MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion and analysis which follows contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind shareholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements.

 

The interim condensed consolidated financial statements appearing elsewhere in this report should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 20-F for the year ended December 31, 2024. The results of operations for the six months ended June 30, 2025, are not necessarily indicative of the operating results for the full fiscal year.

 

Overview

 

We manufacture, market and sell technologically advanced custom-made printed circuit boards, or PCBs, including high density interconnect, or HDI, flex-rigid and rigid, with high layer count boards.  Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers.  PCBs are constructed from a variety of base raw materials.  PCBs can be double-sided or multi-layered and made of rigid, flexible, flex-rigid or high-frequency materials.  In essence, they are platforms that conduct electrical signals among active and passive microelectronics components, microprocessors, memories, resistors and capacitors.  Photolithographic type processes transfer the images of the electrical circuit onto the layers, and chemical processes etch these lines on the boards. Our focus is on short run quick-turnaround, prototype, pre-production and low to medium volume runs of high-end PCB products for high growth, advanced electronics applications, mainly flex-rigid PCBs. We also act as an agent for the importation of PCBs from Southeast Asia when customers require high volume production runs, although such activity was less material in recent years.

Critical Accounting Estimates

 

The preparation of our consolidated financial statements and other financial information requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate on an on-going basis these estimates, mainly related to inventory, deferred tax assets and share-based compensation expenses.

We base our estimates on our experience and on various assumptions that we believe are reasonable under the circumstances. The results of our estimates form the basis for our management’s judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial information:

Inventory

 

We are required to state our inventories at the lower of cost or net realizable value.  Cost is determined on the weighted average basis for raw materials.  For work in progress and finished goods, the cost is determined based on calculation of accumulated actual direct and indirect costs. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

We periodically evaluate the inventory quantities on hand relative to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels of parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, excess inventories, market prices lower than cost and adjusted revenue forecasts. Any write-off is recognized in our consolidated statements of income as cost of revenues. In addition, if required, we record a liability for firm non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of our forecast of future demand consistent with our valuation of excess and obsolete inventory.

The process of evaluating these write-offs often requires us to make subjective judgments and estimates concerning future sales potential at which such an inventory will be sold in the normal course of business. Incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such an inventory is disposed of or sold. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuations to be a critical accounting estimate.

Explanation of Key Income Statement Items

 

Revenues. Our revenues are mainly derived from sales of PCBs, including high density interconnect, flex-rigid and multi-layered boards. The principal markets of the Company are in Israel, Europe, India and North America.

 

Cost of Revenues. Cost of revenues consists primarily of salaries, raw materials, subcontractor expenses, related depreciation costs, inventory write-downs and overhead allocated to cost of revenues activities.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries and related expenses for executives and for selling, and marketing personnel, marketing activities, accounting, legal, administrative personnel, professional fees, provisions for doubtful accounts and other general corporate expenses.

 

Financial Expenses, Net. Financial expenses consist of bank expenses and currency re-measurement losses. Financial income consists of interest on cash and cash equivalent balances (including Short-term bank deposits) and currency re-measurement gains.

Results of Operations

 

Revenues. Our revenues for the six months ended June 30, 2025, were $25.2 million as compared to $22.2 million for the six months ended June 30, 2024, an increase of $3.0 million. The increase in revenues is primarily attributable to increased demand for our products, increased capacity and a more favorable mix of products which resulted in higher sales prices.

Cost of Revenues. Cost of revenues increased by 15% to $20.0 million for the six months ended June 30, 2025, from $17.4 million for the six months ended June 30, 2024. The increase is mainly due to the increase in revenues and increase in labor costs of manufacturing employees that took place in July 2024.

 

Gross Profit. Our gross profit increased to $5.2 million or 20.7% for the six months ended June 30, 2025, from $4.9 million, or 22.0% for the six months ended June 30, 2024. The increase in our gross profit is mainly due to the increase in revenues. The decrease in gross margin in 2025 is attributed to increased labor costs and the ramp-up of new production equipment, which temporarily has led to lower yields.

 

Our operating expenses were $3.1 million for the six months ended June 30, 2025, as compared to $2.8 million for the six months ended June 30, 2024. The increase is mainly due to the increase in revenues.

 

Financial Income (expense), Net. We had net financial expenses of $0.5 million in the first six months of 2025 compared to net income of $0.8 million in the first six months of 2024. The increase in financial expenses is primarily attributable to the devaluation of the U.S. Dollar exchange rate against the NIS and its $1.0 million impact on our outstanding Dollar denominated balances in the second quarter of 2025.

Net Profit. Our net profit for the first six months of 2025 was $1.4 million compared to net profit of $2.5 million in the first six months of 2024.

Liquidity and Capital Resources

 

Historically, we have financed our operations through cash generated by operations, shareholder loans, long-term and short-term bank loans, borrowings under available credit facilities and the proceeds from our initial public offering in 1997, rights offerings in 2019 and 2020 and a follow-on public offering in 2024.

 

As of June 30, 2025, our cash position (cash and cash equivalents and short-term bank deposits) totaled $11.2 million compared to $17.2 million in cash and cash equivalents as of December 31, 2024. As of June 30, 2025, we had working capital of $25.1 million as compared to working capital of $25.8 million as of December 31, 2024.

As of June 30, 2025, we had revolving lines of credit aggregating NIS 8.7 million ($2.6 million) with our banks, none of which was utilized as of such date. As of June 30, 2025, we had no debt and were in compliance with our banks' covenants. All of our assets are pledged to our banks, whose consents are required for any future pledge of such assets.

Net cash used in operating activities for the first six months of 2025 was $2.8 million as compared to net cash provided by operating activities of $2.9 million during the first six months of 2024. The net cash used in operating activities for the first six months of 2025 was primarily due to net income of $1.4 million, an increase in trade receivables of $1.7 million and an increase in inventory of $2.6 million.

 

Net cash used in investing activities during the first six months of 2025 was $2.4 million as compared to net cash used in investing activities of $12.5 million during the first six months of 2024. This was primarily due to our purchase of fixed assets in the amount of $2.9 million during the first six months of 2025 compared to purchase of fixed assets in the amount of $6.0 million and investment in short-term bank deposits in the amount of $6.5 million during the first six months of 2024.

 

Net cash used in financing activities during the first six months of 2025 was $1.3 million, mainly attributable to a dividend distribution, compared to cash provided by financing activities of $9.6 million during the first six months of 2024, which included mainly proceeds from the follow-on offering. 

Our working capital requirements and cash flow provided by our operating and financing activities are likely to vary from quarter to quarter, depending on the following factors: (i) the timing of orders and deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the build‑up of inventories; (v) the payment terms offered to our customers; (vi) the payment terms offered by our suppliers; (vii) the repayment of existing lines of credit and loans; and (vii) approval of the current or additional lines of credit and long-term loans from banks.

 

The corporate tax in Israel is 23% as of June 30, 2025. According to the Law for the Encouragement of Capital Investments and our Preferred Enterprise status, our applicable tax rate is 16%.