M-tron Industries Inc

M-TRON INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

A. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

M-tron Industries, Inc. (the “Company”, “we”, “our” or “us”) was founded in1965 and is engaged in the designing, manufacturing and marketing of highly engineered, high reliability frequency and spectrum control products used to control the frequency or timing of signals in electronic circuits in various applications.

The Company’s operations include itstwo principal subsidiaries: Piezo Technology, Inc. ("PTI"), and M-tron Asia, LLC ("Mtron"). The Company has operations in Orlando, Florida; Yankton, South Dakota; and Noida, India, and has a sales office in Hong Kong. The Company and its subsidiaries currently operate together as a single group under the MtronPTI brand (“MtronPTI”).

The Company offers a wide range of precision frequency control and spectrum control solutions including radio frequency (“RF”), microwave and millimeter wave filters; cavity, crystal, ceramic, lumped element and switched filters; high performance and high frequency OCXOs, integrated PLL OCXOs, TCXOs, VCXOs, low jitter and harsh environment oscillators; crystal resonators, Integrated Microwave Assemblies (IMA), and state-of-the-art solid state power amplifier products.

MtronPTI’s Separation

On* October 7, 2022,*the separation of the MtronPTI business from The LGL Group, Inc. ("LGL" or "LGL Group") was completed (the "Separation") and the Company became an independent, publicly traded company trading on the NYSE American under the stock symbol "MPTI."

Basis of Presentation - Consolidated and Combined Financial Statements

The Company’s financial statements for periods through the Separation are combined financial statements prepared on a “carve-out” basis as discussed below. The Company’s financial statements for the period from* October 7, 2022through December 31, 2023* are consolidated financial statements based on the reported results of the Company as a standalone company.

The Consolidated and Combined Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These Consolidated and Combined Financial Statements* may**not* be indicative of the Company’s future performance and donot necessarily reflect what the financial position, results of operations, and cash flows would have been had the Company operated as an independent company during the periods presented.

Basis of Presentation–*** Prior to Separation***

Through the Separation date, the Company's combined financial statements are prepared on a "carve-out" basis. The Consolidated and Combined Financial Statements have been derived from the consolidated financial statements and accounting records of LGL Group in conformity with GAAP.

The Consolidated and Combined Financial Statements include the accounts of the Company and all of its majority-owned subsidiaries. Intercompany transactions and accounts have been eliminated. Transactions between the Company and LGL Group have been included in these Consolidated and Combined Financial Statements. The aggregate net effect of transactions between the Company and related parties that have been historically settled other than in cash are reflected in the Consolidated and Combined Statements of Cash Flows as Net Transfers from LGL Group, Inc. For additional information, see Note B – Related Party Transactions.

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The debt and associated interest expense in these Consolidated and Combined Financial Statements relate tothird-party borrowings under a revolving credit agreement specifically attributable to legal obligations of the Company.

Cash and Cash Equivalents in the Consolidated Balance Sheets represent Cash and Cash Equivalents held by the Company at the respective period-ends.

The Consolidated and Combined Statements of Operations include an allocation for certain corporate and shared service functions historically provided by LGL Group, including, butnot limited to, executive oversight, accounting, tax, and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Management believes the assumptions underlying our Consolidated and Combined Financial Statements, including the assumptions regarding the allocation of general corporate expenses from LGL Group, are reasonable. Nevertheless, our Consolidated and Combined Financial Statements* maynot* include all of the actual expenses that would have been incurred and* maynot* reflect our results of operations, financial position and cash flows had we operated as a standalone company during the periods presented. Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

During the periods prior to the Separation that are presented in these Consolidated and Combined Financial Statements, the Company’s income tax expense has been included in the LGL Group’ income tax returns. Income tax expense contained in the Consolidated and Combined Financial Statements for periods prior to the Separation is presented on a separate return basis, as if the Company had filed its own income tax returns. Post-Separation, the Company filed a consolidated U.S. federal income tax return as well as separate and combined income tax returns in various state, local and international jurisdictions. Income tax expense contained in the Consolidated and Combined Financial Statements for the period after the Separation is based on the consolidated results of the Company on a standalone basis.

