What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-05-16 compared with 2022-03-25 · 239 added, 334 removed, 15 unchanged (97% of the section changed)

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion

of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements

for the years ended December 31, 2021 and 2020 and the notes to those statements included elsewhere in this report.

This discussion contains

forward-looking statements that involve risks and uncertainties.

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 statements.

Business Overview

Air Industries Group is a holding

company with three legal subsidiaries, AIM, NTW and SEC.

SEC began manufacturing aircraft components in 1941 – over 80-years ago

– for use in World War II.

NTW was formed in the early 1960’s and AIM has been in business since 1971.

We became a public

company in 2005.

We manufacture aerospace components

primarily for the defense industry.

Our Complex Machining Segment (“CMS”), which consists of AIM and NTW, manufactures structural

parts and assemblies focusing on flight safety, including aircraft landing gear, arresting gear, engine mounts, flight controls, throttle

quadrants, and other components.

Our Turbine and Engine Component segment (“TEC”) segment consists of SEC which makes components

and provides services for aircraft jet engines and ground-power turbines.

Products of CMS are 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, CMS also makes a critical

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

TEC makes products

used in jet engines that are used on military and commercial aircraft including the USAF F-15 and F-16, the Airbus A-330 and the Boeing

777, and others, and in addition, a number of ground-power turbine applications.

The aerospace market is highly

competitive in both the defense and commercial sectors and we face intense competition in all areas of our business.

Nearly all of our

revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process.

As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying

more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class

products and service but also by increasing our ability to produce more complex and complete assemblies for our customers.

We are focused on maintaining

profitability and positive cash flows from operating activities.

We remain resolute on meeting customers’ needs.

To take advantage

of the long-term growth opportunities we see in our markets, we have made significant capital investments in new equipment in recent years.

We believe these investments will increase the velocity and efficiency of production, increase the size of product we can make and allow

us to offer additional services to our customers.

Some of our investment expands our capabilities allowing us to internally process product

that was previously outsourced to third party suppliers.

We are pleased with the positive responses from our customers about these initiatives.

Our ability to operate profitably

and generate positive cash flows from operating activities is determined by our ability to win new or renewal contracts and fulfilling

these contracts on a timely and cost effective basis.

Winning a contract generally requires that we submit a bid containing fixed prices

for the product or products covered by the contract for an agreed upon period of time, sometimes for five-years or longer.

submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we

can obtain from our subcontractors.

While our revenues are largely

determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs

are determined by a number of factors.

The principal factors impacting our costs are the cost of materials and supplies, labor, financing

and the efficiency at which we can produce our products.

The cost of materials used in the aerospace industry is highly volatile.

the market for the skilled labor we require to operate our plants is highly competitive.

The profit margin of the various products we

sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product

and, in some cases, the ability to deliver replacement parts on short notice.

Thus, in assessing our performance from one period to another,

a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold.

Our operations have a

large percentage of fixed factory overhead.

As a result, our profit margins are also highly variable with sales volumes as under-absorption

of factory overhead decreases profits.

Our revenues are 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, though over the term of a LTA prices often increase.

Our direct costs of production include costs

for material, labor, and factory overhead;

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

following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated

financial statements for the years ended December 31, 2022 and 2021 and the notes to those statements included elsewhere in this report.

This discussion contains forward-looking statements that involve risks and uncertainties.

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

Industries Group is a holding company with three legal subsidiaries, AIM, NTW and SEC.

SEC began manufacturing aircraft components in

1941 – over 80-years ago – for use in World War II.

NTW was formed in the early 1960’s and AIM has been in business

We became a public company in 2005.

manufacture aerospace components primarily for the defense industry.

AIM and NTW, manufacture structural parts and assemblies focusing

on flight safety, including aircraft landing gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components.

SEC makes components and provides services for aircraft jet engines and ground-power turbines.

of AIM and NTW are 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.

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

SEC makes products used in jet engines that are used on military and commercial aircraft including the USAF F-15 and F-16, the Airbus

A-330 and the Boeing 777, and others, and in addition, a number of ground-power turbine applications.

aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our

Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through

a competitive bidding process.

