What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-22 · 140 added, 124 removed, 177 unchanged (60% of the section changed)

7 unchanged sentences

You should specifically consider the various

risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking

risk factors identified in this report and in our 2021 Form 10-K that could cause actual results to differ materially from those anticipated

in these forward-looking statements.

Business Overview

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currently deployed on a wide range of high-profile military and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin

F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft, and also makes a critical

F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 and F-15 fighter aircraft.

They also make a critical

component for the Pratt & Whitney Geared TurboFan (“GTF”) aircraft engine used on commercial airliners.

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Our revenues are principally

determined by orders from our customers, generally orders – which we call releases – against LTA’s with those customers.

These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact of inflation,

though over the term of a LTA prices often increase and not all of the increase is covered by agreed upon price protection clauses in

our agreements.

determined by orders from our customers for the delivery of product – which we call releases – against LTA’s with those

These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact

of inflation, though over the term of a LTA prices often increase and not all of the increase is covered by agreed upon price protection

clauses in our agreements.

Our direct costs of production include costs for material, labor, and factory overhead;

all of these costs may vary based

on the efficiency of our factory operations.

Our gross profit is highly variable due to the mix of products sold, and by sales volume,

which can lead to the over absorption or under absorption of factory overhead costs.

all of these costs

may vary based on the efficiency of our factory operations.

Our gross profit is highly variable due to the mix of products sold, and by

sales volume, which can lead to the over absorption or under absorption of factory overhead costs.

Beyond these direct costs

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of sales

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Balance Sheet Data:

September 30,

Working capital

1 unchanged sentence

Results of Operations for the three months

ended June 30, 2022

ended September 30, 2022

Consolidated net sales for

the three months ended June 30, 2022 were $14,008,000, a decrease of $1,445,000, or 9.4%, compared with $15,453,000 for the three months

ended June 30, 2021.

The decrease in sales resulted principally from the decline of approximately $115,000 in sales from two products

whose contracts expired or were cancelled by the customer in 2021.

the three months ended September 30, 2022 were $13,278,000, a decrease of $1,076,000, or 7.5%, compared with $14,354,000 for the three

months ended September 30, 2021.

The decrease in sales resulted principally from the sale of products with lower selling prices during

As indicated in the table

below, three customers represented 66.2% and three customers represented 76.2% of total sales for the three months ended June 30, 2022

and June 30, 2021, respectively.

below, two customers represented 63.9% and 67.7% of total sales for the three months ended September 30, 2022 and September 30, 2021,

respectively.

Percentage of Sales

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Sikorsky Aircraft

United States Department of Defense

* Customer was less than 10% of sales for the three months ended June 30, 2021.

** Customer was less than 10% of sales for the three months ended June 30, 2022.

Gross Profit:

Consolidated gross profit

from operations for the three months ended June 30, 2022 was $2,422,000, a decrease of $181,000, or 7.0%, as compared to gross profit

of $2,603,000 for the three months ended June 30, 2021.

Consolidated gross profit as a percentage of sales was 17.3% and 16.8% for the

three months ended June 30, 2022 and 2021, respectively.

For interim periods, substantially all of the inventory value has been estimated

using a gross profit percentage based on the annual gross profit percentage of the immediately preceding year as applied to the net sales

of the current period.

Operating Expenses:

Consolidated gross profit from operations for the three months ended

September 30, 2022 was $2,242,000, an increase of $228,000, or 11.3%, as compared to gross profit of $2,014,000 for the three months ended

September 30, 2021.

Consolidated gross profit as a percentage of sales was 16.9% and 14.0% for the three months ended September 30, 2022

and 2021, respectively.

For interim periods, substantially all of the inventory value has been estimated using a gross profit percentage

based on the annual gross profit percentage of the immediately preceding year.

Inventory value and gross profit margin for 2021 was estimated

using the gross profit margin percentage in 2020.

Gross profit margins in 2020 were negatively impacted by Covid-19 and therefore impacted

the estimated gross profit margins applied to the 2021 interim periods.

Actual gross profit margins returned to historical levels in 2021

and this higher gross profit margin have been used to calculate the gross profit margins for the interim periods for 2022.

Operating Expense

Consolidated operating expenses

for the three months ended June 30, 2022 totaled $2,172,000 and increased by $9,000 or 0.4% compared to $2,163,000 for the three months

ended June 30, 2021.

The increase was caused by increases in employment costs, including employee health benefits increases which were

not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel to customers

as Covid restrictions eased.

