NORTECH SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) 2024 2023 2024 2023 THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2024 2023 2024 2023 Net sales $ 31,407 $ 33,369 $ 99,513 $ 103,278 Cost of goods sold 27,572 28,050 85,613 87,001 Gross profit 3,835 5,319 13,900 16,277 Operating expenses: Selling 891 923 2,605 2,766 General and administrative 2,951 2,958 9,103 9,328 Research and development 284 314 893 907 Restructuring charges 176 - 267 - Total operating expenses 4,302 4,195 12,868 13,001 (Loss) income from operations ( 467 ) 1,124 1,032 3,276 Other expense: Interest expense ( 216 ) ( 130 ) ( 548 ) ( 365 ) (Loss) income before income taxes ( 683 ) 994 484 2,911 Income tax expense (benefit) 56 ( 213 ) 301 389 Net (loss) income $ ( 739 ) $ 1,207 $ 183 $ 2,522 Net (loss) income per common share: Basic (in dollars per share) $ ( 0.27 ) $ 0.44 $ 0.07 $ 0.93 Weighted average number of common shares outstanding - basic (in shares) 2,760,438 2,737,895 2,754,399 2,716,166 Diluted (in dollars per share) $ ( 0.27 ) $ 0.42 $ 0.06 $ 0.87 Weighted average number of common shares outstanding - diluted (in shares) 2,760,438 2,888,679 2,931,343 2,887,889 Other comprehensive (loss) income Foreign currency translation 223 ( 77 ) ( 135 ) ( 318 ) Comprehensive (loss) income, net of tax $ ( 516 ) $ 1,130 $ 48 $ 2,204 See Accompanying Condensed Notes to Condensed Consolidated Financial Statements. 3 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, 2024 DECEMBER 31, 2023 (1) ASSETS Current assets: Cash $ 1,239 $ 960 Restricted cash - 715 Accounts receivable, less allowances of $ 286 and $ 358 , respectively 16,584 19,279 Inventories, net 22,332 21,660 Contract assets 15,058 14,481 Prepaid assets and other assets 5,065 1,698 Total current assets 60,278 58,793 Property and equipment, net 5,834 6,513 Operating lease assets, net 8,034 6,917 Deferred tax assets 2,641 2,641 Other intangible assets, net 179 263 Total assets $ 76,966 $ 75,127 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current portion of finance lease obligations $ 175 $ 356 Current portion of operating lease obligations 1,174 1,033 Accounts payable 12,315 15,924 Accrued payroll and commissions 2,940 4,138 Customer deposits 5,263 4,068 Other accrued liabilities 1,451 1,063 Total current liabilities 23,318 26,582 Long-term liabilities: Long-term line of credit, net of issuance costs 9,508 5,815 Long-term finance lease obligations, net of current portion 340 209 Long-term operating lease obligations, net of current portion 7,689 6,763 Other long-term liabilities 421 414 Total long-term liabilities 17,958 13,201 Total liabilities 41,276 39,783 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; 2,756,367 and 2,740,178 shares issued and outstanding, respectively 28 27 Additional paid-in capital 17,226 16,929 Accumulated other comprehensive loss ( 667 ) ( 532 ) Retained earnings 18,853 18,670 Total shareholders’ equity 35,690 35,344 Total liabilities and shareholders’ equity $ 76,966 $ 75,127 (1) The balance sheet as of December 31, 2023 has been derived from the consolidated audited financial statements at that date. See Accompanying Condensed Notes to Condensed Consolidated Financial Statements. 4 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) 2024 2023 SEPTEMBER 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 183 $ 2,522 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,400 1,539 Compensation on stock-based awards 334 299 Change in inventory reserves 194 ( 8 ) Change in accounts receivable allowances ( 72 ) ( 18 ) Other, net 9 137 Changes in current operating assets and liabilities: Accounts receivable 2,727 ( 162 ) Employee Retention Credit Receivable - 2,650 Inventories ( 922 ) 899 Contract assets ( 577 ) ( 1,780 ) Prepaid expenses and other current assets ( 2,888 ) ( 976 ) Accounts payable ( 3,609 ) ( 1,636 ) Accrued payroll and commissions ( 1,198 ) ( 810 ) Customer deposits 1,195 345 Other accrued liabilities 181 ( 820 ) Net cash (used in) provided by operating activities ( 3,043 ) 2,181 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment 9 - Purchases of property and equipment ( 980 ) ( 1,121 ) Net cash used in investing activities ( 971 ) ( 1,121 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit 99,888 95,783 Payments to line of credit ( 96,185 ) ( 98,035 ) Proceeds from financing leases 198 - Principal payments on financing leases ( 304 ) ( 291 ) Share repurchases ( 67 ) - Proceeds from stock option exercises 31 155 Net cash provided by (used in) financing