As the commercial aerospace and defense industries continue to consolidate and major contractors seek

to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only

by providing cost-effective world class products and service but also by increasing our ability to produce more complex and complete

assemblies for our customers.

are focused on maintaining profitability and positive cash flows from operating activities.

We remain resolute on meeting customers’

To take advantage of the long-term growth opportunities we see in our markets, we have made significant capital investments in

new equipment in recent years.

We believe these investments will increase the velocity and efficiency of production, increase the size

of product we can make and allow us to offer additional services to our customers.

Some of our investment expands our capabilities allowing

us to internally process product that was previously outsourced to third party suppliers.

We are pleased with the positive responses

from our customers about these initiatives.

ability to operate profitably and generate positive cash flows from operating activities is determined by our ability to win new or renewal

contracts and fulfilling these contracts on a timely and cost effective basis.

Winning a contract generally requires that we submit a

bid containing fixed prices for the product or products covered by the contract for an agreed upon period of time, sometimes for five-years

or longer, with negotiated increases to reflect a portion of the impact of inflation.

Thus, when submitting bids, we are required to

estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.

our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under

each contract, our costs are determined by a number of factors.

The principal factors impacting our variable costs are the cost of materials

and supplies, labor, financing and the efficiency at which we can produce our products.

The cost of materials used in the aerospace industry

is highly volatile.

The invasion of the Ukraine by the Russian Federation and retaliatory measures imposed by the United States, United

Kingdom, the European Union and other countries, and the responses of Russia to such measures, have negatively impacted the availability

and market price of certain minerals, such as titanium, for which Russia was a source of supply.

To obtain necessary raw materials at

prices deemed acceptable, we are working with those of our larger customers which have access to sources of metals necessary to manufacture

their products not readily available to us or other companies of our size.

Nevertheless, there can be no assurance that disruptions in

the markets for metals will not adversely impact our ability to timely meet the needs of our customers.

addition, the market for the skilled labor we require to operate our plants is highly competitive.

Changes in the available pool of labor

caused by Covid-19 and life-style changes in response to Covid-19 have not materially adversely impacted our ability to meet our production

Nevertheless, as we seek to grow our business, there can be no assurance that the skilled labor we need to operate our machinery

will be available to us or that the costs incurred to maintain our current labor force and those we seek to bring on will not increase.

profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity

of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice.

Thus, in assessing

our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the

mix of products sold.

Our operations have a large percentage of fixed factory overhead.

As a result, our profit margins are also highly

variable with sales volumes as under-absorption of factory overhead decreases profits.

revenues are principally determined by orders from our customers for the delivery of product – 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 b 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.

Beyond these direct costs of production, we incur

general and administrative costs termed Operating Expenses and financing costs for borrowed money, income taxes and miscellaneous income

A very large percentage of

the products we produce are used on military as opposed to civilian aircraft.

These products can be replacements for aircraft already

in the fleet of the armed services or for the production of new aircraft.

Reductions to the Defense Department budget and decreased usage

of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business and our revenue.

In this report, we follow

Financial Accounting Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes

standards for reporting information about operating segments in annual and interim financial statements, ASC 280 requires that companies

report financial and descriptive information about their reportable segments based on a management approach.

ASC 280 also establishes

standards for related disclosures about products and services, geographic areas and major customers.

Historically we have operated our businesses and reported their results

as two separate segments with AIM and NTW comprising our CMS segment and SEC as the TEC segment.

Our CMS segment specializes in flight

critical components including flight controls and landing gear.

Our TEC segment focuses on manufacturing components for jet engines.

segment having different customers.

The accounting policies of

our segments are the same as those described in the Summary of Significant Accounting Policies.

We evaluate performance based on revenue,

gross profit contribution and assets employed.

In recent years we integrated

and consolidated the business of AIM and NTW into one facility on Long Island and the operations of our CMS and TEC segments have become

increasingly integrated.

We also made significant capital expenditures and all of our operations now share the same manufacturing facilities

and use most, if not all, of the same sales and marketing functions.

We made these changes to take advantage of the long-term growth opportunities

we see in the A&D market.

In early fiscal 2022, we further changed our management approach and will now make decisions about resources

to be allocated and assessing performance based on one integrated business rather than two reporting segments.

