2024 was $35,213 thousand, level with the beginning of the quarter and a 4.1% increase from March 31, 2023.

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

Our total order backlog as of March 31, 2024 was $86,001 thousand, a 6.2% decrease from $91,684 thousand at the beginning of the quarter and a 13.0% decrease from March 31, 2023.

As the supply chain continues to normalize, lead times are reducing and customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog.

Our 90-day order backlog by market has remained flat when compared to the prior quarter and increased relative to the same period of the prior year.

More recently we are also noting, similar to many other contract manufactures, reduced visibility to revenues in the next several quarters as compared with order patterns in the prior-year quarters as customers are balancing their inventories and therefore, deferring the placement of some orders.

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

(in thousands)

March 31, 2024

December 31, 2023

March 31, 2023

Aerospace and defense

Total backlog

The 90-day and total backlog as of March 31, 2024 contain the contract asset value of $14,194 thousand which has been recognized as net sales.

Operating Costs and Expenses.

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

Three Months Ended March 31,

(Dollars in thousands)

Increase/(Decrease)

Cost of goods sold

Gross margin percentage (1)

Selling expenses

% of Net sales

General and administrative expenses

% of Net sales

Research &development expense

Operating income

Gross margin percentage is defined as gross profit as a percentage of net sales.

Basis points change in gross margin percentage.

Gross profit and gross margins.

Gross profit as a percent of net sales was 15.9% for the three months ended March 31, 2024.

Gross profit as a percent of net sales was 15.7% for the three months ended March 31, 2023.

The 20-basis point increase in gross profit as a percentage of net sales for the three months ended March 31, 2024 compared to the same period of the prior year relates primarily to favorable product mix and was net of a $178 thousand, or 16 basis points, catch-up accrual for Mexican statutory benefits.

Selling expenses.

Selling expenses for the three months ended March 31, 2024 were $805 thousand or 2.3% of net sales.

Selling expenses for the three months ended March 31, 2023 were $890 thousand or 2.6% of net sales.

This decrease was driven by the lower revenue in the comparison periods.

General and administrative expenses.

General and administrative expenses for the three months ended March 31, 2024 were $3,170 thousand or 9.3% of net sales.

General and administrative expenses for the three months ended March 31, 2023 were $3,265 thousand or 9.5% of net sales.

Research and development expense.

Research and development expenses were $318 and $276, or 0.9% and 0.8% of net sales, in the three months ended March 31, 2024 and 2023, respectively.

Operating income.

Operating income for the three months ended March 31, 2024 was $1,155 thousand or 3.4% of net sales.

Operating income for the three months ended March 31, 2023 was $1,053 thousand or 3.0% of net sales.

Other expense

Interest expense.

Interest expense was $167 thousand for the three months ended March 31, 2024 and $110 thousand for the three months ended March 31, 2023.

This increase was driven by higher interest rates.

Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

Income taxes.

We reported income tax expense of $223 thousand and $262 thousand for the three months ended March 31, 2024 and 2023, respectively.

Our effective tax rate was 22.6% and 27.8% for the three months ended March 31, 2024 and 2023, respectively.

Cash Flow Operating Results

The following is a summary of cash flow results:

Three Months Ended March 31,

(in thousands)

Cash provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rates on changes in cash and cash equivalents

Net change in cash and cash equivalents

Operating Activities.

Cash provided by operating activities was $2,828 thousand in the first three months of 2024, compared with cash provided of $1,718 thousand in the same prior-year period.

Significant changes in operating assets and liabilities affecting cash flows during these periods included:

Cash provided by accounts receivable and contract assets was $3,502 thousand in the current-year quarter as compared with cash usage of $1,029 thousand in the same prior-year quarter.

The improved cash flow in the current year was due to an expected increase in cash collections due to higher sales and the timing of customer payments in the fourth quarter of 2023 as compared with the fourth quarter of 2022.

Cash used in inventory was $1,400 thousand in the current-year quarter as compared with cash provided of $1,075 thousand in the prior-year quarter.

The increase in the current-year period cash usage was the result of procurement requirements related to a higher 90-day shipment backlog versus the prior-year quarterly period and normal timing variances of inventory purchases.

Cash provided by changes in accounts payable and accruals was $632 thousand in the current-year period as compared with cash usage of $555 thousand, primarily related to the timing of cash payments.

Cash used in customer deposits was $926 thousand in the current-year quarter as compared with cash provided of $1,315 thousand in the prior-year period.

This was driven by decreased lead times in the supply chain.

Investing Activities.

Cash used in investing activities was $735 thousand in the first three months of 2024, compared with cash used of $496 thousand in the same prior-year period, both primarily for capital expenditures.

Financing Activities.

Cash provided by financing activities was $274 thousand in the first three months of 2024, compared with cash used of $1,073 thousand in the same prior-year period.

The improvement in cash provided by operating activities resulted from the timing of line of credit repayments.

Liquidity and Capital Resources

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

Credit Facility.

We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit arrangement of $16 million that was to expire on June 15, 2026.

On February 29, 2024, we replaced the asset backed line of credit agreement with a $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 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 Company met the covenants for the period ended March 31, 2024.

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

The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027.

Amounts borrowed on the Revolver are subject to variations in the SOFR index rate.

Our line of credit bears interest at a weighted-average interest rate of 9.4% and 8.3% as of March 31, 2024 and December 31, 2023, respectively.

We had borrowings on our line of credit of $6.2 million and $5.8 million outstanding as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024 we had unused availability on the line of credit of $8.8 million.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

Forward-Looking Statements

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

Supply chain disruption and unreliability;

Lack of supply of sufficient human resources to produce our products;

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;

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.

All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements.

We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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 three and six months

ended June 30, 2024 and 2023, we recognized net sales to Marpe Technologies of $ 0 and $ 67 , respectively.

As of June 30, 2024 and December

31, 2023, we have recorded an unbilled receivable of $ 21 and $ 39 , respectively, related to expected reimbursement from the BIRD Foundation

and have outstanding accounts receivable of $ 0 and $ 20 , respectively.

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.

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-Q

Item 1. Financial Statements