Uses of Estimates

The preparation of the Consolidated and Combined Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments withno maturity or with a maturity of less thanthree months when purchased.

Accounts Receivable

Accounts receivable consists principally of amounts due from both domestic and foreign customers. Credit is extended based on an evaluation of the customer's financial condition and collateral isnot required. In relation to export sales, the Company requires letters of credit supporting a significant portion of the sales price prior to production to limit exposure to credit risk. Certain credit sales are made to industries that are subject to cyclical economic changes.

The Company maintains an allowance for credit losses for estimated uncollectible accounts receivable. Our reserves for estimated credit losses are based upon historical experience, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables and other financial assets. Accounts are written off against the allowance account when they are determined tono longer be collectible.

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Inventories

Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in,first-out) method.

The Company maintains a reserve for inventory based on estimated losses that result from inventory that becomes obsolete or for which the Company has excess inventory levels. In determining these estimates, the Company performs an analysis on current demand and usage for each inventory item over historical time periods. Based on that analysis, the Company reserves a percentage of the inventory amount within each time period based on historical demand and usage patterns of specific items in inventory.

Property, Plant and Equipment, Net

Property, plant and equipment are recorded at cost less accumulated depreciation and include expenditures for major improvements. Maintenance and repairs are charged to operations as incurred. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range from 5 years to 35 years for buildings and improvements, and from 3 years to 10 years for other fixed assets. Property, plant and equipment are periodically reviewed for indicators of impairment. If any such indicators were noted, the Company would assess the appropriateness of the assets' carrying value and record any impairment at that time.

Depreciation expense was $797,000 for2023 and $671,000 for2022.

Intangible Assets

Intangible assets are recorded at cost less accumulated amortization. Amortization is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range up to 10 years. The intangible assets consist of intellectual property and goodwill. The net carrying value of the amortizable intangible assets was $5,000 and $58,000 as of* December 31, 2023and2022*, respectively. The remaining balance amortizable intangible assets of $5,000 will be amortized during2024. Goodwill, which isnot amortizable, was $40,000 as of both* December 31, 2023and2022*.

Warranties

The Company offers a standardone-year warranty. The Company tests its products prior to shipment in order to ensure that they meet each customer's requirements based upon specifications received from each customer at the time its order is received and accepted. The Company's customers* mayrequest to return products for various reasons, including, butnot* limited to, the customers' belief that the products arenot performing to specification. The Company's return policy states that it will accept product returns only with prior authorization and if the product doesnot meet customer specifications, in which case the product would be replaced or repaired. To accommodate the Company's customers, each request for return is reviewed; and if and when it is approved, a return materials authorization ("RMA") is issued to the customer.

Each month, the Company records a specific warranty reserve for approved RMAs covering products that havenot yet been returned. The Company doesnot maintain a general warranty reserve because, historically, valid warranty returns resulting from a productnot meeting specifications or being non-functional have been de minimis.

Revenue Recognition

The Company recognizes revenue from the sale of its products in accordance with the criteria in Accounting Standards Codification (“ASC”)606, Revenue from Contracts with Customers, which are:

Step1: Identify the contract(s) with a customer.

Step2: Identify the performance obligations in the contract.

Step3: Determine the transaction price.

Step4: Allocate the transaction price to the performance obligations in the contract.

Step5: Recognize revenue when (or as) the entity satisfies a performance obligation.

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The Company meets these conditions upon the Company’s satisfaction of the performance obligation, usually at the time of shipment to the customer, because control passes to the customer at that time. Our standard payment terms for customers are net due within30 days, with a few exceptions,none regularly exceeding60 days.

The Company provides disaggregated revenue details by geographic markets in Note J – Domestic and Foreign Revenues.

The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company doesnot have a history of significant price protection adjustments or returns. The Company provides a standard assurance warranty that doesnot create a performance obligation.

Practical Expedients:

Shipping Costs

Amounts billed to customers related to shipping and handling are classified as revenue, and the Company's shipping and handling costs are included in manufacturing cost of sales.

Research and Development Costs

Research and development costs are charged to operations as incurred. Such costs were $2,216,000 for2023 and $2,006,000 for2022, and are included within engineering, selling and administrative expenses.

Stock-Based Compensation

The Company measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the requisite service period, typically the vesting period.

The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. There isno expected dividend rate. The basis for the expected volatility assumption includes historical Company volatility and that of its former parent blended with peer group volatility as the Company's historical volatility was limited as a recently public company, didnot fully cover the life of the option, and that blending its historical volatility with peer data provides a reasonable indication of expected volatility in the future. The risk-free interest rate is based on the U.S. Treasuryzero-coupon rates with a remaining term equal to the expected term of the option. The Company records any forfeitures in the period that the shares are forfeited.

Restricted stock awards are measured at the fair value of the Company's common stock on the date of the grant and recognized over the respective service period.

Earnings Per Share

The Company computes earnings per share in accordance with ASC260, Earnings Per Share. Basic earnings per share is computed based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.

As a result of the Separation, on* October 7, 2022,*the Company had 2.67 million shares of common stock outstanding. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation. After the Separation, actual outstanding shares are used to calculate both basic and diluted weighted-average number of shares of common stock outstanding.

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Options representing 183.300 shares were excluded from the below calculation of weighted average shares outstanding because they would have been anti-dilutive.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company’s Consolidated and Combined Statement of Operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely thannot that such assets willnot be realized.

The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Cuts and Jobs Act of2017, enacted on* December 22, 2017 (the “Tax Cuts and Jobs Act”), require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. An accounting policy election is available to either account for the tax effects of GILTI in the period that is subject to such taxes or to provide deferred taxes for book and tax basis differences that upon reversal maybe subject to such taxes. The Company has elected to account for the tax effects of these provisions in the period that is subject to such tax, and the impact was reflected in the Company’s2023* and2022 provisions.

In determining the Company’s provision for income taxes, the Company considers permanent differences between book and tax income and statutory income tax rates.

The Company follows atwo-step approach to recognize and measure uncertain tax positions. Thefirst step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely thannot that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Thesecond step is to measure the tax benefit as the largest amount which is more than50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which* mayrequire periodic adjustments and for which actual outcomes may*differ from forecasted outcomes. The Company's policy is to include interest and penalties related to uncertain tax positions in income tax expense.

Effective for tax years beginning after* December 31, 2021,taxpayers are required to capitalize any expenses incurred that are considered incidental to research and experimentation (R&E) activities under Section174* of the Internal Revenue Code of1986, as amended (the “IRC”). While taxpayers historically had the option of deducting these expenses under IRC Section174, the Tax Cuts and Jobs Act mandates capitalization and amortization of R&E expenses for tax years beginning after* December 31, 2021.Expenses incurred in connection with R&E activities in the US must be amortized over a5*-year period if incurred, and R&E expenses incurred outside the US must be amortized over a15-year period. R&E activities are broader in scope than qualified research activities that are considered under IRC Section41 (relating to the research tax credit).

The Company includes its tax contingencies accrual, including accrued penalties and interest, in Other Long-term Liabilities on the Consolidated Balance Sheets unless the liability is expected to be paid withinone year. Changes to the tax contingencies accrual, including accrued penalties and interest, are included in Income Tax Provision on the Consolidated and Combined Statements of Operations.