As such, effective with

our first quarter ending March 31, 2022, we will present our operations as one reportable operating segment.

RESULTS OF OPERATIONS-CONTINUING OPERATIONS

Years ended December 31, 2021 and 2020:

For purposes of the following

discussion of our selected financial information and operating results, we have presented our financial information based on our continuing

operations unless otherwise noted.

Selected Financial Information:

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.

these direct costs of production, we incur general and administrative costs termed Operating Expenses and financing costs for borrowed

money, income taxes and miscellaneous income and expense.

very large percentage of the products we produce are used on military as opposed to civilian aircraft.

These products can be replacements

for aircraft already in the fleet of the armed services or for the production of new aircraft.

Reductions to the Defense Department budget

and decreased usage of aircraft reduces the demand for both new production and replacement spares and could adversely impact our business

and our revenue.

OF OPERATIONS

ended December 31, 2022 and 2021:

Financial Information:

Cost of sales

Operating expenses and interest and financing costs

Operating expenses

Interest and financing costs

Other income, net

Forgiveness of notes payable - SBA Loan

Benefit from income taxes

Income from continuing operations

Balance Sheet Data:

Cash and cash equivalents

Gain on write-off of accounts payable

Provision/(Benefit) from income taxes

Net (loss) income

$ (1,076,000 )

Working capital

Total stockholders’ equity

The following sets forth the results of

operations for each of our segments individually and on a consolidated basis for the periods indicated:

net sales for the year ended December 31, 2022 were $53,238,000, a decrease of $5,701,000, or 9.7%, compared with $58,939,000 for the

year ended December 31, 2021.

COMPLEX MACHINING

Income before benefit from income taxes

TURBINE ENGINE COMPONENTS

Loss before benefit from income taxes

Income (Loss) before benefit from income taxes

Benefit from Income Taxes

Loss from Discontinued Operations, net of taxes

Consolidated net sales for the

year ended December 31, 2021 were $58,939,000, an increase of $8,842,000, or 17.6%, compared with $50,097,000 for the year ended December

Net sales of CMS were $52,921,000, an increase of $8,262,000, or 18.5%, from $44,659,000 in the prior year.

Net sales in our

TEC segment were $6,018,000, an increase of $580,000 or 10.7%, compared with $5,438,000 for the year ended December 31, 2020.

was directly attributable to shipping product that had remained in Work In Process at the end of 2020 due certain subcontractors who were

severely impacted by COVID-19 and our ability to increase production and return to pre-COVID-19 business environment.

As indicated in the table

below, three customers represented 75.4% and 73.9% of total sales for the years ended December 31, 2021 and 2020, respectively.

Percentage of Sales

Goodrich Landing Gear Systems

Sikorsky Aircraft

United States Department of Defense

As indicated in the table

below, three customers represented 74.7% and 80.3% of gross accounts receivable at December 31, 2021 and 2020, respectively.

Percentage of Receivables

Goodrich Landing Gear Systems

United States Department of Defense

Gross Profit:

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

contracts that expired in 2021 that were not renewed in 2022.

indicated in the table below, four customers represented 76.5% and three customers represented 75.4% of total sales for the years ended

December 31, 2022 and 2021, respectively.

Landing Gear Systems

States Department of Defense

was less than 10% of sales for the year-ended December 31, 2021

indicated in the table below, three customers represented 70.3% and three customers represented 74.7% of gross accounts receivable

at December 31, 2022 and 2021, respectively.

of Receivables

Landing Gear Systems

States Department of Defense

was less than 10% of accounts receivable at December 31, 2022

was less than 10% of accounts receivable at December 31, 2021

Consolidated gross profit

from operations for the year ended December 31, 2021 was $10,253,000, an increase of $3,741,000, or 57.4%, as compared to gross profit

of $6,512,000 for the year ended December 31, 2020.

from operations for the year ended December 31, 2022 was $7,452,000, a decrease of $2,801,000, or 27.3%, as compared to gross profit of

$10,253,000 for the year ended December 31, 2021.

Consolidated gross profit as a percentage of sales was 14.0% and 17.4% for the years

ended December 31, 2022 and 2021, respectively.

These increases were directly attributable to a better mix of products that were shipped

during 2021, and the end of an LTA, where our costs were equal to the sales price of the item.