activities 3,561 ( 2,388 ) Effect of exchange rate changes on cash 17 ( 32 ) Net change in cash and cash equivalents ( 436 ) ( 1,360 ) Cash - beginning of period 1,675 2,481 Cash - end of period $ 1,239 $ 1,121 Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets: Cash $ 1,239 $ 699 Restricted cash - 422 Total cash and restricted cash reported in the condensed consolidated statements of cash flows $ 1,239 $ 1,121 5 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 2024 2023 Supplemental disclosure of cash flow information: Cash paid for interest $ 531 $ 388 Cash paid for income taxes $ 374 $ 1,242 Supplemental noncash investing and financing activities: Property and equipment purchases in accounts payable $ 107 $ 23 Operating lease assets acquired under operating leases $ 1,923 $ - Equipment acquired under finance lease $ 256 $ - See Accompanying Condensed Notes to Condensed Consolidated Financial Statements. 6 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) (IN THOUSANDS) Shares Amount Shares Amount Capital Loss Earnings Equity Accumulated Additional Other Total Preferred Stock Common Stock Paid-In Comprehensive Retained Shareholders’ Shares Amount Shares Amount Capital Loss Earnings Equity Balance as of June 30, 2023 250 $ 250 2,737 $ 27 $ 16,712 $ ( 611 ) $ 13,111 $ 29,489 Net income - - - - - - 1,207 1,207 Foreign currency translation adjustment - - - - - ( 77 ) - ( 77 ) Stock option exercises - - - - 9 - - 9 Compensation on stock-based awards - - - - 80 - - 80 Balance as of September 30, 2023 250 $ 250 2,737 $ 27 $ 16,801 $ ( 688 ) $ 14,318 $ 30,708 Balance as of June 30, 2024 250 $ 250 2,762 $ 28 $ 17,165 $ ( 890 ) $ 19,592 $ 36,145 Net loss - - - - - - ( 739 ) ( 739 ) Foreign currency translation adjustment - - - - - 223 - 223 Compensation on stock-based awards - - - - 128 - - 128 Stock repurchases - - ( 6 ) - ( 67 ) - - ( 67 ) Balance as of September 30, 2024 250 $ 250 2,756 $ 28 $ 17,226 $ ( 667 ) $ 18,853 $ 35,690 Balance as of December 31, 2022 250 $ 250 2,691 $ 27 $ 16,347 $ ( 370 ) $ 11,826 $ 28,080 Net income - - - - - - 2,522 2,522 Foreign currency translation adjustment - - - - - ( 318 ) - ( 318 ) Compensation on stock-based awards - - - - 299 - - 299 Stock option exercises - - 46 - 155 - - 155 Cumulative adjustment related to adoption of ASC 326 (current expected credit loss) - - - - - - ( 30 ) ( 30 ) Balance as of September 30, 2023 250 $ 250 2,737 $ 27 $ 16,801 $ ( 688 ) $ 14,318 $ 30,708 Balance as of December 31, 2023 250 $ 250 2,740 $ 27 $ 16,929 $ ( 532 ) $ 18,670 $ 35,344 Balance 250 $ 250 2,740 $ 27 $ 16,929 $ ( 532 ) $ 18,670 $ 35,344 Net income - - - - - - 183 183 Net income (loss) - - - - - - 183 183 Foreign currency translation adjustment - - - - - ( 135 ) - ( 135 ) Compensation on stock-based awards - - - - 334 - - 334 Stock option exercises - - 22 1 30 - - 31 Stock repurchases - - ( 6 ) - ( 67 ) - - ( 67 ) Balance as of September 30, 2024 250 $ 250 2,756 $ 28 $ 17,226 $ ( 667 ) $ 18,853 $ 35,690 Balance 250 $ 250 2,756 $ 28 $ 17,226 $ ( 667 ) $ 18,853 $ 35,690 See Accompanying Condensed Notes to Condensed Consolidated Financial Statements. 7 CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) NOTE 1. 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. All dollar amounts are stated in thousands of U.S. dollars. 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): 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. 8 Inventories Inventories are as follows: SCHEDULE OF INVENTORIES September 30, December 31, 2024 2023 Raw materials $ 21,596 $ 20,863 Work in process 1,108 1,033 Finished goods 992 934 Reserves ( 1,364 ) ( 1,170 ) Inventories, net $ 22,332 $ 21,660 Other Intangible Assets Other intangible assets as of September 30, 2024 and December 31, 2023 are as follows: SCHEDULE OF OTHER INTANGIBLE ASSETS Customer Relationships Patents Total Balances as of January 1, 2023 $ 216 $ 206 $ 422 Amortization 144 15 159 Balances as of December 31, 2023 $ 72 $ 191 $ 263 Balances $ 72 $ 191 $ 263 Amortization 72 12 84 Balances as of September 30, 2024 $ - $ 179 $ 179 Balances $ - $ 179 $ 179 Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is 5.5 years. Of the patents value as of September 30, 2024, $ 94 are being amortized and $ 85 are in process and a patent has not yet been issued. Amortization expense of finite life intangible assets for the three months ended September 30, 2024 and 2023 was $ 4 and $ 40 , respectively. Amortization expense of finite life intangible assets for the nine months ended September 30, 2024 and 2023 was $ 84 and $ 120 , respectively. As of September 30, 2024, estimated future annual amortization expense (except projects in process) related to these assets is as follows: SCHEDULE OF ESTIMATED FUTURE ANNUAL AMORTIZATION EXPENSE Year Amount 2024 $ 5 2025 18 2026 18 2027 18 2028 18 Thereafter 17 Total $ 94 NOTE 2. 