Proof - form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

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

Telephone number: (952) 345-2244

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $.01 per share		NSYS		NASDAQ Capital Market

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐		Accelerated Filer ☐
Non-accelerated Filer ☒		Smaller Reporting Company ☒
Emerging growth company ☐

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

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

Number of shares of $.01 par value common stock outstanding as of August 1, 2024 was 2,762,177.

TABLE OF CONTENTS

	PAGE

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)	3
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Cash Flows	5-6
Condensed Consolidated Statements of Shareholders’ Equity	7
Condensed Notes to Consolidated Financial Statements	8-15
Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations	16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	20
Item 4 - Controls and Procedures	20

PART II – OTHER INFORMATION

Item 1 - Legal Proceedings	21
Item 1A. - Risk Factors	21
Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds	21
Item 3 - Defaults on Senior Securities	21
Item 4 - Mine Safety Disclosures	21
Item 5 - Other Information	21
Item 6 - Exhibits	21
SIGNATURES	22

PART I

ITEM 1. FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	2024			2023			2024			2023
	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2024			2023			2024			2023

Net sales	$	33,891		$	35,021		$	68,106		$	69,909
Cost of goods sold		29,274			29,547			58,041			58,951
Gross profit		4,617			5,474			10,065			10,958
Operating expenses:
Selling		909			953			1,714			1,843
General and administrative		2,982			3,105			6,152			6,370
Research and development		291			317			609			593
Restructuring charges		91			-			91			-
Total operating expenses		4,273			4,375			8,566			8,806
Income from operations		344			1,099			1,499			2,152
Other expense:
Interest expense		(165	)		(125	)		(332	)		(235	)
Income before income taxes		179			974			1,167			1,917
Income tax expense		22			340			245			602
Net income	$	157		$	634		$	922		$	1,315

Net income per common share:
Basic (in dollars per share)	$	0.06		$	0.23		$	0.34		$	0.49
Weighted average number of common shares outstanding - basic (in shares)		2,760,052			2,718,066			2,751,330			2,705,121
Diluted (in dollars per share)	$	0.05		$	0.22		$	0.32		$	0.46
Weighted average number of common shares outstanding - diluted (in shares)		2,935,671			2,870,848			2,922,113			2,887,313

Other comprehensive income (loss)
Foreign currency translation		(175	)		(281	)		(358	)		(241	)
Comprehensive income (loss), net of tax	$	(18	)	$	353		$	564		$	1,074

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2024 AND DECMEBER 31, 2023

(IN THOUSANDS, EXCEPT SHARE DATA)

	JUNE 30, 2024			DECEMBER 31, 2023⁽¹⁾
ASSETS
Current assets:
Cash	$	1,542		$	960
Restricted cash		-			715
Accounts receivable, less allowances of $270 and $358, respectively		17,577			19,279
Inventories, net		22,793			21,660
Contract assets		14,957			14,481
Prepaid assets and other assets		2,291			1,698
Total current assets		59,160			58,793
Property and equipment, net		6,001			6,513
Operating lease assets, net		8,274			6,917
Deferred tax assets		2,641			2,641
Other intangible assets, net		183			263
Total assets	$	76,259		$	75,127

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of finance lease obligations	$	214		$	356
Current portion of operating lease obligations		1,169			1,033
Accounts payable		12,728			15,924
Accrued payroll and commissions		2,612			4,138
Customer deposits		5,453			4,068
Other accrued liabilities		1,120			1,063
Total current liabilities		23,296			26,582
Long-term liabilities:
Long-term line of credit, net of issuance costs		8,314			5,815
Long-term finance lease obligations, net of current portion		146			209
Long-term operating lease obligations, net of current portion		7,949			6,763
Other long-term liabilities		409			414
Total long-term liabilities		16,818			13,201
Total liabilities		40,114			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; 2,762,177 and 2,740,178 shares issued and outstanding, respectively		28			27
Additional paid-in capital		17,165			16,929
Accumulated other comprehensive loss		(890	)		(532	)
Retained earnings		19,592			18,670
Total shareholders’ equity		36,145			35,344
Total liabilities and shareholders’ equity	$	76,259		$	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.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	2024			2023
	SIX MONTHS ENDED
	JUNE 30,
	2024			2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	922		$	1,315
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		966			1,027
Compensation on stock-based awards		206			192
Change in inventory reserves		113			(53	)
Change in accounts receivable allowances		(88	)		(31	)
Other, net		(59	)		(116	)
Changes in current operating assets and liabilities:
Accounts receivable		1,690			(1,580	)
Employee Retention Credit Receivable		-			2,650
Inventories		(1,288	)		1,350
Contract assets		(476	)		(1,620	)
Prepaid expenses and other current assets		(531	)		(1,042	)
Accounts payable		(2,546	)		586
Accrued payroll and commissions		(1,516	)		(1,788	)
Customer deposits		1,385			(195	)
Other accrued liabilities		(236	)		(414	)
Net cash (used in) provided by operating activities		(1,458	)		281

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment		9			-
Purchases of property and equipment		(1,020	)		(956	)
Net cash used in investing activities		(1,011	)		(956	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit		68,323			65,886
Payments to line of credit		(65,809	)		(65,726	)
Principal payments on financing leases		(202	)		(189	)
Proceeds from stock option exercises		31			173
Net cash provided by financing activities		2,343			144

Effect of exchange rate changes on cash		(7	)		(35	)

Net change in cash and cash equivalents		(133	)		(566	)
Cash and cash equivalents - beginning of period		1,675			2,481
Cash and cash equivalents - end of period	$	1,542		$	1,915

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets:
Cash	$	1,542		$	781
Restricted cash		-			1,134
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	1,542		$	1,915

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	SIX MONTHS ENDED
	JUNE 30,
	2024		2023

Supplemental disclosure of cash flow information:
Cash paid for interest	$	307	$	248
Cash paid for income taxes	$	279	$	1,036

Supplemental noncash investing and financing activities:
Property and equipment purchases in accounts payable	$	75	$	49
Operating lease assets acquired under operating leases	$	1,923	$	-

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS)

											Accumulated
									Additional		Other						Total
	Preferred Stock				Common Stock				Paid-In		Comprehensive			Retained			Shareholders’
	Shares		Amount		Shares		Amount		Capital		Loss			Earnings			Equity
Balance as of March 31, 2023		250	$	250		2,701	$	27	$	16,481	$	(330	)	$	12,477		$	28,905
Net income		-		-		-		-		-		-			634			634
Foreign currency translation adjustment		-		-		-		-		-		(281	)		-			(281	)
Stock option exercises		-		-		36		-		138		-			-			138
Compensation on stock-based awards		-		-		-		-		93		-			-			93
Balance as of June 30, 2023		250	$	250		2,737	$	27	$	16,712	$	(611	)	$	13,111		$	29,489

Balance as of March 31, 2024		250	$	250		2,755	$	27	$	17,009	$	(715	)	$	19,435		$	36,006
Net income		-		-		-		-		-		-			157			157
Foreign currency translation adjustment		-		-		-		-		-		(175	)		-			(175	)
Issuance for stock-based awards		-		-		7		-		126		-			-			126
Compensation on stock-based awards		-		-		-		1		30		-			-			31
Balance as of June 30, 2024		250	$	250		2,762	$	28	$	17,165	$	(890	)	$	19,592		$	36,145

Balance as of December 31, 2022		250	$	250		2,691	$	27	$	16,347	$	(370	)	$	11,826		$	28,080
Net income		-		-		-		-		-		-			1,315			1,315
Foreign currency translation adjustment		-		-		-		-		-		(241	)		-			(241	)
Compensation on stock-based awards		-		-		-		-		192		-			-			192
Issuance for stock-based awards		-		-		46		-		173		-			-			173
Cumulative adjustment related to adoption of ASC 326 (current expected credit loss)		-		-		-		-		-		-			(30	)		(30	)
Balance as of June 30, 2023		250	$	250		2,737	$	27	$	16,712	$	(611	)	$	13,111		$	29,489

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		-		-		-		-		-		-			922			922
Foreign currency translation adjustment		-		-		-		-		-		(358	)		-			(358	)
Compensation on stock-based awards		-		-		-		-		206		-			-			206
Issuance for stock-based awards		-		-		22		1		30		-			-			31
Balance as of June 30, 2024		250	$	250		2,762	$	28	$	17,165	$	(890	)	$	19,592		$	36,145
Balance		250	$	250		2,762	$	28	$	17,165	$	(890	)	$	19,592		$	36,145

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)

(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.

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 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.

Inventories

Inventories are as follows:

SCHEDULE OF INVENTORIES

	June 30,			December 31,
	2024			2023
Raw materials	$	22,463		$	20,863
Work in process		645			1,033
Finished goods		965			934
Reserves		(1,280	)		(1,170	)
Inventories, net	$	22,793		$	21,660

Other Intangible Assets

Other intangible assets as of June 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		8		80
Balances as of June 30, 2024	$	-	$	183	$	183
Balances	$	-	$	183	$	183

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 June 30, 2024, $98 are being amortized and $85 are in process and a patent has not yet been issued.

Amortization 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.

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

Year	Amount
2024	$	9
2025		18
2026		18
2027		18
2028		18
Thereafter		17
Total	$	98

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 $1,542 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. 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.

As 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.

Contract 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.