Concentration Risks

For the year ended* December 31, 2023*, the Company's largest customer accounted for $12,921,000, or 31.4%, of the Company's total revenues, compared to $8,190,000, or 25.7%, of the Company’s total revenues for the year ended* December 31, 2022*. The Company’ssecond largest customer for the year ended* December 31, 2023* accounted for $7,822,000, or 19.0%, of the Company's total revenues, compared to $4,857,000, or 15.3%, of the Company’s total revenues for the year ended* December 31, 2022*.

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A significant portion of the Company's accounts receivable is concentrated with a relatively small number of customers. As of* December 31, 2023*, four of the Company's largest customers accounted for approximately $3,774,000, or 76.4%, of accounts receivable. As of* December 31, 2022*, four of the Company's largest customers accounted for approximately $2,872,000, or 53.8%, of accounts receivable. The Company carefully evaluates the creditworthiness of its customers in deciding to extend credit and utilizes letters of credit to further limit credit risk for export sales. As a result of these policies, the Company has experienced very low historical bad debt expense and believes the related risk to be minimal.

At various times throughout the year and at* December 31, 2023and2022*, some deposits held at financial institutions were in excess of federally insured limits. The Company has mitigated its risk through placing excess cash balances in a US Treasury money market fund and hasnot experienced any losses related to these balances.

Segment Information

The Company reports segment information in accordance with ASC280, Segment Information ("ASC280"). ASC280 requires companies to report financial and descriptive information for each identified operating segment based on management's internal organizational decision-making structure. Management has identified the Company’s only segment as electronic components, and has determined that it doesnot operate its businesses on a geographic basis which might otherwise require segment reporting.

Impairments of Long-Lived Assets

Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset* may**not* be recoverable. Long-lived assets are grouped with other assets to the lowest level to which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Management assesses the recoverability of the carrying cost of the assets based on a review of projected undiscounted cash flows. If an asset is held for sale, management reviews its estimated fair value less cost to sell. Fair value is determined using pertinent market information, including appraisals or broker's estimates, and/or projected discounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset.

The Company performed an assessment to determine if there were any indicators of impairment as a result of the operating conditions at the end of each2023 fiscal quarter, including at* December 31, 2023.The Company concluded that, while there were events and circumstances in the macro-environment that did impact us, we didnot* experience any entity-specific indicators of asset impairment andno triggering events occurred.

Financial Instruments

Cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses are carried at cost which approximates fair value due to the short-term maturity of these instruments.

Foreign Currency Translation

The assets and liabilities of international operations are remeasured at the exchange rates in effect at the balance sheet date for monetary assets and liabilities and at historical rates for nonmonetary assets and liabilities, with the related remeasurement gains or losses reported within the consolidated statement of operations. The results of international operations are remeasured at the monthly average exchange rates. The Company's foreign subsidiaries and respective operations' functional currency is the U.S. dollar. The Company has determined this based upon the majority of transactions with customers as well as intercompany transactions and parental support being based in U.S. dollars. The Company has recognized a remeasurement gain of $71,000 and loss of $82,000 in2023 and2022, respectively, which is included within other income (expense), net in the Consolidated and Combined Statements of Operations.

Recently Issued Accounting Pronouncements

In* November 2023,the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU")2023-07, “Improvements to Reportable Segment Disclosures,” effective for fiscal years beginning after December 15, 2023.The ASU adds disclosure requirements for segment expense information. In December 2023,the FASB issued ASU2023*-09, “Improvements to Income Tax Disclosures,” effective for annual periods beginning after* December 15, 2024.The ASU requires disclosure of disaggregated income tax information, including the effective tax rate reconciliation and income taxes paid. There are other ASUs that have been issued by the FASB but arenot* yet effective. We expect to implement these new standards by their effective dates, and donot expect their adoption to have a material impact on our results of operations, financial condition or cash flows.

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In* June 2016,the FASB issued ASU2016*-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments,” which changes the impairment model for most financial assets. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets. The Company adopted the provisions of this standard on* January 1, 2023,*with minimal effect on its financial statements.