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. The account in the United States may at times exceed federally insured limits. The Company’s $ 1,239 cash balance as of September 30, 2024 included approximately $ 1,035 and $ 6 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. One customer accounted for 28 % and 26 % of net sales for the three and nine months ended September 30, 2024, respectively. Two customers accounted for 36 % and 38 % of net sales for both the three and nine months ended September 30, 2023. 9 As of September 30, 2024, one customer represented approximately 22 % 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 44 % of gross contract assets as of September 30, 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 2 % of net sales for both the three and nine months ended September 30, 2024. Export sales represented approximately 3 % of net sales for both three and nine month ended September 30, 2023. NOTE 3. REVENUE Revenue Recognition Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 72 % and 73 % of net sales for the three and nine months ended September 30, 2024, respectively and approximately 74 % of net sales for both the three and nine months ended September 30, 2023, respectively. The following tables summarize our net sales by market for the three months ended September 30, 2024 and 2023, respectively: SCHEDULE OF NET SALES BY MARKET Three Months Ended September 30, 2024 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical $ 12,711 $ 4,435 $ 901 $ 18,047 Industrial 5,505 2,667 262 8,434 Aerospace and defense 4,394 494 38 4,926 Total net sales $ 22,610 $ 7,596 $ 1,201 $ 31,407 Three Months Ended September 30, 2023 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical $ 12,029 $ 5,185 $ 621 $ 17,835 Industrial 8,195 1,999 241 10,435 Aerospace and defense 4,609 450 40 5,099 Total net sales $ 24,833 $ 7,634 $ 902 $ 33,369 1 Noncash consideration represents material provided by the customer used in the build of the product. 10 The following tables summarize our net sales by market for the nine months ended September 30, 2024 and 2023, respectively: Nine Months Ended September 30, 2024 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical $ 37,469 $ 14,112 $ 2,410 $ 53,991 Industrial 18,847 7,682 1,114 27,643 Aerospace and defense 16,494 1,231 154 17,879 Total net sales $ 72,810 $ 23,025 $ 3,678 $ 99,513 Nine Months Ended September 30, 2023 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical $ 42,324 $ 15,564 $ 1,926 $ 59,814 Industrial 21,378 6,532 1,056 28,966 Aerospace and defense 12,523 1,674 301 14,498 Total net sales $ 76,225 $ 23,770 $ 3,283 $ 103,278 1 Noncash consideration represents material provided by the customer used in the build of the product. 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 nine months ended September 30, 2024 were as follows: SCHEDULE OF CONTRACT ASSETS Balances as of January 1, 2024 $ 14,481 Increase (decrease) attributed to: Amounts transferred over time to contract assets 72,810 Allowance for current expected credit losses ( 15 ) Amounts invoiced during the period ( 72,218 ) Balance outstanding as of September 30, 2024 $ 15,058 We expect substantially all of the remaining performance obligations for the contract assets recorded as of September 30, 2024 to be transferred to accounts receivable 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. NOTE 4. 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. 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 September 30, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were in compliance with all the financial covenants related to this agreement as of and for the period ended September 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in the first and second quarters of 2024 in excess of the amounts allowed under the Revolver. We received a waiver of this event of default from the bank in August 2024. Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 7.9 % and 8.3 % as of September 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $ 9,550 and $ 5,846 outstanding as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024 we had unused availability on the line of credit of $ 5,450 . The Company has an interim funding agreement as of September 30, 2024 with a bank related to $ 317 of deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of September 30, we have $ 317 outstanding on the interim funding agreement for equipment we expect to receive in the fourth quarter of 2024. The line of credit is shown net of debt issuance costs of $ 42 and $ 31 on the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023, respectively. 11 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. We amended our operating leases for part of our manufacturing facility in China and our corporate office in Maple Grove, Minnesota during the first nine months of 2024 which extended the lease through August of 2033 with monthly lease payments of $ 14 to $ 18 . As of September 30, 2024, we have a lease commitment of approximately $ 400 for a finance lease that will commence in the fourth quarter of 2024. The components of lease expense were as follows: SCHEDULE OF COMPONENTS OF LEASE EXPENSE Lease Cost 2024 2023 Three Months Ended September 30, Lease Cost 2024 2023 Operating lease cost $ 569 $ 576 Finance lease interest cost 6 9 Finance lease amortization expense 265 182 Total lease cost $ 840 $ 767 Lease Cost 2024 2023 Nine Months Ended September 30, Lease Cost 2024 2023 Operating lease cost $ 1,746 $ 1,735 Finance lease interest cost 18 32 Finance lease amortization expense 394 546 Total lease cost $ 2,158 $ 2,313 Supplemental condensed consolidated balance sheet information related to leases was as follows: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION RELATED TO LEASES Balance Sheet Location September 30, 2024 December 31, 2023 Assets Finance lease assets Property and equipment, net $ 485 $ 636 Operating lease assets Operating lease assets, net 8,034 6,917 Total leased assets $ 8,519 $ 7,553 Liabilities Current Current finance lease liabilities Current portion of finance lease obligations $ 175 $ 356 Current operating lease liabilities Current portion of operating lease obligations 1,174 1,033 Noncurrent Long-term finance lease liabilities Long-term finance lease liabilities, net of current portion 340 209 Long-term operating lease liabilities Long-term operating lease obligations, net of current portion 7,689 6,763 Total lease liabilities $ 9,378 $ 8,361 12 Supplemental condensed consolidated statement of cash flows information for the nine months ended September 30, 2024 related to leases was as follows: SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION September 30, September 30, 2024 2023 Operating Leases Cash paid for amounts included in the measurement of lease liabilities $ 468 $ 1,381 Property acquired under operating lease $ 1,923 $ - Future payments of lease liabilities as of September 30, 2024 were as follows: SCHEDULE OF FUTURE PAYMENTS OF LEASE LIABILITIES Operating Leases Finance Leases Total 2024 $ 469 $ 70 $ 539 2025 1,809 165 1,974 2026 1,774 168 1,942 2027 1,472 60 1,532 2028 1,469 60 1,529 Thereafter 5,505 44 5,549 Total lease payments $ 12,498 $ 567 $ 13,065 Less: imputed interest ( 3,635 ) ( 52 ) ( 3,687 ) Present value of lease liabilities $ 8,863 $ 515 $ 9,378 The lease term and discount rate as of September 30, 2024 were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE Weighted-average remaining lease term (years) Operating leases 7.9 Finance leases 3.4 Weighted-average discount rate Operating leases 7.8 % Finance leases 5.7 % NOTE 6. STOCK BASED AWARDS Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations within general and administrative expenses of $ 127 and $ 80 for the three months ended September 30, 2024 and 2023, respectively, and $ 334 and $ 299 for the nine months ended September 30, 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 , 100,000 and 100,000 shares were authorized in March 2020, May 2022, May 2023 and May 2024, respectively. We granted 1,000 and 23,000 , respectively, service-based stock options during the three and nine months ended September 30, 2024, respectively. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2024 was $ 8.20 . We granted 25,000 and 54,000 , respectively, service-based stock options during the three and nine months ended September 30, 2023. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows: SCHEDULE OF WEIGHTED AVERAGE GRANT DATE FAIR VALUE OF STOCK OPTIONS GRANTED 2024 2023 Stock option fair value assumptions: Risk-free interest rate 4.38 % 3.45 % Expected life (years) 6.0 6.5 Dividend yield 0 % 0 % Expected volatility 58 % 60 % Weighted average grant date fair value of stock options granted $ 6.49 $ 5.67 13 Total compensation expense related to stock options was $ 61 and $ 184 for the three and nine months ended September 30, 2024, respectively. Total compensation expense related to stock options was $ 42 and $ 184 for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, there was $ 775 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 3.6 years. Following is the status of option activity for the nine months ended and as of September 30, 2024: SCHEDULE OF OPTION ACTIVITY Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding – December 31, 2023 458,700 $ 6.63 6.53 $ 1,432 Granted 23,000 11.08 Exercised ( 5,500 ) 5.42 Forfeited ( 12,400 ) 10.13 Outstanding – September 30, 2024 463,800 $ 6.78 5.94 $ 2,301 Exercisable on September 30, 2024 284,500 $ 4.77 4.43 $ 1,979 Restricted Stock Units During the three and nine months ended September 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 $ 66 and $ 150 for the three and nine months ended September 30, 2024, respectively. Total compensation expense related to the RSUs was $ 38 and $ 113 for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, total unrecognized compensation expense related to the RSUs was $ 153 , which will vest over a weighted average period of 0.6 years. Following is the status of restricted stock activity for the nine months ended and as of September 30, 2024: SCHEDULE OF RESTRICTED STOCK ACTIVITY Shares Weighted- Average Remaining Vesting Term (in years) Aggregate Intrinsic Value Outstanding – December 31, 2023 27,000 1.0 $ 254 Granted 15,141 Vested ( 16,500 ) Forfeited ( 1,500 ) Outstanding – September 30, 2024 24,141 0.6 $ 283 14 NOTE 7. NET (LOSS) INCOME PER SHARE DATA Basic net (loss) income per common share is calculated by dividing net (loss) 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. In a period where the Company incurs a net loss, the Company excludes dilutive securities, and the shares used for the basic and diluted loss per share are the same. The calculation of diluted (loss) income per shared excluded 189,265 and 93,391 in weighted average shares for the three and nine months ended September 30, 2024, respectively, and 64,322 and 52,896 in weighted average shares for the three and nine months ended September 30, 2023, respectively, as their effect was anti-dilutive. Basic and diluted weighted average shares outstanding were as follows: SCHEDULE OF BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 2024 2023 2024 2023 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Basic weighted average shares outstanding 2,760,438 2,737,895 2,754,399 2,716,166 Dilutive effect of outstanding stock options and non-vested restricted stock units - 150,783 176,944 171,723 Diluted weighted average shares outstanding 2,760,438 2,888,679 2,931,343 2,887,889 15 NOTE 8. INCOME TAXES 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 and nine months ended September 30, 2024 was 8 % and 62 %, respectively. Our effective tax rate for the three and nine months ended September 30, 2023 was ( 21 %) and 13 %, respectively. The primary drivers of the change in rate relate to changes in pretax book income and the 2023 U.S. federal provision to return adjustments recorded in the third quarter of 2024, partially offset by realization of deferred tax assets in the 2024 periods as the Company removed its valuation allowance in the fourth quarter of 2023. NOTE 9. RESTRUCTURING CHARGES During the first nine months of 2024, we accrued restructuring charges of $ 267 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 nine months ended September 30, 2023. NOTE 10. PAYROLL TAX DEFERRAL On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. During the year ended December 31, 2023, the Company remitted $ 1,158 to the Internal Revenue Service (“IRS”) related to the deferral of payroll taxes, of which $ 785 was recorded as a refund receivable as of December 31, 2023, with a corresponding liability due. These amounts were settled during the first quarter of 2024. NOTE 11. RELATED PARTY TRANSACTIONS David 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. Mr. 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 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 September 30, 2024 and 2023, we recognized net sales to Marpe Technologies of $ 8 and $ 0 , respectively. During the nine months ended September 30, 2024 and 2023, we recognized net sales to Marpe Technologies of $ 75 and $ 163 , 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. 16