Operating Expenses

Consolidated operating expenses

were $7,766,000 and $7,951,000 for fiscal 2021 and 2020, respectively, representing a decrease of $185,000 or 2.3%.

Operating expenses

declined due to a bad debt expense in 2020 that was partially recovered in 2021.

Absent this, operating expenses increased by $345,000

As a percentage of consolidated net sales, operating expenses were 13.2% and 15.8% for fiscal 2021 and 2020, respectively.

Interest and Financing Costs

Our interest and financing

costs for the year ended December 31, 2021 totaled $1,265,000, a decrease of $226,000 or 15.2% from $1,491,000 in 2020, as a result of

lower balances on our Loan Facility at the end of 2021.

Income from Continuing Operations, Net of Taxes

Income from continuing operations,

net of tax for the year ended December 31, 2021 was $1,627,000, an improvement of $301,000 compared to $1,326,000 for the year ended December

Included in income from continuing operations for 2020 was the forgiveness of the Paycheck Protection Program (“PPP”)

loans in the amount of $2,414,000 and $1,416,000 resulting from a tax refund from tax law changes enacted in the CARES Act.

Net income for the year ended

December 31, 2021 was $1,627,000, an improvement of $531,000, compared to $1,096,000 for the year ended December 31, 2020, for the reasons

discussed above.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2020, we took

advantage of a number of U.S.

government programs to improve our liquidity to offset the negative impact to our business from COVID-19.

These steps include:

Received PPP Loans from the SBA – In May 2020, our three operating subsidiaries entered into government subsidized loans with Webster Bank (F/K/A Sterling National Bank) (“Webster”) in an aggregate principal amount of approximately $2,414,000 (“SBA Loans”).

In accordance with U.S.

government regulations we applied for forgiveness of each Loan in full.

In December 2020, we received final approval from the SBA that our SBA Loans which approximated $2,414,000 plus accrued interest had been forgiven.

Deferred Certain Tax Payments – In accordance with Section 2302 of the CARES Act, we elected to defer the deposit and payment of the employer’s portion of Social Security taxes.

These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022.

In December 2021 we made the first required deposit and payment of the employer’s portion of our deferred Social Security taxes.

The second of these required payments will be made during December 2022.

As of December 31, 2021, we continue to defer $314,000, which is classified as Deferred payroll tax liability – CARES Act in the accompanying Consolidated Balance Sheets.

Received a Net Operating Loss Refund – Pursuant to the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter of 2020.

Also, the U.S.

of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred

and worked performed on certain contracts.

In addition to taking advantage

of the aforementioned U.S.

government programs, we took additional significant steps to improve our liquidity, including:

Entered into a Lower Cost Financing Facility – On December 31, 2019, we entered into a new loan facility (“Webster Facility”) with Webster which originally was set to expire on December 30, 2022.

The Webster Facility initially provided for a $16,000,000 revolving loan (“Webster revolving line of credit”) and a term loan (“Webster term loan”).

The formula to determine the amounts

of revolving advances permitted to be borrowed under the Webster Facility is based on a percentage of eligible receivables and inventory

(as defined).

On June 14, 2021, we entered into the

Second Amendment to the Loan and Security Agreement (“Second Amendment”).

The purpose of the Second Amendment was to clarify

the definition and calculation of Excess Cash Flow, and to confirm the extension of the due date for the payment of the Excess Cash Flow.

On December 7, 2021, we entered in the

Third Amendment to the Loan and Security Agreement (“Third Amendment”).

The purpose of the amendment was to extend the maturity

date of both the Webster revolving line of credit and the Webster term loan by three years, from December 30, 2022 to December 30, 2025.

Additionally, the Webster revolving line of credit was increased to $20,000,000 from $16,000,000 and the inventory sublimit for the Webster

revolving line of credit was increased to $14,000,000 from $11,000,000.

Under the terms of the Third Amendment, we are now allowed, subject

to certain limitations, to begin amortizing a portion of our subordinated debt.

The terms of the Webster Facility require

that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter.

we are limited in the amount of Capital Expenditures we can make.

As of December 31, 2021, we were in compliance with all loan covenants.

The Webster Facility also restricts the amount of dividends we may pay to our stockholders.