B. Related Party Transactions

The Consolidated and Combined Financial Statements are prepared on a standalone basis through the date of Separation and have been derived from the consolidated financial statements and accounting records of LGL Group through the date of Separation. The following discussion summarizes activity between the Company and LGL Group prior to the Separation.

Allocation of General Corporate Expenses

For purposes of preparing these Consolidated and Combined Financial Statements on a “carve-out” basis, for periods prior to the Separation we have allocated a portion of LGL Group’s corporate expenses totaling $946,000 to the Company for the year ended* December 31, 2022* which are recorded within engineering, selling and administrative expenses. See Note A – Description of Business, Basis of Presentation and Summary of Significant Accounting Policies for a discussion of the methodology used to allocate corporate-related costs for purposes of preparing these Consolidated and Combined Financial Statements on a “carve-out” basis.

Net Transfers to LGL Group, Inc.

The following table presents the components of Net Transfers to LGL Group, Inc. in the Consolidated and Combined Statements of Stockholders’ Equity for the year ended* December 31, 2022*:

LGL Group’s board of directors initially approved a budget of $400,000 for Separation costs. However, the total Separation costs incurred through* December 31, 2022* were $838,000 which was $438,000 greater than the budgeted amount. MtronPTI and LGL Group agreed to share any excess Separation costs. Included in other expense for the period ended* December 31, 2022* is an amount of $219,000 which represents 50% of the excess Separation costs incurred. Excess Separation costs for the period ended* December 31, 2023*was $28,000.

Cash Investments

The Company has a balance of $2,765,000 in the Gabelli US Treasury Money Market Fund, which is managed by Gabelli Funds, LLC ("Fund Manager"), all of which was classified within Cash and cash equivalents on the Consolidated Balance Sheets. The Fund Manager is related to the Company through certain of our shareholders and receives a fund management fee of approximately8 bps annually on asset balances under management. For the year ended* December 31, 2023,*the Company earned income on its investments with the Fund Manager totaling $12,000 which was included in Interest Income on the Consolidated and Combined Statements of Operations.

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C. Inventories

The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The inventory reserve for excess and obsolescence inventory as of* December 31, 2023and2022* was $1,268,000 and $1,318,000, respectively. The components of inventory as of* December 31, 2023and2022* are summarized below:

D. Income Taxes

Prior to the Separation, the Company's U.S. operations and certain of its non-U.S. operations were historically included in the income tax returns of LGL Group or its subsidiaries. For the periods prior to the Separation, the income tax expense and all tax liabilities that are presented in these financial statements were calculated on a "carve-out" basis, which applied the accounting guidance as if the Company filed income tax returns on a standalone, separate return basis. The Company believes the assumptions supporting its allocation and presentation of income taxes on a separate return basis are reasonable. However, the Company's tax results, as presented in these financial statements for periods prior to the Separation,* may**not* be reflective of the results that the Company expects to generate in the future.

Post-Separation, the Company filed a consolidated U.S. federal income tax return as well as separate and combined income tax returns in various state, local and international jurisdictions. Income tax expense for the period prior to the Separation is based on the combined financial statements prepared on a "carve-out" basis. Income tax expense for the period after the Separation is based on the consolidated results of the Company on a standalone basis.

Income before income taxes for the years ended* December 31, 2023and2022* consist of the following:

Income tax provision for the years ended* December 31, 2023and2022* is as follows:

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A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes is detailed below:

Deferred income taxes for2023 and2022 were provided for the temporary differences between the financial reporting basis and the income tax basis of the Company's assets and liabilities. Tax effects of temporary differences and carryforwards at* December 31, 2023and2022* were as follows:

As of* December 31, 2023*, our unrecognized tax benefits totaled $111,000, and are included within accrued expenses in our Consolidated Balance Sheet. The following table summarizes the activity related to the Company’s unrecognized tax benefits, without interest and penalties:

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The Company will recognize any interest and penalties related to unrecognized tax positions in Income Tax Provision in the Consolidated and Combined Statements of Operations. Our total accrued interest and penalties associated with uncertain tax positions were immaterial as of* December 31, 2023*. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $111,000. We donot expect a significant change to the amount of unrecognized tax benefits over the next12 months. The Company believes that the taxes accrued in our Consolidated Balance Sheets fairly represent the amount of income taxes to be settled or realized in the future.

As of* December 31, 2023*, the Company had Federal and research and development tax credit carryforwards of approximately $33,000 available to reduce future tax liabilities, which will begin to expire starting in2027.

The Company filed a U.S. federal income tax return as well as income tax returns in various states and in non-U.S. jurisdictions. The Company filed its initial consolidated U.S. federal income tax return in* October 2023,and there areno* open Internal Revenue Service examinations.

On* August 19, 2022,*the Company and LGL Group entered into an Amended and Restated Tax Indemnity and Sharing Agreement. Under the agreement, LGL Group will generally be responsible for all U.S. federal, state, local and non-U.S. income taxes of the Company for any taxable period, or portion of such period, ending on or before the Separation.

E. Revolving Credit Agreement

On* June 15, 2022,MtronPTI entered into a loan agreement (the “Loan Agreement”) for a revolving line of credit with Fifth Third Bank, National Association (“Fifth Third Bank”), for up to $5,000,000 bearing interest at the Secured Overnight Financing Rate (“SOFR”) plus a margin of 2.25%, with a SOFR floor of 0.00%. The Loan Agreement has a maturity date of June 15, 2025 and contains various affirmative and negative covenants that are customary for lines of credit and transactions of this type, including limitations on the incurrence of debt and liabilities, as well as financial reporting requirements. The Loan Agreement also imposes certain financial covenants based on the following criteria: (a) Minimum Fixed Charge Coverage Ratio; (b) Minimum Current Ratio; and (c) Minimum Tangible Net Worth (each as defined in the Loan Agreement). All loans pursuant to the Loan Agreement will be secured by a continuing and unconditionalfirst* priority security interest in and to any and all property of the Company. All loans pursuant to the Loan Agreement will be secured by a continuing and unconditionalfirst priority security interest in and to any and all property of the Company. At* December 31, 2023and2022*, there wereno outstanding borrowings under the revolving line of credit with Fifth Third Bank.

F. Leases

The Company leases certain manufacturing and office space and equipment. We determine if an arrangement is a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. Amounts associated with operating leases, which arenot short-term, are included in right-of-use lease assets. Current lease liabilities are included in other accrued expenses and long-term lease liabilities are included in other liabilities in our Consolidated Balance Sheets. Right-of-use lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its incremental borrowing rate at the lease commencement date in determining the present value of lease payments. Short-term leases, leases with an initial term of12 months or less, arenot recorded in the Consolidated Balance Sheets; we recognize lease expense for these short-term leases on a straight-line basis over the lease term.

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The Company leases certain property and equipment under operating leases with terms that range fromone tofive years. Our lease agreements donot contain any material residual value guarantees or material restrictive covenants.

Total operating lease costs amounted to $270,000 and $349,000 for the years ended* December 31, 2023and2022*, respectively.

At* December 31, 2023and2022*, our total lease obligation was $97,000 and $147,000, respectively, of which the current portion of $71,000 was included in other accrued expenses on the Consolidated Balance Sheets. The weighted average discount rate for the years ended* December 31, 2023and2022* was 7.6% and 6.3%, respectively. At* December 31, 2023and2022*, the weighted average remaining lease term was 1 year and 2 years, respectively.