Export 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.

NOTE 3. REVENUE

Revenue Recognition

Revenue 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.

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

SCHEDULE OF NET SALES BY MARKET


	Three Months Ended June 30, 2024
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	12,725	$	4,435	$	711	$	17,871
Aerospace and defense		6,097		494		44		6,635
Industrial		6,163		2,667		555		9,385
Total net sales	$	24,985	$	7,596	$	1,310	$	33,891


	Three Months Ended June 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	14,570	$	5,318	$	719	$	20,607
Aerospace and defense		4,499		674		182		5,355
Industrial		6,593		2,125		341		9,059
Total net sales	$	25,662	$	8,117	$	1,242	$	35,021

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

The 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 Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	25,789	$	9,679	$	1,508	$	36,976
Aerospace and defense		11,301		736		116		12,153
Industrial		13,110		5,014		853		18,977
Total net sales	$	50,200	$	15,429	$	2,477	$	68,106


	Six Months Ended June 30, 2023
	Product/ Service Transferred Over Time		Product Transferred at Point in Time		Noncash Consideration¹		Total Net Sales by Market
Medical	$	30,295	$	10,379	$	1,305	$	41,979
Aerospace and defense		7,914		1,224		261		9,399
Industrial		13,183		4,533		815		18,531
Total net sales	$	51,392	$	16,136	$	2,381	$	69,909

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 six months ended June 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		27,904
Allowance for current expected credit losses		(14	)
Amounts invoiced during the period		(27,414	)
Balance outstanding as of June 30, 2024	$	14,957

We 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.

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 June 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 June 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in excess of the amounts allowed under the Revolver. We have received a waiver of this event of default from the bank.

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 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.

The 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.

NOTE 5. LEASES

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. As of 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.

The components of lease expense were as follows:


	Three Months Ended June 30,
Lease Cost	2024		2023
Operating lease cost	$	581	$	592
Finance lease interest cost		6		11
Finance lease amortization expense		129		182
Total lease cost	$	716	$	785


	Six Months Ended June 30,
Lease Cost	2024		2023
Operating lease cost	$	1,177	$	1,159
Finance lease interest cost		12		23
Finance lease amortization expense		129		364
Total lease cost	$	1,318	$	1,546

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

	Balance Sheet Location	June 30, 2024		December 31, 2023
Assets
Finance lease assets	Property and equipment, net	$	373	$	636
Operating lease assets	Operating lease assets, net		8,274		6,917
Total leased assets		$	8,647	$	7,553

Liabilities
Current
Current finance lease liabilities	Current portion of finance lease obligations	$	214	$	356
Current operating lease liabilities	Current portion of operating lease obligations		1,169		1,033
Noncurrent
Long-term finance lease liabilities	Long-term finance lease liabilities, net of current portion		146		209
Long-term operating lease liabilities	Long-term operating lease obligations, net of current portion		7,949		6,763
Total lease liabilities		$	9,478	$	8,361

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

	June 30,		June 30,
	2024		2023
Operating Leases
Cash paid for amounts included in the measurement of lease liabilities	$	933	$	934
Property acquired under operating lease	$	1,923	$	-

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

	Operating Leases			Finance Leases			Total
2024	$	928		$	163		$	1,091
2025		1,792			106			1,898
2026		1,758			105			1,863
2027		1,470			-			1,470
2028		1,469			-			1,469
Thereafter		5,510			-			5,510
Total lease payments	$	12,927		$	374		$	13,301
Less: imputed interest		(3,809	)		(14	)		(3,519	)
Present value of lease liabilities	$	9,118		$	360		$	9,478

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

Weighted-average remaining lease term (years)
Operating leases	8.1
Finance leases	1.7
Weighted-average discount rate
Operating leases	8.0	%
Finance leases	5.3	%

NOTE 6. STOCK BASED AWARDS

Stock-based 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.

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 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:

	2024			2023
Stock option fair value assumptions:
Risk-free interest rate		4.40	%		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	$	6.47		$	5.67

Total compensation expense related to stock options was $65 and $121 for the three and six months ended June 30, 2024, respectively. Total compensation expense related to stock options was $55 and $123 for the three and six months ended June 30, 2023, respectively. As of 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.

Following is the status of option activity for the six months ended and as of June 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		22,000			11.06
Exercised		(5,500	)		5.42
Forfeited		(9,600	)		10.26
Outstanding – June 30, 2024		465,600		$	6.78		6.20	$	3,150
Exercisable on June 30, 2024		279,300		$	4.67		4.60	$	2,479

Restricted Stock Units

During 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.

Following is the status of restricted stock activity for the six months ended and as of June 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 – June 30, 2024		24,141			0.9	$	330

NOTE 7. NET INCOME PER SHARE DATA