M-tron Industries, Inc.

2.** Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of M-tron Industries, Inc. and its majority owned subsidiaries.

The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Intercompany accounts and transactions have been eliminated in consolidation.

Uses of Estimates

The preparation of the Consolidated Financial Statements in conformity with U.S. 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 cash on hand and 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.

Inventories

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

Refer to Note13 - Other Financial Statement Information for further information.

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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 to10 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.

Refer to Note 13 - Other Financial Statement Information for further information.

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 amortizable intangible assets are fully amortized as of* December 31, 2024*.

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 for Sales to Customers

The Company recognizes revenue from the sale of its products in accordance with the criteria in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic606, Revenue from Contracts with Customers("ASC606"), 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.

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 Note14 - 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

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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. For the years ended* December 31, 2024and2023*, research and development costs were $2,809 and $2,216, respectively. Such costs are included within Engineering, selling and administrative expenses on the Consolidated Statements of Operations.

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.

Refer to Note7 - Stock-Based Compensation for further information.

Earnings Per Share

The Company computes earnings per share in accordance with ASC Topic260, Earnings Per Share("ASC260"). Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of stock options and restricted stock using the treasury stock method, only in the periods in which the effects are dilutive. Under the treasury stock method, the Company utilizes the average market price to determine the amount of cash that would be available to repurchase shares if the common shares vested. The net incremental share count issued represents the potential dilutive and anti-dilutive securities.

Refer to Note9 - Earnings Per Share for further information.

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 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.

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

Global Intangible Low-Taxed Income

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’s2024* and2023 provisions.

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Research and Experimentation

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).

Uncertain Tax Positions

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.

Tax Contingencies, Interest, and Penalties

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 expense on the Consolidated Statements of Operations.

Refer to Note5 - Income Taxes for further information.

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 each2024 fiscal quarter, including as of2024. 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.

Concentration Risks

In2024, the Company's largest andsecond largest customers accounted for $18,145, or 37.0%, and $8,522, or 17.4%, respectively, of the Company's total revenues. In2023, the Company's largest andsecond largest customer accounted for $12,921, or 31.4%, and $7,822, or 19.0%, respectively, of the Company’s total revenues.

A significant portion of the Company's accounts receivable is concentrated with a relatively small number of customers. As of* December 31, 2024*, four of the Company's largest customers accounted for approximately $4,648, or 66.2%, of accounts receivable. As of* December 31, 2023*, four of the Company's largest customers accounted for approximately $3,774, or 76.4%, 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 during the years ended and as of* December 31, 2024and2023*, 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 U.S. Treasury money market fund and hasnot experienced any losses related to these balances.

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Segment Information

The Company reports segment information in accordance with ASC Topic280, 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.

Refer to Note3 - Segment Information for further information.

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. For the years ended* December 31, 2024and2023*, the Company recognized a remeasurement gain of $5 and $71, respectively, which is included within Other income, net in the Consolidated Statements of Operations.

Accounting Standards Adopted

Segment Reporting

In* November 2023,the FASB issued ASU2023*-07, "Segment Reporting (Topic280*) - Improvements to Reportable Segment Disclosures*" ("ASU2023-07"), to address improvements to reportable segment disclosures. The standard primarily requires the following disclosure on an annual and interim basis: (i) significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss; and (ii) other segment items and description of its composition. The standard also requires current annual disclosures about a reportable segment's profits or losses and assets to be disclosed in interim periods and the title and position of the CODM with an explanation of how the CODM uses the reported measure(s) of segment profits or losses in assessing segment performance. The provisions of the standard are effective for public companies for fiscal years beginning after* December 15, 2023,and interim periods within fiscal years beginning after December 15, 2024,with early adoption permitted. The amendment is applied retrospectively to all prior periods presented. The Company adopted2023*-07 during the year ended* December 31, 2024.Refer to Note3* - Segment Information for further information.

Future Application of Accounting Standards

Income Taxes

In* December 2023,the FASB issued ASU2023*-09, "Income Taxes (Topic740*) - Improvements to Income Tax Disclosures*" ("ASU2023-09"). The standard requires disaggregated information about a company's effective tax rate reconciliation as well as information on income taxes paid. The provisions of the standard are effective for public companies for fiscal years beginning after* December 15, 2024,*with early adoption permitted. This accounting standards update applies prospectively; however, retrospective application is permitted. The Company is currently assessing the impact of this standard.

Disaggregation of Income Statement Expenses

In* November 2024,the FASB issued ASU2024*-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic220*-40)" ("ASU2024*-03"). The standard requires certain details for expenses presented on the face of the Consolidated Statements of Operations as well as selling expenses to be presented in the notes to the financial statements on an interim and annual basis. The provisions of the standard are effective for public companies for fiscal years beginning after* December 15, 2026,and interim periods within fiscal years beginning after December 31, 2027.*The amendment can be applied either prospectively or retrospectively, with early adoption permitted. The Company is currently assessing the impact of this standard.

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