These increased costs were partially offset by reductions in information technology and bad debt expense.

Interest and Financing Costs:

for the three months ended September 30, 2022 totaled $2,073,000 and increased by $239,000 or 13.0% compared to $1,837,000 for the three

months ended September 30, 2021.

The increase was caused by increases in employment costs, including employee health benefits increases

which were not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel

to customers as Covid restrictions eased.

These increased costs were partially offset by reductions in expenses related to information

technology and the recovery of bad debt.

Interest and Financing Costs

for the three months ended June 30, 2022 were $289,000 a decrease of $44,000 or 13.2% compared to $333,000 for the three months ended

June 30, 2021.

The primary reason for this was lower balances on our debt with Webster Bank.

Net (Loss) Income:

Interest and financing costs for the three months ended September 30,

2022 were $323,000 a decrease of $8,000 or 2.4% compared to $331,000 for the three months ended September 30, 2021.

The primary reason

for this was lower balances on our debt with Webster Bank.

The average interest rate charged was 4.70% and 3.50% for the three months

ended September 30 2022 and 2021, respectively.

Net loss for the three months

ended June 30, 2022 was $7,000, a decrease of $246,000, compared to net income of $239,000 for the three months ended June 30, 2021 due

to the reasons stated above.

Results of Operations for the six months ended June 30, 2022

ended September 30, 2022 was $142,000, compared to a net loss of $66,000 for the three months ended September 30, 2021 due to the reasons

stated above.

Results of Operations for the nine months ended

September 30, 2022

Consolidated net sales for

the six months ended June 30, 2022 were $26,070,000, a decrease of $3,095,000, or 10.6%, compared with $29,165,000 for the six months

ended June 30, 2021.

The decrease in sales resulted principally from the decline of approximately $1,575,000 in sales from two products

whose contracts expired or were cancelled by the customer in 2021.

As indicated in the table

below, four customers represented 77.9% and three customers represented 77.0% of total sales for the six months ended June 30, 2022 and

June 30, 2021, respectively.

the nine months ended September 30, 2022 were $39,348,000, a decrease of $4,171,000, or 9.6%, compared with $43,519,000 for the nine months

ended September 30, 2021.

The decrease in sales resulted principally from the sale of products with lower selling prices and from contracts

that expired in 2021 and were not renewed in 2022.

indicated in the table below, three customers represented 68.9% and 75.5% of total sales for the nine months ended September 30, 2022

and September 30, 2021, respectively.

Percentage of Sales

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United States Department of Defense

* Customer was less than 10% of sales for the six months ended June 30, 2021.

Gross Profit:

Consolidated gross profit

from operations for the six months ended June 30, 2022 was $4,500,000, an increase of $100,000, or 2.3%, as compared to gross profit of

$4,400,000 for the six months ended June 30, 2020.

Consolidated gross profit as a percentage of sales was 17.3% and 15.1% for the six

months ended June 30, 2022 and 2021, respectively.

For interim periods, substantially all of the inventory value has been estimated using

a gross profit percentage based on the annual gross profit percentage of the immediately preceding year as applied to the net sales of

the current period.

Operating Expenses:

Consolidated gross profit from operations for the nine months ended

September 30, 2022 was $6,742,000, an increase of $328,000, or 5.1%, as compared to gross profit of $6,414,000 for the nine months ended

September 30, 2021.

Consolidated gross profit as a percentage of sales was 17.1% and 14.7% for the nine months ended September 30, 2022

and 2021, respectively.

For interim periods, substantially all of the inventory value has been estimated using a gross profit percentage

based on the annual gross profit percentage of the immediately preceding year.

Inventory value and gross profit margin for 2021 was estimated

using the gross profit margin percentage in 2020.

Gross profit margins in 2020 were negatively impacted by Covid-19 and therefore impacted

the estimated gross profit margins applied to the 2021 interim periods.

Actual gross profit margins returned to historical levels in 2021

and this higher gross profit margin have been used to calculate the gross profit margins for the interim periods for 2022.

Operating Expense

Consolidated operating expenses

for the six months ended June 30, 2022 totaled $4,043,000 and increased by $110,000 or 2.8% compared to $3,933,000 for the six months

ended June 30, 2021.

The increase was caused by increases in employment costs, including employee health benefits increases which were

not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel to customers

as Covid restrictions eased.

These increased costs were partially offset by reductions in information technology and bad debt expense.

Interest and Financing Costs:

for the nine months ended September 30, 2022 totaled $6,116,000 and increased by $346,000 or 6.0% compared to $5,770,000 for the nine

months ended September 30, 2021.