Substantially all of our assets are pledged

as collateral under the Webster Facility.

In addition, for so long as the Webster

term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year, beginning with the year ending

December 31, 2020, we shall pay to Webster an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for

such Fiscal Year and (ii) the outstanding principal balance of the term loan.

Such payment shall be made to Webster and applied to the

outstanding principal balance of the term loan, on or prior to the April 15 immediately following such Fiscal Year.

The amount of the

Excess Cash Flow for the year ended December 31, 2021 was calculated to be $787,000.

This is scheduled to be paid on or about April 15,

2022 per the terms of the Webster Facility.

As of December 31, 2021, our debt to

Webster in the amount of $16,648,000 consisted of the Webster revolving line of credit note in the amount of $12,456,000 and the Webster

term loan in the amount of $4,192,000.

Increased Term Loan to modernize equipment - On November 6, 2020, we entered into the First Amendment to Loan and Security Agreement, increasing the Term Loan to $5,685,000.

This allowed us to finance the acquisition of the new equipment at what we believe to be a reasonable interest rate.

The repayment terms of the term loan

were amended to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final payment of

any unpaid balance of principal and interest payable on December 30, 2022.

We paid an amendment fee of $20,000.

We are currently in early discussions

with Webster Bank to further expand our Term Loan to support the acquisition of additional equipment.

We anticipate that this additional

financing will occur in the second quarter of 2022.

We anticipate spending an additional $1,750,000 to $2,500,000 during 2022 to continue

to acquire new equipment.

Conversion and Extension of Subordinated Notes – During 2020, third party holders of convertible subordinated notes of the remaining principal balance plus accrued interest, converted these notes into common stock.

In addition, the maturity date of related party convertible subordinated notes and subordinated notes payable in the aggregate amount of $6,012,000 plus $400,000 of accrued interest was extended until July 1, 2023, and we were relieved of the obligation to make any principal payments on these notes prior to maturity.

During December 2021, in accordance with the extension of the due date of the Webster Facility, these notes were further extended to July 1, 2026.

In addition to our loan with

Webster and Subordinated Notes, we have various equipment leases and contractual obligations of an ongoing nature which we service in

the ordinary course out of our cash flow from operations.

Substantially all of these obligations are described in the notes to our financial

statements included in this report.

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.

Nevertheless, our 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 1A of this Annual Report.

Changes in our cash flow during

fiscal 2021 are discussed further below.

The following table summarizes

our net cash flow from operating, investing and financing activities for the periods indicated (in thousands):

Cash provided by (used in)

Operating activities

Investing activities

Financing activities

Net (decrease) increase in cash and cash equivalents

The above cash flows include

the cash flows from our continuing and discontinued operations.

Cash Provided By Operating Activities

Cash provided by or used in

operating activities reflects our net income adjusted for certain non-cash items and changes to working capital items.

These decreases were attributable to lower sales and the mix of products sold during 2022

as compared to 2021.

The Company also corrected its policy for determining the reserve for slow-moving and excess inventory which led

to an increase in the reserve, further decreasing the gross profit and gross profit percentage.

Consolidated operating expenses were $7,646,000 and $7,766,000 for

fiscal 2022 and 2021, respectively, representing a decrease of $120,000 or 1.5%.

As a percentage of consolidated net sales, operating

expenses were 14.4% and 13.2% for fiscal 2022 and 2021, respectively.

There were increase in cost related to employment costs, including

employee health benefits which were not passed on to the employees, increases in investor relations and increased travel costs resulting

from the resumption of travel to customers as Covid-19 restrictions eased.

The increased costs were primarily offset by reductions in

expenses related to information technology and the recovery of bad debt.

Gain on write-off of Accounts Payable

During the year ending December 31, 2022, the Company, reviewed all

old outstanding payables that were not paid and based on the statute of limitations, a claim would no longer be enforceable.

determined that approximately $317,000 of old payables fell into this category.

This adjustment is recorded as Write-off of accounts payable

on the accompanying Statement of Operations.

and Financing Costs

interest and financing costs for the year ended December 31, 2022 totaled $1,338,000, an increase of $73,000 or 5.8% from $1,265,000

in 2021, as a result of higher interest rates on our Loan Facility during 2022.

The average interest rate charged was 4.50% and 3.50%

for the years ended December 31, 2022 and 2021, respectively.

(Loss) Income

Net loss for the year ended December 31, 2022 was $1,076,000, compared

to net income of $1,627,000 for the year ended December 31, 2021, for the reasons discussed above.

AND CAPITAL RESOURCES

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

of December 31, 2022, we have debt service requirements related to:

Webster Facility of $18,748,000 consisting of a Revolving Loan of $13,352,000 and a term loan in the amount of $5,396,000.

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

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, as long as certain conditions are met.

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

equipment leases and contractual obligations related to our normal business.

We have historically met our cash requirements with funds provided

by a combination of cash generated from operating activities and cash generated from equity and debt financing transactions.

our current revenue visibility and strength of our backlog, we believe that we have sufficient liquidity to meet our short-term cash requirements

over the next twelve months.

On May 17, 2022, we entered into the Fourth Amendment to the Loan and Security Agreement with Webster.

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 year.

During December

2022 we borrowed $878,000 for a capital expenditure and again in January 2023 we borrowed $739,500 for an additional capital expenditure.

For so long as the Webster

term loan remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any Fiscal Year, we are obligated to pay Webster

an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow and (ii) the outstanding principal balance of the

Such payment shall be made to Webster and applied to the outstanding principal balance of the term loan, on or prior to the

April 15 immediately following such Fiscal Year.

As required, we provided the calculation for the Excess Cash Flow payment of $208,000

for fiscal year ended December 31, 2022 to Webster prior to the April 15, 2023 deadline for such payment.

Additionally, we authorized

such payment to be made from the Revolving Loan.

As of the date of this filing, such payment has not been processed by Webster.

Because we believe that our sales in 2023 will be comparable to those

of 2022, we believe our liquidity will remain stable, though our borrowing costs would increase if prevailing interest rates increased

or we failed to meet our covenant in the Webster Facility.

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, which could be significant.

such increases are not expected to materially impact our liquidity.

Nevertheless, our liquidity may be adversely impacted by various risks

and uncertainties, including, but not limited to future and current impacts of global events such as a widespread health crisis, the continuation

of the war in the Ukraine, the outbreak of another conflict and the ongoing tensions between the United States and China, increases in

inflation, disruptions in the labor market and other risks detailed in Part 1, Item 1A of this Annual Report.

addition to our loan with Webster and Subordinated Notes, we have various equipment leases and contractual obligations of an ongoing

nature which we service in the ordinary course out of our cash flow from operations.

Substantially all of these obligations are described

in the notes to our financial statements included in this report

in our cash flow during fiscal 2022 are discussed further below.

following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated (in thousands):

provided by (used in)

(decrease) increase in cash and cash equivalents

Provided By Operating Activities

provided by or used in operating activities reflects our net income adjusted for certain non-cash items and changes to working capital

For the year ended December

31, 2021, net income of $1,627,000 and $3,746,000 of non-cash items, consisting primarily of employee and directors stock based compensation

of $653,000, amortization of right-of-use assets of $492,000, depreciation of property and equipment of $2,803,000 were partially offset

by non-cash other income recognized in the amount of $326,000.

Operating assets and liabilities used cash in the net amount of $1,309,000,

consisting primarily of the net increases in accounts receivable and deposits and other assets of $1,589,000 and $193,000, respectively,

and net decreases in accounts payable, operating lease liabilities and deferred payroll tax expense-CARES ACT in the amounts of $1,594,000,

$701,000 and $313,000, which were partially offset primarily by a decrease in inventory and an increase in deferred revenue in the amounts

of $2,588,000 and $553,000, respectively.

Cash Used In Investing Activities

Cash used in investing activities

consists of cash used for capital expenditures for property and equipment.

31, 2022, net loss of $(1,076,000) and $3,094,000 of non-cash items, consisting primarily of employee and director stock-based compensation

of $526,000, amortization of right-of-use assets of $545,000, depreciation of property and equipment of $2,522,000 and Impairment of Goodwill

of $163,000 were partially offset by non-cash other income recognized in the amount of $94,000, a reduction in bad debt expense in the

amount of $313,000 and accounts payable write-offs in the amount of $317,000.

Operating assets and liabilities used cash in the net amount

of $1,570,000, consisting primarily of the net increases in inventory, deposits and other assets and prepaid expenses, taxes and other

current assets of $2,289,000, $194,000 and $87,000, respectively, and net decreases in operating lease liabilities, customer deposits

and deferred payroll tax expense-CARES ACT in the amounts of $686,000, $439,000 and $314,000, which were partially offset by a decrease

in accounts receivable of $1,303,000 and an increase in accounts payable in the amount of $1,136,000.

Used In Investing Activities

used in investing activities consists of cash used for capital expenditures for property and equipment.

For the year ended December

31, 2022, cash used in investing activities was $2,361,000.

Primarily this was for the purchase of state of the art machinery installed

at our Bay Shore facility.

The purchase of state of the

art machinery installed at our Bay Shore facility allowed us to relocate machinery from our Bay Shore to our Connecticut facility.

Cash Used In Financing Activities

Cash used in financing activities

consists of the borrowings and repayments under our credit facilities with our senior lender, Webster, increases in and repayments of

finance lease obligations and other notes payable.

For the year ended December

31, 2021, cash used in financing activities was $4,578,000.

This was comprised of repayments of $3,193,000 on our Webster revolving loan,

$1,371,000 on our Webster term loan, $9,000 on our financed lease obligations and $5,000 on our financed asset note payable.

CONTRACTUAL OBLIGATIONS

The following table sets forth our future contractual obligations

as of December 31, 2021 (in thousands):

Payment due by period

Debt and Finance Leases

Operating Leases

Critical Accounting Policies and Estimates

A critical accounting policy

is one that is both important to the portrayal of a company’s financial condition and results of operations and requires management’s

most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are

inherently uncertain.

Our consolidated financial

statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S.

This was primarily for the purchase of state-of-the-art machinery.

Provided by Financing Activities

provided by financing activities consists of the borrowings and repayments under our credit facilities with our senior lender, Webster,

increases in and repayments of finance lease obligations and other notes payable.

For the year ended December 31, 2022, cash provided by financing activities

was $1,567,000.

This was comprised of net borrowings of $916,000 on our Webster revolving loan, increased borrowings of $2,823,000 under

the Webster term loan, offset by repayments of $1,609,000 on our Webster term loan, and payments on our financed lease obligations, related

party notes and our financed asset note payables in the amounts of $284,000, $250,000 and $9,000, respectively.

For a discussion of our contractual obligations see “Item 8.

Financial Statements and Supplementary Data” – “Note 8.

Debt” and “Note 9.

Operating Lease Liabilities”.

Accounting Policies and Estimates

critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results of operations

and requires management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about

the effect of matters that are inherently uncertain.

consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America

All applicable U.S.

GAAP accounting standards effective as of December 31, 2021 have been taken into consideration in preparing the consolidated

GAAP accounting standards effective as of December 31, 2022 have been taken into consideration

in preparing the consolidated financial statements.

The preparation of 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 judgements and assumptions inherent in these policies could affect our consolidated

financial statements:

The preparation of 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 judgements and assumptions inherent in these policies could affect our consolidated financial statements:

Going Concern

Inventory Valuation

Revenue Recognition

Stock-Based Compensation

See Note 3 of the notes to

our consolidated financial statements included in this Annual Report on Form 10-K for a description of our significant accounting policies.

QUANTITATIVE AND QUALITATIVE

DISCLOSURE ABOUT MARKET RISK .

No disclosure is required

in response to this Item.

Inventory Valuation, which includes the estimates and methodology used

in accounting for the transition of production costs to inventory costs.

In our financial statements, inventory is reflected at the

lower of cost or net realizable value including write-downs for obsolescence, slow moving and excess inventory;

Income Taxes, which includes the determination of the valuation allowance for deferred tax assets.

See Note 2 of the notes to our consolidated financial statements included

in this Annual Report on Form 10-K for a more complete description of our significant accounting policies.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

disclosure is required in response to this Item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

The financial statements required

by this item begin on page F-1 hereof.

CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Financial Statements

financial statements required by this item begin on page F-1 hereof.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 7. Management’s Discussion and Analysis