Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders. Forward-looking statements generally include discussion of current expectations or forecasts of future events and can be identified by the use of terminology such as "believe," "estimate," "expect," "intend," "may," "could," "will," and similar words or expressions. Any statement that does not relate solely to historical fact should be considered forward-looking.

Our forward-looking statements generally relate to our growth strategy, future financial results, product development, and sales efforts. We make forward-looking statements throughout this Form 10-Q, but primarily in this Management's Discussion and Analysis of Financial Condition and Results of Operations section. These include statements relating to our beliefs and expectations and intentions with respect to (i) our growth and profitability, (ii) our marketing and product development, (iii) our ability to continue to obtain parts and materials for our products from various manufacturers and distributors in a timely manner and at reasonable prices, (iv) the value of our intellectual property, (v) our competitive position in the marketplace, (vi) the effect of governmental regulations on our business, (vii) our employee relations, (viii) the adequacy of our facilities, (ix) our intention to develop new products, (x) the possibility of us acquiring compatible businesses or product lines as part of our growth strategy, and (xi) our future cash requirements and use of cash.

Forward-looking statements cannot be guaranteed and our actual results may vary materially due to the uncertainties and risks, known and unknown, associated with these statements, including our ability to successfully develop new products and manage our cash requirements. We undertake no obligation to update any forward-looking statements. We cannot foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of these factors to be an exhaustive statement of all risks, uncertainties, or potentially inaccurate assumptions. These forward-looking statements are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results listed under the heading "Forward-Looking Statements" under "Item 1-Business," in our Annual Report on Form 10-K for the year ended December 31, 2024.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management's estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. There have been no changes to our critical accounting estimates during the three and nine-month periods ended September 30, 2025.

SELECTED FINANCIAL INFORMATION

The following table contains selected financial information, for the periods indicated, from our Condensed Statements of Operations expressed as a percentage of net sales.

The following paragraphs discuss the Company's performance for the three and nine months ended September 30, 2025and 2024.

RESULTS OF OPERATIONS (in thousands)

Net Sales

Net sales for the thirdquarter of 2025 were $2,748, an increase of $236, or 9.4%, from $2,512 during the comparable period in 2024. Net sales for the nine months ended September 30, 2025were $7,387, an increase of $414, or 5.9%, from $6,973during the comparable period in 2024. The increase during the three and nine-month periods were primarily driven by increased sales to industrial automation and OEM customers.

Gross Profit

Gross profit for the thirdquarter of 2025 was $1,458, an increaseof $193, or 15.3%, over the same period in 2024. Gross profit for the nine months ended September 30, 2025was $3,770, an increaseof $378, or 11.1%, over the same period in 2024. Gross margin increased in the thirdquarter of 2025 to 53.1% from 50.4% during the same period in 2024. Gross margin for the nine months ended September 30, 2025increased to 51.0% from 48.6% over the same period in 2024. The increase in gross margin for both periods was due to an increase in average selling prices implemented over the last twelve months to partially offset increased material costs.

Operating Expenses

Total operating expenses increased$185, or 16.9%, to $1,277for the thirdquarter of 2025 compared to the same period in 2024, and increasedas a percentage of net sales to 46.5% from 43.5%. Total operating expenses increased$334, or 9.7%, to $3,760for the nine months ended September 30, 2025compared to the same period in 2024, and increasedas a percentage of net sales to 50.9% from 49.1%. The increase in total operating expenses for both periods was primarily due to costs associated with additional employee headcount and variable compensation related to increased sales and stock compensation expense related to the acceleration of vesting of equity awards for a retired board member.

 Selling and marketing expenses in the thirdquarter of 2025 increased$94to $434, or 27.6%, from the same period in 2024, and increasedas a percentage of net sales to 15.8% from 13.5%. Selling and marketing expenses in the nine months ended September 30, 2025 increased$251to $1,295, or 24.0%, from the same period in 2024, and increasedas a percentage of net sales to 17.5% from 15.0%. The increase in selling and marketing expenses for both periods was primarily due to higher compensation and benefits due to the hiring of sales leadership and variable sales compensation related to the increase in sales.

 General and administrative expenses increased$89to $606, or 17.2%, in the thirdquarter of 2025compared to the same period in 2024, and increased as a percentage of net sales to 22.1% from 20.6%. General and administrative expenses increased$147to $1,768, or 9.1%, in the nine months ended September 30, 2025compared to the same period in 2024, and increasedas a percentage of net sales to 23.9% from 23.2%. The increase in general and administrative expenses for both periods was primarily due to stock compensation expense resulting from the accelerated vesting of equity awards for a retired board member and an increase in the allowance for credit losses.

 Research and development expenses increased$2to $237, or 0.9%, in the thirdquarter of 2025compared to the same period in 2024, but decreasedas a percentage of net sales to 8.6% from 9.4%. Research and development expenses decreased$64to $697, or 8.4%, in the nine months ended September 30, 2025compared to the same period in 2024, and decreasedas a percentage of net sales to 9.4% from 10.9%. The increase in research and development expense for the quarter was due to increased engineering costs related to product development and enhancements, offset by a decrease in compensation and benefits due to lower employee headcount. The net decrease for the nine-month period was due to the decrease in employee headcount, partially offset by an increase in engineering costs related to product development and enhancements.

Non-Operating Income

Net non-operating income decreased $26, or 22.2%, for the three-month period ended September 30, 2025compared to the same period in 2024. Net non-operating income decreased $81, or 23.7%, for the nine months ended September 30, 2025 compared to the same period in 2024. The decrease for the period is the result of lower interest income earned as a result of lower interest rates on Treasury Bills.

Income Before Income Tax Expense

Income before income tax expense decreased to $272 in the thirdquarter of 2025, representing decrease of $18from $290for the same period in 2024. Income before income tax expense was $271 for the nine months ended September 30, 2025, representing a decrease of $37 from $308 for the same period in 2024. The decrease for both periods was primarily due to higher operating expenses and a decrease in interest income, partially offset by increased net sales and gross margin, as described above.

Income Tax Expense

Income tax expense was $64, or 2.3% of net sales, in the thirdquarter of 2025 compared to $52, or 2.1% of net sales, in the thirdquarter of 2024. Income tax expense was $68, or 0.9% of net sales for the nine months ended September 30, 2025 compared to $63, or 0.9% of net sales for the nine months ended September 30, 2024. The effective tax rate for the thirdquarter of 2025was 23.5% compared to 18.0% for the same period in 2024. The effective tax rate for the nine months ended September 30, 2025 was 25.0% compared to 20.5% for the same period of 2024. The 2025effective tax rate for the nine months ended September 30, 2025was higher due to the timing of differences between tax and book deductions primarily resulting from a change in research and development expense treatment.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $10,571at September 30, 2025and $9,948at December 31, 2024. The increase was primarily the result of an increase in cash generated from operating activities.

Cash from operating activities was $642 for the nine months ended September 30, 2025 compared to $406for the nine months ended September 30, 2024. The $236 increase was due primarily to an increase in accounts payable and noncash expenditures, partially offset by an increase in accounts receivable. The increase in accounts payable is due to the timing of payments and receipt of inventory. The increase in accounts receivable is due to the increase in net sales.

Cash used in investing activities was $19and $30for the nine months ended September 30, 2025and 2024, respectively. The cash used was for the purchase of office equipment.

There was no cash flow from financing activities in the nine months ended September 30, 2025and 2024.

Subject to the following section, entitled "Supply Chain and Labor Dynamics," the Company believes its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, corporate and business development, and other strategic alternatives and that existing cash, cash equivalents, and investments and any cash generated from operations will be sufficient to meet these cash requirements through at least the next 12 months.

Supply Chain and Labor Dynamics

We purchase parts and materials from various manufacturers and distributors. While we believe our supply chain has generally stabilized, we still occasionally see unexpected price increases and delivery delays requiring us to intervene and remediate. To meet these challenges, we are seeking additional sources for components and modifying product designs to accommodate new components that are more readily available at competitive prices. There is no guarantee that we will continue to be successful in modifying these designs and sourcing alternative components and material. As a result, we could experience significant delays in receiving certain components needed to make timely customer deliveries, as well as increased costs that erode gross margins. Current supply chain dynamics may have a negative effect on the efficiency of our operations, our customer base, and the domestic or worldwide economy. Changes in general economic and financial conditions, inflationary pressures, the potential for economic recession in the U.S., tariffs and trade restrictions, including the imposition of new and higher tariffs on imported goods, the uncertainty of evolving tariffs, and retaliatory tariffs implemented by other countries on U.S. goods may have a negative impact on our business and results of operations. We continually monitor and attempt to remediate negative situations as they occur. However, we may not be able to fully remediate or offset costs, all of which could have a material negative impact on our business and results of operations.

Furthermore, the labor market for qualified employees able to fill our various open positions is challenging and becoming more costly. These factors may result in delays in filling these positions and negatively impact profit margins. In addition, we may experience changes in transportation and freight availability that may make it difficult to have materials and components shipped to us, or our products shipped to customers, in a timely and cost-effective manner. While we continue to closely monitor and manage each of these activities, our actions may not be successful and may result in a negative effect on our sales and profit margins.

Future Corporate and Business Development Activities

We continue to seek growth opportunities, both internally through our existing portfolio of products, technologies, and markets, as well as externally through technology partnerships or related-product or business acquisitions. In addition, we may make strategic or other investments that we believe present good opportunities for the Company and its shareholders. The Company's Board of Directors has established a special committee and continues to explore business development and other strategic alternatives.

Off-balance Sheet Arrangements

As of September 30, 2025, the Company had no off-balance sheet arrangements or transactions.