The increase was caused by increases in employment costs, including employee health benefits increases

which were not passed on to employees, increases in investor relations and increased travel costs resulting from the resumption of travel

to customers as Covid restrictions eased.

These increased costs were partially offset by reductions in information technology and bad

debt expense.

Interest and Financing Costs

for the six months ended June 30, 2022 were $612,000 a decrease of $18,000 or 2.9% compared to $630,000 for the six months ended June

The primary reason for this was lower balances on our debt with Webster Bank.

Interest and financing costs for the nine months ended September 30,

2022 were $935,000 a decrease of $26,000 or 2.7% compared to $961,000 for the nine months ended September 30, 2021.

The primary reason

for this was lower balances on our debt with Webster Bank.

The average interest rate charged was 3.94% and 3.50% for the nine months ended

September 30 2022 and 2021, respectively.

Net (Loss) Income

Net loss for the six months

ended June 30, 2022 was $35,000, a decrease of $122,000 compared to net income of $87,000 for the six months ended June 30, 2021, for

the reasons stated above.

Net Loss for the nine months

ended September 30, 2022 was $177,000, compared to net income of $21,000 for the nine months ended September 30, 2021, for the reasons

discussed above.

LIQUIDITY AND CAPITAL RESOURCES

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are for debt service, capital expenditures and funding working capital/operating costs.

As of June 30, 2022, we have

debt service requirements related to:

Webster Facility of $18,222,000 consisting of a Revolving Loan of $13,343,000 and a term loan in the amount of $4,879,000.

remainder of our fiscal 2022, we are required to pay $357,000 of the principal due under the term loan.

party debt consisting of convertible subordinated note payables of $4,812,000 and subordinated note payables of $1,600,000.

is not due until July 1, 2026.

We are permitted to make principal payments in the amount of $250,000 per quarter pursuant to the Third

Amendment to the Loan and Security Agreement with Webster Bank, as long as certain conditions are met.

On July 14, 2022, a principal

payment in the amount of $250,000 was made as the conditions for such payment were met for the first quarter of 2022.

equipment leases and contractual obligations related to our normal business.

As of September 30, 2022,

we have debt service requirements related to:

Our Webster Facility of $18,788,000 consisting of a Revolving Loan of $14,097,000 and a term loan in the amount of $4,691,000.

During the remainder of fiscal 2022, we are required to pay $178,000 of principal under the term loan.

Related party debt consisting of convertible subordinated note payables of $4,812,000 and subordinated note payables of $1,350,000.

This debt is not due until July 1, 2026.

We are permitted to make principal payments against this debt in the amount of $250,000 per quarter pursuant to the Third Amendment to the Loan and Security Agreement with Webster Bank, as long as certain conditions are met.

On July 14, 2022, a principal payment in the amount of $250,000 was made as the conditions for such payment were met for the first quarter of 2022.

Various equipment leases and contractual obligations related to our normal business.

We have historically met our

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debt financing transactions.

Based on our current revenue visibility and strength of our backlog, we believe that we have enough liquidity

Based on our current revenue visibility and strength of our backlog, we believe that we have sufficient liquidity

to meet our short-term cash requirements.

1 unchanged sentence

Webster Bank.

The purpose of the amendment was to increase the Term Loan to $5,000,000 and establish a capital expenditure line of credit

in the amount of $2,000,000 which we can draw upon from time to time to finance purchases of machinery and equipment, reduce the monthly

principal installments to be made in respect to the term loan and increase the amount of capital expenditures that the Company may make

Because we believe our fiscal

2022 sales will be in line with the amount achieved in fiscal 2021, we believe our liquidity in 2022 will continue to improve.

of recent increases in the federal funds borrowing rate, interest rates and related expense under our Webster Facility are expected to

increase from current levels.

The purpose of the amendment was to increase the Term Loan to $5,000,000, reduce the monthly principal installments to be

made in respect to the term loan and establish a capital expenditure line of credit in the amount of $2,000,000 which we can draw upon

from time to time to finance purchases of machinery and equipment, thereby increasing the amount of capital expenditures we may make each

Because we believe our fourth

quarter fiscal 2022 sales will be in line with the amount achieved in the comparable period of 2021, we believe our liquidity will continue

As a result of recent increases in the federal funds borrowing rate, interest rates and related expense under our Webster

Facility are expected to increase from current levels.

Such increases are not expected to materially impact our liquidity.