Future minimum lease payment obligations under operating leases are as follows (in thousands):

G. Stock-Based Compensation

Prior to the Separation, certain Company employees participated in LGL Group’s stock plan ("LGL Group's Plan"). In connection with the Separation, the Company's board of directors (the “Board”) approved the Amended and Restated2022 Incentive Plan (the*“2022* Plan”), including the authority to issue 500,000 shares of common stock pursuant to the2022 Plan. The2022 Plan is the only long-term plan under which equity compensation* maybe awarded to employees, advisors and members of the Board aligning their interest with those of stockholders. At December 31, 2023*,380,074 shares remained available for future issuance under the2022 Plan.

In connection with the Separation, restricted stock and stock option awards granted to Company employees under LGL Group's Plan were converted to awards representing 60,039 shares of the Company's common stock (the "Converted Awards") under the Company's2022 Plan. Adjustments to the underlying shares and terms of outstanding restricted stock and stock options were made primarily to preserve the value of the awards immediately before the Separation. The outstanding awards continue to vest over their original vesting periods.

For the period prior to the Separation, the share-based compensation expense recognized by the Company was based on grants related directly to Company employees. Total stock-based compensation expense for the years ended* December 31, 2023and2022* was $2,421,000 and $458,000, respectively.

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Restricted Stock Awards

Restricted stock awards are measured at a value equal to the market price of the Company's common stock on the date of grant which is recognized over the service period of the award. The following table provides the Company’s restricted stock activity from the Separation date to* December 31, 2023*:

As of* December 31, 2023*, there was $699,000 of total unrecognized compensation cost related to nonvested shares granted. The cost is expected to be recognized over a weighted-average period of 2.04 years.

Stock Options

Stock options granted to Company employees under LGL Group's Plan were converted to awards representing 9,710 shares of the Company's common stock in2022.

The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. There isno expected dividend rate. The basis for the expected volatility assumption includes historical Company volatility and that of its former parent blended with peer group volatility as the Company's available historical volatility was limited as a recently public company, didnot fully cover the life of the option, and that blending its historical volatility with peer data provides a reasonable indication of expected volatility in the future. The risk-free interest rate is based on the U.S. Treasuryzero-coupon rates with a remaining term equal to the expected term of the option. The Company records any forfeitures in the period that the shares are forfeited.

The Company estimates the fair value of stock option awards on the grant date using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:

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A summary of option activity for the period from Separation to* December 31, 2023,*is as follows:

H. Employee Benefit Plan

The Company offers a defined contribution plan for eligible employees that includes discretionary matching contributions up to 50% of thefirst 6% of eligible compensation contributed by participants, which became effective in* January 2023.LGL Group previously offered a defined contribution plan for eligible Company employees with similar terms and discretionary matching contributions. The Company contributed $162,000 and $89,000 in discretionary contributions during2023* and2022 respectively. Participants vest in employer contributions starting after theirsecond year of service at 20% increments, vesting 100% in year six.

I. Contingencies

In the normal course of business, the Company and its subsidiaries* maybecome defendants in certain product liability, patent infringement, worker claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. The Company isnot* involved in any legal proceedings other than routine litigation arising in the normal course of business,none of which the Company believes will have a material adverse effect on the Company's business, financial condition or results of operations.

J. Domestic and Foreign Revenues

Significant foreign revenues from operations (10% or more of foreign sales) were as follows:

The Company allocates its foreign revenue based on the customer's ship-to location.

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K. Quarterly Financial Data (Unaudited)

The following table provides summarized quarterly financial data for2023 (in thousands, except per share data):

(a) Due to changes in stock prices during the year and timing of issuances of shares, the cumulative total of quarterly net income (loss) per share amounts* may**not* equal the net income per share for the year.

The following table provides summarized quarterly financial data for2022 (in thousands, except per share data):

(a) Due to changes in stock prices during the year and timing of issuances of shares, the cumulative total of quarterly net income per share amounts* may**not* equal the net income per share for the year.

(b) For periods prior to the Separation, basic shares at the Separation date are being utilized for the calculation of basic and diluted net income per share. For additional information regarding the basic shares at the Separation date, see Note A. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies, under “Earnings per Share”.

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