Our future liquidity may

be adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such

Our future liquidity may be

adversely impacted by various risks and uncertainties, including, but not limited to future and current impacts of global events such

as COVID-19 and the war in the Ukraine, increases in inflation, disruptions in the labor market and other risks detailed in Part1, Item

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our net cash flow from operating, investing and financing activities for the periods indicated below:

Six Months Ended

Nine Months Ended

September 30,

Cash provided by (used in)

2 unchanged sentences

Financing activities

Net increase (decrease) in cash

Net decrease in cash

$ (1,813,000 )

2 unchanged sentences

primarily consists of our net loss adjusted for certain non-cash items and changes to working capital items.

For the six months ended June

30, 2022, the net loss as adjusted for non-cash items provided cash of $1,653,000.

This was a result of our net loss of $35,000, offset

by $1,688,000 of non-cash items consisting primarily of depreciation of property and equipment of $1,308,000, non-cash employee stock

compensation expense of $207,000, amortization of right-of-use assets of $265,000 and non-cash directors’ compensation expense of

The remaining non-cash items totaled $(200,000).

For the nine months ended

September 30, 2022, our net loss as adjusted for non-cash items provided cash of $2,414,000.

This was a result of our net loss of $177,000,

offset by $2,591,000 of non-cash items consisting primarily of depreciation of property and equipment of $1,906,000, non-cash employee

stock compensation expense of $262,000, amortization of right-of-use assets of $403,000 and non-cash directors’ compensation expense

The remaining non-cash items totaled absorbed $142,000.

Changes in operating assets

and liabilities used cash in the net amount of $1,338,000 consisting primarily of increases in inventory, deposits and prepaid taxes in

the amounts of $3,456,000, $99,000 and $5,000, respectively, and decreases in operating lease liabilities and customer deposits of $331,000

and $53,000, respectively, partially offset by a decrease in accounts receivable in the amount of $1,513,000, and an increase in accounts

payable and accrued expenses in the amount of $1,093,000.

and liabilities used cash in the net amount of $2,487,000 consisting primarily of increases in inventory, deposits and prepaid expenses

and other current assets in the amounts of $3,876,000, $74,000 and $24,000, respectively, and decreases in operating lease liabilities

and customer deposits of $504,000 and $179,000, respectively, partially offset by a decrease in accounts receivable in the amount of $1,917,000,

an increase in accounts payable and accrued expenses in the amount of $117,000 and an increase in other current liabilities of $139,000.

Cash Used in Investing Activities

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consists of capital expenditures for property and equipment.

For the six months ended June

30, 2022, cash used in investing activities was $1,327,000.

This was for the purchase of property and equipment.

Cash Used In Financing Activities

For the six months ended June

30, 2022, cash provided by financing activities consisted of net proceeds from the Webster re-financing of $1,945,000 and net advances

on our Webster revolving loan in the amount of $888,000, partially offset by repayments of $1,251,000 on our Webster term note, $263,000

on our financed lease obligations and $4,000 on our financed asset note payable.

For the nine months ended September 30, 2022, cash used in investing activities

was $1,980,000.

Cash Provided by (Used in) Financing Activities

For the nine months ended

September 30, 2022, cash provided by financing activities consisted of net proceeds from the Webster re-financing of $1,945,000 and net

advances on our Webster revolving loan in the amount of $1,641,000, partially offset by repayments of $1,430,000 on our Webster term note,

$263,000 on our financed lease obligations, $250,000 on our subordinated notes payable – related party and $5,000 on our financed

asset note payable.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance

sheet arrangements as of June 30, 2022.

sheet arrangements as of September 30, 2022.

Critical Accounting Policies and Estimates

6 unchanged sentences

GAAP”), and all applicable U.S.

GAAP accounting standards effective as of June 30, 2022 have been taken into consideration in preparing

the condensed consolidated financial statements.

The preparation of condensed consolidated financial statements requires estimates and

assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Some of those estimates

are subjective and complex, and, consequently, actual results could differ from those estimates.

The following accounting policies and

estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies could affect

our condensed consolidated financial statements:

GAAP accounting standards effective as of September 30, 2022 have been taken into consideration

in preparing the condensed consolidated financial statements.

The preparation of condensed consolidated financial statements requires

estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

those estimates are subjective and complex, and, consequently, actual results could differ from those estimates.

The following accounting

policies and estimates have been highlighted as significant because changes to certain judgments and assumptions inherent in these policies

could affect our condensed consolidated financial statements:

Inventory valuation;

12 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis