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Item 9A. Controls and Procedures

2023-05-16 compared with 2022-03-25 · 1406 added, 928 removed, 588 unchanged (80% of the section changed)

CONTROLS AND PROCEDURES

Evaluation of Disclosure

Controls and Procedures

An evaluation was conducted

under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”),

its principal executive officer, and Chief Financial Officer (“CFO”), its principal financial officer, of the effectiveness

of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)

of the Exchange Act) as of December 31, 2021.

Based on that evaluation, the CEO and CFO concluded our disclosure controls and procedures

were effective as of December 31, 2021.

Management’s Report

on Internal Control over Financial Reporting

Section 404 of the Sarbanes-Oxley

Act of 2002 requires that management document and test the Company’s internal controls over financial reporting and include in this

Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal controls over financial reporting.

Management is responsible

for establishing and maintaining adequate internal control over financial reporting for the Company.

Internal controls over financial

reporting refers to the process designed by, or under the supervision of our Chief Executive Officer and our Chief Accounting Officer,

and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting

and the preparation of financial statements for external purposes in accordance with U.S.

GAAP, and includes those policies and procedures

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.

GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors;

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of inherent limitations,

internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of

compliance with the policies or procedures may deteriorate.

of Disclosure Controls and Procedures

An evaluation was conducted under the supervision and with the participation

of our management, including the Chief Executive Officer (“CEO”), our principal executive officer, and Chief Financial Officer

(“CFO”), our principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure

controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, as of December 31, 2022.

Based on that evaluation,

the CEO and CFO concluded for the reasons discussed below that our disclosure controls and procedures were not effective as of December

31, 2022, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act,

is recorded, processed, summarized and reported within the required time periods, and that such information is accumulated and communicated

to our management to allow timely decisions regarding required.

Report on Internal Control over Financial Reporting

Section 404 of the Sarbanes-Oxley Act of 2002 requires that management

document and test the Company’s internal controls over financial reporting and include in this Annual Report, as term is defined

in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act, and include in this Form 10-K a report on management’s assessment of the

effectiveness of our internal controls over financial reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting.

Internal controls over financial reporting refers to those policies, procedures and processes that pertain to the maintenance of records

that accurately and fairly reflect transactions with respect to our assets;

provide reasonable assurance that transactions are recorded

as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts

and expenditures are made only in accordance with authorizations of our management;

and provide reasonable assurance regarding the prevention

and timely detection of unauthorized transactions with respect to our assets that could have a material effect on our financial statements.

of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any

evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,

or that the degree of compliance with the policies or procedures may deteriorate.

Our management relies upon

the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway

Commission in designing a system intended to meet the needs of our Company and provide reasonable assurance for its assessment.

Commission (2013 framework) in designing a system intended to meet the needs of our Company and provide reasonable assurance for its assessment.

In connection with their review

of our internal controls over financial reporting for the fiscal year ended December 31, 2022, our Chief Executive Officer and Chief Financial

Officer have concluded that our internal controls over financial reporting were effective as of December 31, 2021 in providing reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance

This annual report does not

include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

of the Securities and Exchange Commission do not require an attestation of the Management’s report by our registered public accounting

firm in this annual report.

Change in Internal Control over Financial Reporting

During 2021, we took various

steps to maintain the effectiveness of our financial reporting system, primarily the acquisition of additional software to increase the

utility of our financial reporting systems and additional steps taken to increase our cybersecurity defenses.

Except for these additions

to our software, there have been no changes in our internal control over financial reporting that occurred during our fiscal quarter and

year ended December 31, 2021 that have materially affected, or are reasonable likely to materially affect, our internal control over financial

Officer have concluded that our internal controls over financial reporting were not effective as of December 31, 2022, as a result of

certain material weaknesses discovered during the course of their review.

In particular, we have outsourced

certain IT related functions to a third-party vendor and have identified a material weakness with respect to our IT systems in that we

did not design and/or implement primary user access controls and program change management systems over key information technology systems

to validate that data produced by the relevant IT systems were complete and accurate and to ensure appropriate segregation of duties to

adequately restrict user and privileged access to the financially relevant systems and data to the Company’s personnel.

we have identified a material weakness with respect to the activities of such vendor in connection with the design and operation of our

IT systems in that because this vendor is unable to provide a SOC 1 (Standard Operating Control) Report, we are unable to verify and validate

the effectiveness of the vendor’s control procedures when implementing changes to our IT systems, including systems affecting our

financial IT applications and underlying data account records.

We also identified a material weakness

related to the effectiveness of management’s review controls over the determination if the methodology used in determining the appropriate

reserves to be taken with respect to certain excess quantities and slow moving inventory was operating at a level to prevent or detect

a potential material misstatement.

The Company determined that the estimates used in prior periods could not be substantiated by actual

results and updated it methodology.

We have also identified a material weakness relating to the effectiveness of management's review controls

over the income tax provision in our financial footnotes, such that management's review procedures were not operating at a level of precision

to prevent or detect a potential material misstatement in our consolidated financial statements.

We are currently assessing the actions that need to be taken to remedy

each of the material weaknesses identified above.

With respect to those weaknesses related to the calculation of our inventory reserve

and the review of our tax management provision, we intend to promptly establish written controls and operating procedures to address the

With respect to the material weaknesses related to our IT systems, we intend to meet with the third-party vendor to determine the

actions to be taken to address each of the weaknesses and consider what actions need to be taken if the issues cannot be adequately addressed.

Each of the material weaknesses noted will only be deemed to have been remediated after the new controls and procedures have been in place

for a sufficient period and management has concluded through appropriate testing that the controls are operating effectively.

annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial

The rules of the Securities and Exchange Commission do not require an attestation of the Management’s report by our

registered public accounting firm in this annual report.

in Internal Control over Financial Reporting

There have not been any changes

in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during

our most recently completed fiscal quarter ended December 31, 2022 which is the subject of this report that have materially affected,

or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT

Not Applicable

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by

Paragraph (a), and Paragraphs (c) through (g) of Item 401 of Regulation S-K (except for information required by Paragraph

(e) of that Item to the extent the required information pertains to our executive officers) and Item 405 of Regulation S-K is hereby

incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after

the close of our fiscal year.

The following table presents

the information required by Paragraph (b) of Item 401 of Regulation S-K.

Our directors and executive officers are:

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Melluzzo was employed in various capacities by EDAC Technologies Corporation (“EDAC”)

a designer, manufacturer and distributor of precision aerospace components and assemblies, precision spindles and complex fixturing, tooling

and gauging with design and build capabilities, whose shares were then listed on the Nasdaq Capital Market.

He served as EDAC’s

Vice President and Chief Operating Officer from November 2005 until February 2010.

rising to the level of Chief Operating Officer in 2005.

EDAC is a designer, manufacturer and distributor of precision aerospace components

and assemblies, precision spindles and complex fixturing, tooling and gauging with design and build capabilities, whose shares were then

listed on the Nasdaq Capital Market.

From September 2011 to November 2015, Mr.

was self-employed in the residential real estate redevelopment industry.

From November 2015 to January 2017, he was general manager of

Polar Corporation, a privately-held company specializing in computer numeric controlled milling and turning of small hardware components

for the aerospace industry.

Melluzzo was self-employed in the residential real estate

redevelopment industry.

From November 2015 to January 2017, he was general manager of Polar Corporation, a privately-held company specializing

in computer numeric controlled milling and turning of small hardware components for the aerospace industry.

been our Chief Financial Officer since October 1, 2016.

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Rettaliata was employed by Grumman Aerospace

Corporation for twenty-two years, where he attained the position of the Senior Procurement Officer.

Corporation for twenty-two years, as the Senior Procurement Officer.

Professionally, Mr.

Rettaliata has

served as the Chairman of “ADDAPT”, an organization of regional aerospace companies, as a member of the Board of Governors

of the Aerospace Industries Association, and as a member of the Executive Committee of the AIA Supplier Council.

He is a graduate of Niagara

University where he received a B.A.

in History and Harvard Business School where he completed the PMD Program.

Rettaliata has served as the Chairman of “ADDAPT”,

an organization of regional aerospace companies, as a member of the Board of Governors of the Aerospace Industries Association, and as

a member of the Executive Committee of the AIA Supplier Council.

He is a graduate of Niagara University where he received a B.A.

and Harvard Business School where he completed the PMD Program.

Michael Brand has been

a director of our Company since 2012, and from March 2017 to November 2017 served as a consultant to our company focused on day to day

production issues, scheduling of the products to be manufactured and related operational issues such as the maintenance of appropriate

inventory levels.

He was the President of Goodrich Landing Gear, a unit of Goodrich Corporation, from July 2005 to June 2012.

joining Goodrich for over 25 years he held senior management positions in the Aerospace industry.

He began his career at General Electric

Corporation and rose to senior management in its jet engine manufacturing operations.

Brand is a graduate of Clarkson University,

with advanced degrees and certificates from Xavier University and the Wharton School.

a director of our Company since 2012.

He enjoyed a successful 32-year career in aerospace manufacturing primarily focused on jet

engines and landing gear.

In 2005, he joined Goodrich as President of Goodrich Landing Gear.

Prior to joining Goodrich, he had senior

management roles at GE Aircraft Engines and Teleflex Aerospace.

Brand has a BS from Clarkson University, with advanced degrees

and certificates from Xavier University and the Wharton School.

Michael Porcelain has

been a director of our Company since October 23, 2017.

Since January 2022, he has severed as President and Chief Executive Officer

(“CEO”) and a member of the Board of Directors of Comtech Telecommunications Corp., (“Comtech”) a publicly

traded company and a leading global provider of next-generation 911 emergency systems and secure wireless communications technologies.

He was first appointed President of Comtech in January 2020 and also served as Comtech Chief Operating Officer since October 2018.

to holding these positions, he served as Comtech’s Chief Financial Officer from 2006 through 2018, and from 2002 to March 2006,

he served as Comtech’s Vice President of Finance and Internal Audit.

Porcelain has been a CPA since 1996 and is currently the President and

CEO of The Independent Adviser Corporation, a privately held company which operates various internet websites including TheAdviser.com,

1800ADVISER.com and IRSADVISER.com, all of which relate to the financial planning and advisory industries.

From 2006 through 2022, Mr.

Porcelain served in several executive positions including service as a member of the Board of Directors of Comtech Telecommunications

Corp., (“Comtech”) a publicly traded company and a leading global provider of next-generation 911 emergency systems and secure

wireless communications technologies.

He was appointed Chief Executive Officer of Comtech in January 2022 and President of Comtech in

January 2020.

He also served as Comtech Chief Operating Officer from October 2018 to January 2022.

Prior to holding these positions,

he served as Comtech’s Chief Financial Officer from 2006 through 2018, and from 2002 to March 2006, he served as Comtech’s

Vice President of Finance and Internal Audit.

From 1998 to 2002, Mr.

Porcelain was Director of Corporate

Profit and Business Planning for Symbol Technologies, a mobile wireless information solutions company.

Previously, he spent five years

in public accounting holding various positions, including Manager in the Transaction Advisory Services Group of PricewaterhouseCoopers.

was Director of Corporate Profit and Business Planning for Symbol Technologies, a mobile wireless information solutions company.

he spent five years in public accounting holding various positions, including Manager in the Transaction Advisory Services Group of PricewaterhouseCoopers.

In March 2021, Mr.

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intellectual properties and trademarks (including various Internet websites) related to the financial planning and advisory industry.

Porcelain has served as an Adjunct Professor at St.

John’s University located in New York where he taught graduate level accounting

Porcelain has a B.S.

Porcelain has served as

an Adjunct Professor at St.

John’s University located in New York where he taught graduate level accounting courses.

in Business Economics from State University of Oneonta, New York, a M.S.

in Accounting and an M.B.A.

degree from Binghamton University.

degree from Binghamton

Taglich and Robert

Taglich are brothers.

All directors hold office

until the next annual meeting of shareholders and until their successors have been duly elected and qualified.

Officers are elected by

and serve at the discretion of the Board of Directors.

Employee directors do not receive any compensation for their services as directors.

Non-employee directors are entitled to receive compensation for serving as directors and may receive option or stock grants from our company.

Information Concerning the Board of Directors

Board Leadership Structure and Risk Oversight

The Board does not have a

policy requiring separation of the roles of Chief Executive Officer and Chairman of the Board.

The Board has determined that a non-employee

director serving as Chairman is in the best interests of our stockholders at this time.

This structure ensures a greater role of non-employee

Directors in the active oversight of our business, including risk management oversight, and in setting agendas and establishing Board

priorities and procedures.

This structure also allows the Chief Executive Officer to focus to a greater extent on the management of our

day-to-day operations.

The Board of Directors as

a whole is responsible for consideration and oversight of the risks we face and is responsible for ensuring that material risks are identified

and managed appropriately.

Certain risks are overseen by committees of the Board of Directors and these committees make reports to the

full Board of Directors, including reports on noteworthy risk-management issues.

Members of the Company’s senior management team

regularly report to the full Board about their areas of responsibility and a component of these reports is the risks within their areas

of responsibility and the steps management has taken to monitor and control such exposures.

Additional review or reporting on risks is

conducted as needed or as requested by the Board or one of its committees.

Board Independence

Our Board of Directors has

determined that David Buonanno, Peter Rettaliata, Michael Brand and Michael Porcelain are “independent directors” within the

meaning of NYSE American Rule 803A(2).

Director Compensation

Non-employee Directors are

entitled to receive compensation for serving as directors and may receive option grants from our company.

Each Director also is entitled

to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings

of our Board of Directors or committees of our Board of Directors or stockholder meetings or otherwise in connection with the discharge

of his duties as a Director.

The compensation committee will assist the directors in reviewing and approving the compensation structure

for our directors.

The following table sets forth

certain information regarding the compensation paid to, earned by or accrued for, our directors during the fiscal year ended December

DIRECTOR COMPENSATION

Non-Qualified

Michael Taglich

Robert Taglich

David Buonanno

Michael Brand

Michael Porcelain

Peter Rettaliata

Director fees paid in shares.

Board Meetings;

Committees and Membership

The Board of Directors held

four meetings during the fiscal year ended December 31, 2022 and each of the directors attended more than 75% of the aggregate of (i)

the number of meetings of the Board of Directors and (ii) the number of meetings of all committees of the Board on which such director

We maintain the following

committees of the Board of Directors:

the Audit Committee, the Compensation Committee and the Nominating Committee.

Each committee is

comprised entirely of directors who are “independent” within the meaning of NYSE American Rule 803A(2).

Each committee acts

pursuant to a separate written charter, and each such charter has been adopted and approved by the Board of Directors.

Copies of the committee

charters are available on our website at airindustriesgroup.com under the heading “Investor Relations.”

Audit Committee .

Porcelain, Brand and Buonanno are members of the Audit Committee.

Porcelain serves as Chairman of the Audit Committee and also qualifies

as an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K.

The Board has determined

that each member of our Audit Committee meets the financial literacy requirements under the Sarbanes-Oxley Act and SEC rules and the independence

requirements under NYSE American Rule 803A(2).

Our Audit Committee is responsible

for preparing reports, statements and charters of audit committees required by the federal securities laws, as well as:

overseeing and monitoring the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters, and our internal accounting and financial controls;

preparing the report that SEC rules require be included in our annual proxy statement;

overseeing and monitoring our independent registered public accounting firm’s qualifications, independence and performance;

providing the Board with the results of its monitoring and its recommendations;

providing to the Board additional information

and materials as it deems necessary to make the Board aware of significant financial matters that require the attention of the Board.

The Audit Committee held four meetings during

Compensation Committee .

Our Compensation Committee is composed of Messrs.

Rettaliata, Brand and Buonanno.

The Compensation Committee

is responsible for:

establishing our company’s general compensation policy, in consultation with senior management, and overseeing the development and implementation of compensation programs;

reviewing and approving corporate goals and objectives relevant to the compensation of the CEO, and evaluating the performance of the CEO at least annually in light of those goals and objectives and communicating the results of such evaluation to the CEO and the Board, and determining the CEO’s compensation level based on this evaluation, subject to ratification by the independent directors on the Board.

In determining the incentive component of CEO compensation, the Committee will consider, among other factors, the performance of our company and relative stockholder return, the value of similar incentive awards to CEOs at comparable companies, the awards given to the CEO in past years, and such other factors as the Committee may determine to be appropriate;

reviewing and approving the compensation of all other executive officers of our company, such other managers as may be directed by the Board, and the directors of our company;

overseeing the Board’s benefit and equity compensation plans, overseeing the activities of the individuals and committees responsible for administering these plans, and discharging any responsibilities imposed on the Committee by any of these plans;

approving issuances under, or any material amendments to, any stock option or other similar plan pursuant to which a person not previously an employee or director of our company, as an inducement material to the individual’s entering into employment with our company, will acquire stock or options;

in consultation with management, overseeing regulatory compliance with respect to compensation matters, including overseeing the company’s policies on structuring compensation programs to preserve related tax objectives;

reviewing and approving any severance or similar termination payments proposed to be made to any current or former officer of our company;

preparing an annual report on executive compensation

for inclusion in our proxy statement for the election of directors, if required under the applicable SEC rules.

The Compensation Committee held two meetings during

Nominating Committee .

Our Nominating Committee is composed of Messrs.

Rettaliata, Brand and Porcelain.

The purpose of the Nominating Committee is to seek and

nominate qualified candidates for election or appointment to our Board of Directors.

The Nominating Committee held one meeting during

The Nominating Committee will

seek candidates for election and appointment that possess the integrity, leadership skills and competency required to direct and oversee

the Company’s management in the best interests of its stockholders, customers, employees, communities it serves and other affected

A candidate must be willing

to regularly attend Committee and Board of Directors meetings, to develop a strong understanding of our company, its businesses and its

requirements, to contribute his or her time and knowledge to our company and to be prepared to exercise his or her duties with skill and

In addition, each candidate should have an understanding of all corporate governance concepts and the legal duties of a director

of a public company.

Stockholders may contact the

Nominating Committee Chairman, the Chairman of the Board or the Corporate Secretary in writing when proposing a nominee.

This correspondence

should include a detailed description of the proposed nominee’s qualifications and a method to contact that nominee if the Nominating

Committee so chooses.

Stockholder Communications

Any stockholder who desires

to contact any of our Directors can write to Air Industries Group, 1460 Fifth Avenue, Bay Shore, New York 11706, Attention:

Your letter should indicate that you are an Air Industries Group stockholder.

Depending on the subject matter, our stockholder

relations personnel will:

forward the communication to the Director(s) to whom it is addressed;

forward the communication to the appropriate management personnel;

attempt to handle the inquiry directly, for example where it is a request for information about the Company, or it is a stock-related matter;

not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.

Code of Ethics

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code of ethics that applies to our principal executive officers, senior financial officers and persons performing similar functions.

written request to our corporate secretary, we will provide you with a copy of our code of ethics, without cost.

Corporate Governance

The information required by

Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is hereby incorporated by reference from our definitive proxy statement to be filed

with the SEC pursuant to Regulation 14A within 120 days after the close of our fiscal year.

code of ethics is available on our website and upon written request to our corporate secretary, we will provide you with a copy, without

EXECUTIVE COMPENSATION

The information required by

this Item is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A

within 120 days after the close of our fiscal year.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by

Item 403 of Regulation S-K is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant

to Regulation 14A within 120 days after the close of our fiscal year.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND

DIRECTOR INDEPENDENCE

The information required by

this Item is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A

within 120 days after the close of our fiscal year.

The following summary compensation

table shows, for the periods indicated, information regarding the compensation awarded to, earned by or paid to each individual that served

as our principal executive officer during the fiscal year ended December 31, 2022 and each other executive officer whose compensation

for the 2022 fiscal year exceeded $100,000 for all services rendered in all capacities to our company and its subsidiaries.

The individuals

listed in the following table are referred to herein collectively as our “Named Executive Officers.”

Summary Compensation Table

Name and Principal Position

Luciano Melluzzo

President and CEO

Michael Recca

Represents car allowance.

Our executive officers named

in the above table do not have employment agreements providing for a fixed term of employment.

Both are employees at will, terminable

at any time without any severance, other than that payable to employees generally.

Executive Compensation Policies as They Relate to Risk Management

The Compensation Committee

and management have considered whether our compensation policies might encourage inappropriate risk taking by the Company’s executive

officers and other employees.

The Compensation Committee has determined that the current compensation structure aligns the interests of

the executive officers with those of the Company without providing rewards for excessive risk taking by awarding a mix of fixed and performance

based or discretionary bonuses with the performance-based compensation focused on profits as opposed to revenue growth.

The Compensation Committee

working with management adopts a plan each year intended to award members of our management including executive officers for meeting or

exceeding targeted goals, The Committee believes the amounts to be paid to Messrs.

Melluzzo and Recca for services rendered in fiscal

2022 are appropriate in light of the significant improvement in our financial performance 2022.

Equity Awards – 2022

The following table shows

the grant of stock option awards to the Named Executive Officers during 2022.

GRANT OF PLAN-BASED AWARDS

Luciano Melluzzo

Michael Recca

Each named executive officer was granted options

to purchase the number of shares indicated at a price of $8.30 per share during a period ended March 31, 2027.

Outstanding Equity Awards at 2022 Year-End

The following table shows

certain information regarding outstanding equity awards held by our Named Executive Officers as of December 31, 2022.

Option Awards

Unexercisable

Equity Incentive

Unearned Shares,

Units or Other

Rights That Have

Equity Incentive Plan

Payout Value of

Unearned Shares,

Units or Other Rights

That Have Not Vested

Luciano Melluzzo

Michael Recca

Equity Incentive Plans

We have five equity incentive

plans all of which are substantially identical except as to the number of awards which may be granted, pursuant to which we can grant

awards with respect to an aggregate of 350,000 shares of our common stock.

We have the right to grant awards pursuant to each plan until

the tenth anniversary of the date on which it was approved by our stockholders.

The 2022 Equity Incentive Plan authorizes grants

as to 100,000 shares and was approved by our stockholders approved in June 22, 2022;

the 2017 Equity Incentive Plan authorizes grants

as to 120,000 shares and was approved by our stockholders in October 3, 2017;

the 2016 Equity Incentive Plan authorizes grants as to 35,000

shares and was approved by our stockholders in November 2016, the 2015 Equity Incentive Plan authorizes grants as to 35,000 shares and

was approved by our stockholders in June 2015, and the 2013 Equity Incentive Plan authorizes grants as to 60,000 shares and was approved

by our stockholders approved in July 2013.

The Plans permit the Company

to grant stock awards and non-qualified and incentive stock options to employees, directors and consultants.

The Plans are administered

by the Compensation Committee of the Board and each has a term of ten years from the date it was adopted by the Board.

We adopted the Plans to provide

a means by which employees, directors, and consultants of our Company and those of our subsidiaries and other designated affiliates, which

we refer to together as our affiliates, may be given an opportunity to purchase our common stock, to assist in retaining the services

of such persons, to secure and retain the services of persons capable of filling such positions, and to provide incentives for such persons

to exert maximum efforts for our success and the success of our affiliates.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The following table sets forth

information known to us regarding beneficial ownership of our Common Stock as of May 10, 2023 by (i) each person known by us to own beneficially

more than 5% of our outstanding Common Stock, (ii) each of our directors, (iii) our chief executive officer and the other Named Executive

Officers, and (iii) all of our directors and executive officers as a group.

Except as otherwise indicated,

we believe, based on information provided by each of the individuals named in the table below, that such individuals have sole investment

and voting power with respect to such shares, subject to community property laws, where applicable.

As of May 10, 2023, we had outstanding

3,259,367 shares of Common Stock.

Except as stated in the table, the address of the holder is c/o our company, 1460 Fifth Avenue, Bay

Shore, New York 11706

Directors and Executive Officers:

David Buonanno

Michael Brand

Michael Porcelain

Luciano Melluzzo, President and CEO

Michael Recca, CFO

All Directors and Executive Officers as a group (8 persons owning shares)

1,369,262 (9)

Beneficial Ownership of More Than 5% of Shares:

Richmond Brothers, Inc.

Includes 410,690 shares owned by Mr.

Taglich, 23,995 shares owned by Taglich Brothers, 236,907 shares he may acquire upon conversion of convertible notes (including 17,228 shares which may be acquired by Taglich Brothers), but excluding shares for accrued interest thereon, 1,750 shares he may acquire upon exercise of warrants (including 1,750 shares which may be acquired by Taglich Brothers) and 5,300 shares he may acquire upon exercise of options, in each case exercisable within 60 days.

Includes 242,584 shares owned by Mr.

Taglich, 23,995 shares owned by Taglich Brothers, 4,476 shares owned by custodial accounts for the benefit of his children under the NY UGMA, 186,135 shares he may acquire upon conversion of convertible notes (including 17,228 shares that may be acquired by Taglich Brothers), but excluding shares for accrued interest thereon, 1,750 shares he may acquire upon exercise of warrants (including 1,750 shares which may be acquired by Taglich Brothers, and 5,300 shares he may acquire upon exercise of options, in each case exercisable within 60 days.

Includes 10,100 shares he may acquire upon exercise of options exercisable within 60 days.

Includes 5,400 shares he may acquire upon exercise of options exercisable within 60 days.

Includes 10,400 shares he may acquire upon exercise of options exercisable within 60 days.

Includes 5,400 shares he may acquire upon exercise of options exercisable

within 60 days.

Includes 107,334 shares he may acquire upon exercise of options exercisable

within 60 days.

Represents shares he may acquire upon exercise of options exercisable within 60 days.

Includes 423,042 shares that may be acquired upon conversion of convertible notes, 1,750 shares that may be acquired upon exercise of warrants and 195,734 shares that may be acquired upon exercise of options, in each case exercisable within 60 days.

The information set forth below is based on the amended

Schedule 13D filed with the SEC and the Company on October 22, 2021 reflecting ownership as of that date.

By virtue of their Joint

Filing Agreement, dated October 9, 2018, the persons and entities affirm their membership in a group under SEC Rule 13d-5(b) and

the group is deemed to beneficially own all of the shares beneficially owned by the group members.

The beneficial ownership of each of

the group members was disclosed as follows, based upon 3,259,367 shares outstanding:

Richmond Brothers, Inc.

RBI Private Investment II, LLC

RBI Private Investment III, LLC

RBI PI Manager, LLC (b)

Richmond Brothers 401(k) Profit Sharing Plan

Held as investment advisor to certain separately managed accounts.

Includes the shares owned by RBI Private Investment II, LLC and RBI Private Investment III, LLC.

Sole voting and dispositive power includes shares owned by Mr.

Richmond directly and by RBI Private Investment II, LLC and RBI Private Investment III, LLC.

Shared voting and dispositive power includes shares owned by Richmond Brothers, Inc.

and the Profit Sharing Plan.

Sole voting and dispositive power includes shares owned by Mr.

Shared voting and dispositive power includes shares owned by Richmond Brothers, Inc.

and the Profit Sharing Plan.

# Includes 31,200 shares which may be acquired upon exercise

+ Includes 28,000 shares which may be acquired upon exercise

* Less than 1 percent

The address for Richmond Brothers, Inc.,

RBI Private Investment I, LLC, RBI Private Investment II, LLC, RBI PI Manager, LLC, Richmond Brothers 401(k)

Profit Sharing Plan, David S.

Richmond and Matthew J.

Curfman is 3568 Wildwood Avenue, Jackson, Michigan 49202.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

Our Policy Concerning Transactions with Related Persons

Under Item 404 of SEC Regulation

S-K, a related person transaction is any actual or proposed transaction, arrangement or relationship or series of similar transactions,

arrangements or relationships, including those involving indebtedness not in the ordinary course of business, to which we or our subsidiaries

were or are a party, or in which we or our subsidiaries were or are a participant, in which the amount involved exceeded or exceeds the

lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years and in which

any of our directors, nominees for director, executive officers, beneficial owners of more than 5% of any class of our voting securities

(a “significant shareholder”), or any member of the immediate family of any of the foregoing persons, had or will have a direct

or indirect material interest.

We recognize that transactions

between us and any of our Directors or Executives or with a third party in which one of our officers, directors or significant shareholders

has an interest can present potential or actual conflicts of interest and create the appearance that our decisions are based on considerations

other than the best interests of our Company and stockholders.

The Audit Committee of the

Board of Directors is charged with responsibility for reviewing, approving and overseeing any transaction between the Company and any

related person (as defined in Item 404 of Regulation S-K), including the propriety and ethical implications of any such transactions,

as reported or disclosed to the Committee by the independent auditors, employees, officers, members of the Board of Directors or otherwise,

and to determine whether the terms of the transaction are not less favorable to us than could be obtained from an unaffiliated party.

There were no transactions completed by us since

January 1, 2022, in which the amount involved exceeded $120,000 and in which any related person has a direct or indirect material interest,

except that during 2022 we paid $250,000 to Michael Taglich in respect of amounts due Mr.

Taglich pursuant to a subordinated note.

are no transactions currently proposed by us in which a related party has a direct or indirect financial interest in which the amount

involved exceeds $120,000.

Board Independence

Our Board of Directors has

determined that David Buonanno, Peter Rettaliata, Michael Brand and Michael Porcelain are “independent directors” within the

meaning of NYSE American Rule 803A(2).

Principal Accountant Fees and Services

The information required by

this Item is hereby incorporated by reference from our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A

within 120 days after the close of our fiscal year.

As required by our Audit Committee

charter, our Audit Committee pre-approved the engagement of Marcum LLP for all audit and permissible non-audit services.

The Audit Committee

annually reviews the audit and permissible non-audit services performed by our principal accounting firm and reviews and approves the

fees charged by our principal accounting firm.

The Audit Committee considered the role of Rotenberg Meril Solomon Bertiger & Guttilla,

in providing tax and audit services and other permissible non-audit services to us while it was serving as our auditor and concluded

that the provision of such services, if any, was compatible with the maintenance of such firm’s independence in the conduct of its

auditing functions.

March 28, 2022, we reported that Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

Public Accountants (“Rotenberg”) which had served as o ur independent registered

public accounting firm since 2008, combined with Marcum LLP (“Marcum”) and became a wholly-owned subsidiary of Marcum.

engaged Marcum to serve as our independent registered public accounting firm for the year ended December 31, 2022, and it began serving

as our independent registered public accounting firm beginning with the review of our Report on Form 10-Q for the quarter ending June

During fiscal year 2022, the

aggregate fees which we were billed by Marcum for professional services were as follows:

Audit Fees (1)

Audit Related Fees (2)

During fiscal year 2021 and

the first quarter of fiscal year 2022, the aggregate fees which we were billed by Rotenberg for professional services were as follows:

Audit Fees (1)

Audit Related Fees (2)

Fees for services to perform our annual audit of financial statements, review of financial

statements included in our quarterly filings included in Form 10-Q, and fees for services that are normally provided by the

accountant for statutory and regulatory filings.

This category includes fees for services rendered that only the auditor reasonably

can provide, including comfort letters, consents, assistance with and review of documents filed with the SEC and accounting and

financial reporting consultations billed as audit services.

The annual audit fee included in this category was $250,000 and $250,000

for 2022 and 2021, respectively.

The balance of the fees in this category were for the reviews of our quarterly financial

Fees for assurance and related services that are traditionally performed by our independent registered public accounting firm, such as due diligence services related to mergers and acquisitions, accounting consultation and audits in connections with acquisitions, consultation concerning financial accounting and reporting standards not classified as audit fees and attest services not required by statute or regulation.

Fees for tax compliance, tax advice and planning.

Tax compliance generally involves preparation of original and amended tax returns, claims for refunds and tax payment-planning services.

Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits and appeals, tax advice related to mergers and acquisitions and requests for rulings or technical advice from taxing authorities.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Consolidated Financial Statements of Air Industries Group for the Year ended December 31, 2021 and 2020.

(b) The following exhibits are included as part of this report.

References to “the Company” in

this Exhibit List mean Air Industries Group, a Nevada Corporation.

Articles of Incorporation

of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed

August 30, 2013).

Certificate of Amendment

increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference to Exhibit

3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).

Amended and Restated By-Laws

of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended

December 31, 2014 filed on March 31, 2015).

Certificate of Amendment

increasing number of authorized shares of common stock to 60,000,000 (incorporated by reference to the Company’s Quarterly

Report on Form 10-Q for the period ended June 30, 2019 filed on August 8, 2019)

Description of the Company’s

securities registered pursuant to Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.1 to the Company’s

Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 27, 2020).

Loan and Security Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 6, 2020)

Guaranty Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 6, 2020)

Pledge Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 6, 2020)

First Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 9, 2020)

Second Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 5, 2021)

Third Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 8, 2021)

Stock Purchase Agreement dated March 21, 2018 with CPI Aerostructures, Inc.

(“CPI SPA”) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 23, 2018).

Second Amendment dated as of December 20, 2018 to CPI SPA (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed April 1, 2019).

Settlement Agreement and Release between the Company and CPI Aerostructures, Inc.

(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 29, 2020).

Promissory Note dated May 6, 2020, between Sterling National Bank and Air Industries Machining Corp.

(incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2020).

Promissory Note dated May 6, 2020, between Sterling National Bank and Nassau Tool Works Inc.

(incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2020).

Promissory Note dated May 6, 2020, between Sterling National Bank and Sterling Engineering Corporation (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2020).

At the Market Offering Agreement dated January 15, 2020 with Roth Capital Partners, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on January 15, 2020).

Purchase Agreement with the Purchasers dated January 15, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 17, 2019).

2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No.

333-191560) filed on October 4, 2013).

2015 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No.

Financial Statements of Air Industries Group for the Year ended December 31, 2022 and 2021.

following exhibits are included as part of this report.

References to “the Company” in this Exhibit List mean Air Industries Group,

a Nevada Corporation.

of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on

Form 8-K filed August 30, 2013).

of Amendment increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference

to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).

and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form

10-K for the year ended December 31, 2014 filed on March 31, 2015).

of Amendment increasing number of authorized shares of common stock to 60,000,000 (incorporated by reference to the Company’s

Quarterly Report on Form 10-Q for the period ended June 30, 2019 filed on August 8, 2019)

Certificate of Change filed with the Secretary of State of Nevada to effectuate reverse stock split (incorporated herein by reference to Exhibit 3.01 to the Company’s Report on Form 8-K filed October 18, 2022).

of the Company’s securities registered pursuant to Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.1

to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 27, 2020).

and Security Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.1

to the Company’s Current Report on Form 8-K filed January 6, 2020)

Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.2 to the Company’s

Current Report on Form 8-K filed January 6, 2020)

Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.2 to the Company’s

Current Report on Form 8-K filed January 6, 2020)

Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s

Quarterly Report on Form 10-Q filed November 9, 2020)

Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s

Quarterly Report on Form 10-Q filed August 5, 2021)

Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed December 8, 2021)

Fourth Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 18, 2022).

Agreement with the Purchasers dated January 15, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current

Report on Form 8-K filed on January 17, 2019).

Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8

(Registration No.

333-206341) filed on August 13, 2015).

2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).

2017 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.79 to the Company’s Registration Statement on Form S-1 (Registration No.

Equity Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for

the quarterly period ended September 30, 2016 filed on November 14, 2016).

Equity Incentive Plan (incorporated herein by reference to Exhibit 10.79 to the Company’s Registration Statement on Form S-1

(Registration No.

333-219490) filed July 26, 2017 and declared effective August 4, 2017).

Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K/A (Amendment No.

2022 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (Registration No.

333-264738) filed May 6, 2022).

of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K/A (Amendment No.

for the year ended December 31, 2017 filed on April 30, 2018.

Subsidiaries (incorporated herein by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on April 1, 2019.

(incorporated herein by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the year ended December 31,

2018 filed on April 1, 2019.

Consent of Marcum LLP

Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

5 unchanged sentences

Section 1350).

Inline XBRL Instance Document.

Inline XBRL Taxonomy Extension Schema Document.

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Inline XBRL Taxonomy Extension Definition Linkbase Document.

Inline XBRL Taxonomy Extension Label Linkbase Document.

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Pursuant to the requirements

of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by

the undersigned, thereunto duly authorized.

March 25, 2022

AIR INDUSTRIES GROUP

/s/ Luciano Melluzzo

XBRL Instance Document.

XBRL Taxonomy Extension Schema Document.

XBRL Taxonomy Extension Calculation Linkbase Document.

XBRL Taxonomy Extension Definition Linkbase Document.

XBRL Taxonomy Extension Label Linkbase Document.

XBRL Taxonomy Extension Presentation Linkbase Document.

Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed

on its behalf by the undersigned, thereunto duly authorized.

INDUSTRIES GROUP

Luciano Melluzzo

1 unchanged sentence

(principal executive officer)

/s/ Michael E.

Chief Financial Officer

1 unchanged sentence

Pursuant to the requirements

of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on March

of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on May

16, 2023 in the capacities indicated.

/s/ Luciano Melluzzo

President and CEO

Luciano Melluzzo

(principal executive officer)

/s/ Michael E.

Chief Financial Officer

(principal financial and accounting officer)

/s/ Michael N.

Chairman of the Board

/s/ Robert F.

/s/ Michael Brand

executive officer)

Financial Officer

financial and accounting officer)

Michael Brand

/s/ Michael Porcelain

Michael Porcelain

AIR INDUSTRIES GROUP

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

INDUSTRIES GROUP

INDEX TO CONSOLIDATED FINANCIAL

December 31, 2022 and 2021

Report of Independent Registered Public Accounting Firm ( Marcum LLP ., Saddle Brook , NJ, PCAOB ID:

Report of Independent Registered Public Accounting Firm (Rotenberg Meril Solomon Bertiger & Guttilla, P.C., Saddle Brook, NJ, PCAOB ID:

1 unchanged sentence

Consolidated Balance Sheets – As of December 31, 2022 and 2021 F-5

Consolidated Statements of Income – For the Years Ended December 31, 2021 and 2020 F-5

Consolidated Statements of Operations – For the Years Ended December 31, 2022 and 2021 F-6

Consolidated Statements of Stockholders’ Equity – For the Years Ended December 31, 2022 and 2021 F-7

1 unchanged sentence

Notes to Consolidated Financial Statements F-10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

2 unchanged sentences

We have audited the accompanying consolidated

balance sheets of Air Industries Group and subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related

consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes

(collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all

material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash

flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

balance sheet of Air Industries Group (the “Company”) as of December 31, 2022, and the related consolidated statements of

operations, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred

to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the

financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended

in conformity with the accounting principles generally accepted in the United States of America.

As discussed in Note 16 to the financial statements, the 2021 financial

statements have been revised to correct certain previously issued disclosures related to the reconciliation of the Company’s income

tax rate for the year ended December 31, 2021 and the components of the Company’s deferred tax assets and liabilities and valuation

allowance as of December 31, 2021 and 2020.

The financial statements of the Company for the year ended December 31, 2021, before the effects

of the adjustments to correct the errors discussed in Note 16 to the financial statements, were audited by other auditors whose report,

dated March 25, 2022, expressed an unqualified opinion on those statements.

We have also audited the adjustments described in Note 16

that were applied to revise the 2021 financial statements to correct the errors.

In our opinion, such adjustments are appropriate and

have been properly applied.

Except for the corrections to revise the tax footnote we were not engaged to audit, review, or apply any procedures

to the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then

ended, other than stated above and, accordingly, we do not express an opinion or any other form of assurance on the 2021 financial statements

taken as a whole.

Basis for Opinion

2 unchanged sentences

Our responsibility is to express an opinion on these financial statements based on our audit.

a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required

to be independent with respect to the Company in accordance with the U.S.

federal securities law and the applicable rules and regulations

of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities law and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

3 unchanged sentences

to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

As part of our audit, we are required to obtain an understanding

of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

1 unchanged sentence

Accordingly, we express no such opinion.

Our audits included performing procedures to assess

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

1 unchanged sentence

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are

matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the

audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) are especially challenging,

subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements,

taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit

matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Refer to Note

3 of the consolidated financial statements

The critical audit matters communicated below

are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to

the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our

especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion

on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions

on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition

Description of the Matter

The Company’s revenue is generated pursuant

to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering

and other services according to the specifications of the customers.

The majority of the Company’s performance obligations under

these contractual agreements are satisfied at a point in time when the customer obtains control of the product, which is generally upon

acceptance by the customer and shipment of the goods.

For contracts with multiple performance obligations, the Company allocates the contract’s

transaction price to each performance obligation using its observable standalone selling price for products and services.

Given the judgment necessary to make reasonably

dependable estimates of revenues associated with such contracts, auditing management’s evaluation of contracts with customers required

extensive audit effort due to analyzing the terms and conditions of the Company’s various customer contracts given that such terms

and conditions are nonstandard.

This included the identification and determination of the performance obligations and the timing of revenue

How the Critical Audit Matter Was Addressed

The Company’s revenue from contracts with

customers is recognized at a point in time when the customer obtains control of the product, which is generally upon the delivery and

acceptance by the customer.

If the contracts, with customers in which the Company satisfies its promise to the customer to provide a service

or product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date

inclusive of profit, the Company would be required to recognize revenue over time as it satisfies the performance obligation.

The Company evaluates each revenue generating

contract to determine whether or not they are entitled to a profit should the contract be terminated, whether or not there is an alternative

use for the product upon contract termination and whether or not there are any contractual restrictions which would prohibit the Company

from selling the product elsewhere (alternative use) upon contract termination.

How We Addressed the Matter in Our Audit

Auditing management’s evaluation of contracts

with customers required extensive audit effort due to the judgment required to analyze the terms and conditions of the Company’s

various customer contracts given that such terms and conditions may be nonstandard.

This included the identification and determination

of the performance obligations and the assessment of whether a product has alternative use.

Our audit procedures included obtaining an understanding

of the Company’s revenue recognition process, among others:

We reviewed management’s assessment of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time.

We reviewed management’s conclusions over completeness of the contract reviews and appropriateness of the accounting conclusions.

We selected a sample of contracts with customers and performed the following:

Compared the transaction price to the consideration expected to be received based on current rights and obligations under the contracts and any modification that were agreed upon with the customers.

Tested the completeness and accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition.

Inventories, net – Refer to Note 3

of the consolidated financial statements

of the Company’s revenue recognition process which included an analysis of the distinct performance obligations and a review of

the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time.

We performed procedures to test the identification

and determination of the performance obligations and the timing of revenue recognition which included, among others, reading a sample

of executed contracts and purchase orders to understand the contract and performing an independent assessment of the identification of

distinct performance obligations.

We performed procedures to test whether or not

the Company is entitled to a profit should the contract be terminated, whether or not there is an alternative use for the product upon

contract termination and whether or not there are any contractual restrictions which would prohibit the Company from selling the product

elsewhere (alternative use) upon contract termination.

Inventory Valuation Reserve

Description of the Matter

The Company records inventory at the lower of cost

or net realizable value.

The Company periodically evaluates the carrying value of inventory, which requires management to make significant

estimates and assumptions related to sales patterns and expected future demand in order to estimate the amount necessary to adjust to

net realizable value as a result of slow moving or obsolete inventory.

Changes in the assumptions could have a significant impact on the

valuation of inventory.

We identified the adjustment to net realizable

value of the inventory as a critical audit matter.

Auditing such estimates required a high degree of subjective auditor judgment and an

increased extent of effort when performing audit procedures and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed

Our audit procedures used to address the adjustment

to net realizable value of inventories included the follow:

We tested the Company’s raw materials and hardware inventory by evaluating the number of days transpiring from the date the inventory was originally received and/or from the last date of movement, and reviewing the historical sales of the inventory.

We selected a sample of finished goods and performed the following:

We tested the finished goods inventory report for any finished goods with no movement in the last two years.

Reviewed the transaction history detail reports, which display all types of movement of that particular part.

Evaluated the accuracy and completeness of the valuation reserve by selecting a sample of inventory items and obtaining supporting documentation regarding current and historical sales patterns.

We tested the accuracy of the Company’s material burden rate calculations to determine proper application of manufacturing overhead costs applied to the cost of work in process and finished goods.

We have served as the Company’s auditors since 2008.

As described in Note 4 to the financial statements,

the Company’s net inventory balance of approximately $31.8 million included a reserve for obsolete and excess inventory of approximately

$4.0 million at December 31, 2022.

The Company maintains a reserve for inventory based on estimated losses that result from inventory

that becomes obsolete or for which the Company has excess inventory levels.

In determining this estimate, the Company performs an analysis

on current demand and usage for each inventory item over historical time periods.

Based on that analysis, the Company reserves a percentage

of the inventory amount within each time period based on historical demand and usage patterns of specific items in inventory.

This requires

management to make significant estimates and assumptions in order to estimate the amount necessary to adjust to net realizable value as

a result of obsolescence or slow-moving inventory.

Changes in the assumptions could have a significant impact on the valuation of inventory.

How We Addressed the Matter in Our Audit

Auditing management’s inventory valuation

process including its impairment procedures required extensive auditor effort due to the judgment required to analyze the Company’s

methodology in determining excess quantities and slow-moving goods.

Our audit procedures included obtaining an understanding

of the Company’s inventory valuation process including the identification of excess quantities and slow-moving goods and the potential

impairment to net realizable value.

We performed procedures to test the identification

and determination of excess quantities and slow-moving goods.

We traced the movement of a sample of goods to the respective transaction

history detail reports of such goods to ensure that excess quantities and slow-moving goods were properly identified and potentially impaired.

We tested the completeness and accuracy of the Company’s inventory reserve reports specifically related to the identification and

determination of excess quantities and slow-moving goods and impairment.

We have served as the Company’s auditor

since 2008 (such date takes into account the acquisition of Rotenberg Meril Solomon Bertiger &Guttilla, P.C., by Marcum LLP effective

February 1, 2022).

/s/ Marcum LLP

Saddle Brook, New Jersey

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Air Industries Group

Opinion on the Financial Statements

We have audited, before the effects of the adjustment

for the correction of the errors described in Note 16, the accompanying consolidated balance sheet of Air Industries Group and subsidiaries

(the “Company”) as of December 31, 2021, and the related consolidated statements of operations, changes in stockholders’

equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, except for the errors described in Note 16, the financial statements present fairly, in all material respects, the financial

position of the Company as of December 31, 2021 and the results of its operations and its cash flows for the years then ended in conformity

with accounting principles generally accepted in the United States of America.

We were not engaged to audit, review, or apply

any procedures to the adjustments for the correction of the errors described in Note 16, and accordingly, we do not express an opinion

or any other form of assurance about whether such adjustments are appropriate and have been properly applied.

Those adjustments were audited

by Marcum LLP.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on these financial statements based on our audit.

a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities law and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding

of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

We have served as the Company’s auditors from 2008 to 2022.

/s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

5 unchanged sentences

Current Assets

and Cash Equivalents

Accounts Receivable, Net of Allowance for Doubtful Accounts of $ 281,000 and $ 594,000

Expenses and Other Current Assets

Total Current

and Equipment, Net

Lease Right-Of-Use-Asset

Financing Costs, Net, Deposits and Other Assets

AND STOCKHOLDERS’ EQUITY

Notes Payable

and Finance Lease Obligations - Current Portion

Payable and Accrued Expenses

Lease Liabilities - Current Portion

Gain on Sale - Current Portion

Related to the Sale of Future Proceeds from Disposition of Subsidiary - Current Portion

payroll tax liability - CARES Act - Current Portion

Total Current

Notes Payable

and Finance Lease Obligations - Net of Current Portion

Notes Payable

- Related Party - Net of Current Portion

Lease Liabilities - Net of Current Portion

Gain on Sale - Net of Current Portion

Related to the Sale of Future Proceeds from Disposition of Subsidiary - Net of Current Portion

payroll tax liability - CARES Act - Net of Current Portion

and Contingencies

Stockholders’

Prepaid Expenses and Other Current Assets

Contract Costs Receivable

Prepaid Taxes

Total Current Assets

Property and Equipment, Net

Operating Lease Right-Of-Use-Assets

Deferred Financing Costs, Net, Deposits and Other Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Debt - Current Portion

Accounts Payable and Accrued Expenses

Operating Lease Liabilities - Current Portion

Deferred Gain on Sale - Current Portion

Customer Deposits

Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary

Deferred payroll tax liability - CARES Act

Total Current Liabilities

Long Term Liabilities

Debt - Net of Current Portion

Subordinated Notes Payable - Related Party

Operating Lease Liabilities - Net of Current Portion

Deferred Gain on Sale - Net of Current Portion

TOTAL LIABILITIES

Commitments and Contingency (see Note 13)

Stockholders’ Equity

Preferred Stock, par value $ .001 - Authorized 3,000,000 shares, 0 shares outstanding, at both December 31, 2022 and December 31, 2021.

Common Stock - Par Value $ .001 - Authorized 6,000,000 Shares, 3,247,937 and 3,212,801 Shares Issued and Outstanding as of December 31, 2022 and December 31, 2021, respectively

Paid-In Capital

Additional Paid-In Capital

Accumulated Deficit

( 65,610,000 )

( 64,534,000 )

STOCKHOLDERS’ EQUITY

LIABILITIES AND STOCKHOLDERS’ EQUITY

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

Consolidated Statements of Income

Consolidated Statements

of Operations

For the Years Ended December 31,

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Operating Expenses

Income (loss) from Operations

( 1,439,000 )

(Loss) Income from Operations

Interest and Financing Costs

1 unchanged sentence

Other Income, Net

Forgiveness of notes payable - SBA Loan

Income (Loss) before Benefit From Income Taxes

Benefit from Income Taxes

( 1,412,000 )

Income from Continuing Operations, net of tax

Loss from Discontinued Operations, net of tax

Income per share from Continuing operations - Basic

Loss per share from Discontinued Operations - Basic

Income per share from Continuing operations - Diluted

Loss per share from Discontinued Operations - Diluted

Gain on write-off of accounts payable

(Loss) Income before Provision for Income Taxes

Provision for Income Taxes

Net (Loss) Income

(Loss) Income per share – Basic

(Loss) Income per share – Diluted

Weighted Average Shares Outstanding – basic

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AIR INDUSTRIES GROUP

Consolidated Statements of Stockholders’

Consolidated Statements

of Stockholders’ Equity

For the Years Ended December 31, 2022 and 2021

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Common Stock issued for directors fees

Costs related to issuance of stock

Issuance of Common Stock

Common Stock Issued for Convertible Notes

Stock Options exercised

Stock Compensation Expense

Adjustments for other note conversion

Balance, December 31, 2021

1 unchanged sentence

Common Stock issued for directors fees

Stock Options exercised

Common Stock issued in conjunction with reverse split

Stock Compensation Expense

( 1,076,000 )

Balance, December 31, 2022

2 unchanged sentences

AIR INDUSTRIES GROUP

Consolidated Statements of Cash Flows For the

Years Ended December 31,

Consolidated Statements

of Cash Flows For the Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net income to net cash provided by (used in) operating activities

Net (Loss) Income

$ ( 1,076,000 )

Adjustments to reconcile net (loss) income to net cash provided by operating activities

Depreciation of property and equipment

3 unchanged sentences

Non-cash interest expense

Non-cash deferred payroll tax expense - CARES Act

Amortization of Right-of-Use Asset

Non-cash gain on accounts payable write-off

Amortization of Right-of-Use Assets

Deferred gain on sale of real estate

Loss on sale of equipment

Amortization of debt discount on convertible notes payable

Bad debt (recovery) expense

Bad debt recovery

Loss on impairment of goodwill

Amortization of deferred financing costs

Forgiveness of notes payable - SBA loan

( 2,414,000 )

Changes in Operating Assets and Liabilities

3 unchanged sentences

( 2,289,000 )

( 3,474,000 )

Prepaid expenses and other current assets

5 unchanged sentences

Operating lease liabilities

Income taxes payable

Deferred revenue

Deferred payroll tax expense - CARES Act

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

( 1,525,000 )

Customer deposits

Deferred payroll tax liability - CARES Act

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES

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CASH FLOWS FROM FINANCING ACTIVITIES

Note payable - revolver - net - Webster Bank

Net proceeds from (payments for) revolving loan - Webster Bank

( 3,193,000 )

Proceeds from note payable - term note - Webster Bank

Payments of note payable - term note - Webster Bank

Payments of term note - Webster Bank

( 1,609,000 )

SBA loan proceeds - Webster Bank

Payments of finance lease obligations

Proceeds from issuance of common stock

Share issuance costs

Deferred financing costs

Payments of notes payable - related party

( 1,371,000 )

Payments of notes payable - third party

Payment of deferred finance costs

Payment of subordinated notes payable - related party

Payments of finance lease obligations

Payments of loan payable - financed asset

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

( 4,578,000 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

NET DECREASE IN CASH

( 1,878,000 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

CASH AND CASH EQUIVALENTS AT END OF YEAR

CASH AT BEGINNING OF YEAR

CASH AT END OF YEAR

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

Consolidated Statements of Cash Flows For the

Years Ended December 31, (Continued)

Consolidated Statements

of Cash Flows For the Years Ended December 31, (Continued)

Supplemental cash flow information

Cash paid during the year for interest

Cash refunded during the year for income taxes, net of taxes paid

Cash paid during the year for taxes

1 unchanged sentence

Acquisition of financed lease asset

Capitalization of related party interest to principal

Right of Use Asset additions under ASC 842

Operating Lease Liabilities under ASC 842

Acquisition of financed asset

Common Stock issued for notes payable - third parties

Common Stock issued in lieu of accrued interest

Capitalization of related party note interest to principal

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FORMATION AND BASIS OF PRESENTATION

Air Industries Group is a Nevada corporation (“AIRI”).

of and for the year ended December 31, 2021 and 2020, the accompanying condensed consolidated financial statements presented are those

of AIRI, and its wholly-owned subsidiaries;

NOTES TO CONSOLIDATED FINANCIAL

ORGANIZATION AND BASIS OF PRESENTATION

Air Industries Group is a Nevada corporation

As of and for the year ended December 31, 2022 and 2021, the accompanying consolidated financial statements

presented are those of AIRI, and its wholly-owned subsidiaries;

Air Industries Machining Corp.

(“AIM”), Nassau Tool Works, Inc.

and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).

At each reporting period, management evaluates

whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within

one year after the date that the financial statements are issued.

The Company is required to make certain additional disclosures if management

concludes that substantial doubt exists about the Company’s ability to continue as a going concern and such doubt is not alleviated

by the Company’s plans or when the Company’s plans alleviate substantial doubt about its ability to continue as a going concern.

The evaluation entails analyzing prospective operating budgets and forecasts for expectations regarding cash needs and comparing those

needs to the current cash and cash equivalent balance and expectations regarding cash to be generated over the following year.

Although the global outbreak of COVID-19 negatively

impacted the Company’s revenues, earnings and operating cash flows in 2020, management believes the Company’s operations substantially

returned to normal in fiscal 2021.

With fiscal 2021 now completed and the Company continuing to see the benefits from its recent investments

in machinery and equipment, management believes the Company will continue to improve its liquidity.

During 2021, the Company generated

$ 4,064,000 of cash from operating activities.

As such, based on the Company generating $ 4,064,000 of cash from operating activities as

well as generating operating income of $ 2,487,000 for the year ended December 31, 2021, its current best estimates of fiscal 2022 sales,

confirmed and expected orders, the strength of existing backlog, overall market demand, expected timing of future cash receipts and expenditures

and the Company’s ability to access additional liquidity, if needed, the Company believes it will have adequate cash to support

operations through at least March 31, 2023.

Reclassifications

Reclassifications occurred to certain 2020 amounts

to conform to the 2021 classification.

These reclassifications had no impact on the Company’s financial position and net income.

Subsequent Events

Management has evaluated subsequent events through

the date of this filing.

DISCONTINUED OPERATIONS

As discussed in Note 14 on December 23, 2020,

the Company and CPI Aerostructures (“CPI”), the buyer of our subsidiary Welding Metallurgy, Inc.

(“WMI”), reached

an agreement to settle the working capital dispute without additional litigation.

The settlement provided that CPI and AIRI would instruct

the escrow agent to release the balance of $ 1,380,684 remaining in the escrow account to CPI.

The Company and CPI exchanged mutual releases

customary in the circumstances.

We originally placed a reserve of $ 1,770,000 against the $ 2,000,000 balance held in escrow, the remaining

amount of $ 230,000 was charged to discontinued operations and classified as other expense for the year ended December 31, 2020.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(“AIM”), Nassau Tool Works,

(“NTW”), and the Sterling Engineering Corporation (“Sterling”), (together, the “Company”).

Principal Business Activity

The Company is a Tier 1 or Tier 2 manufacturer of precision assemblies

and components for mission-critical aerospace and defense applications, and a prime contractor to the U.S.

Department of Defense.

Company’s AIM and NTW subsidiaries manufactures flight critical or flight safety aircraft components including landing gear, arresting

gear, flight controls, primarily for military aircraft, including the UH-60 Helicopter, the E2-D, and F-35, F-18 fighter aircraft, and

the Pratt & Whitney Geared Turbofan jet engine.

Sterling manufactures components used in jet engines of military and commercial aircraft

and ground power turbine engines.

The Company’s primary customers are large publicly traded companies including the four largest

suppliers to the US Department of Defense.

The Company is a Tier 1 or Tier 2 manufacturer

of precision assemblies and components for mission-critical aerospace and defense applications and a prime contractor to the U.S.

The Company’s AIM and NTW subsidiaries manufacture flight critical or flight safety aircraft components including landing

gear, arresting gear, flight controls, primarily for military aircraft, including the UH-60 Helicopter, the E2-D, and F-35, F-18 fighter

aircraft, and the Pratt & Whitney Geared Turbofan jet engine.

Sterling manufactures components used in jet engines of military and

commercial aircraft and ground power turbine engines.

The Company’s primary customers are large publicly traded companies including

the four largest suppliers to the US Department of Defense.

Basis of Presentation

The accompanying consolidated financial statements

of the Company included in this report have been prepared in accordance with accounting principles generally accepted in the United States

of America and the rules and regulations of the Securities and Exchange Commission.

Historically the Company operated its businesses

and reported its results as two separate segments with AIM and NTW comprising the Complex Machining segment (“CMS”) and Sterling

as the Turbine & Engine Component segment (“TEC”).

The CMS segment specialized in flight critical components including

flight controls and landing gear.

The TEC segment focused on manufacturing components for jet engines.

Along with its operating subsidiaries,

the Company reported the results of its corporate division as an independent segment.

In recent years the Company integrated and consolidated

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

The Company also made significant capital expenditures and all of its operations now share the same manufacturing facilities

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

The Company made these changes to take advantage of the long-term

growth opportunities it sees in the aerospace and defense market.

In early fiscal 2022, the Company further changed its management approach

and is now making decisions about resources to be allocated and assesses performance based on one integrated business rather than two

reporting segments.

As such, effective with the fiscal quarter ended March 31, 2022, the Company is presenting its operations as one

reportable operating segment.

At each reporting period, management evaluates

whether there are conditions or events that raise any substantial doubt about the Company’s ability to continue as a going concern

within one year after the date that the financial statements are issued.

The Company is required to make certain additional disclosures

if management concludes that if substantial doubt exists about the Company’s ability to continue as a going concern provided that

such doubt is not alleviated by the Company’s plans or when the Company’s plans alleviate substantial doubt about its ability

to continue as a going concern.

This evaluation entails analyzing prospective operating budgets and forecasts for expectations regarding

cash needs and comparing those needs to the current cash and cash equivalent balance and expectations regarding cash to be generated

over the following year.

The global outbreak of COVID-19 negatively impacted

the Company’s revenues, earnings and operating cash flows in 2020.

While operations substantially returned to normal in fiscal

2021 and 2022, there remains some substantial issues and problems receiving raw materials and prompt processing of its products.

With fiscal 2022 now completed and the Company continuing to see the

benefits from its recent investments in machinery and equipment, management believes the Company will continue to improve its liquidity.

During 2022, the Company generated $ 448,000 of cash from operating activities.

Based on the Company’s current best estimates of

fiscal 2023 and first half of fiscal 2024 sales, confirmed orders from existing backlog and expected orders from existing and new customers

expected timing of future cash receipts and expenditures and the Company’s ability to access additional liquidity, if needed, the

Company firmly believes it will have adequate cash to support operations through at least one year from the date of the accompanying financial

statements are issued.

Reverse Stock Split

On October 4, 2022, the Company announced a reverse

stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10.

The reverse stock split was effective

on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time.

All share and per share amounts of

its common stock presented have been retroactively adjusted to reflect the 1-for-10 reverse stock split.

As result of the reverse stock

split there were no fractional shares issued and all holders were rounded up to the next whole share.

See Note 11 – Stockholders’

Equity for more information.

SUMMARY OF SIGNIFICANT ACCOUNTING

Principles of Consolidation

3 unchanged sentences

in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid

instruments with an original maturity of three months or less.

Accounts Receivable

5 unchanged sentences

Inventory Valuation

The Company values inventory at the lower of cost

on a first-in-first-out basis or an estimated net realizable value.

The Company generally purchases raw materials

and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable contracts

for orders have been received for finished goods.

It occasionally produces larger more complex products, such as landing gear, in excess

of purchase order quantities in anticipation of future purchase order demand.

Historically this excess has been used in fulfilling future

purchase orders.

The Company purchases supplies and materials useful in a variety of products as deemed necessary even though orders have

not been received.

The Company periodically evaluates inventory items that are not secured by purchase orders and establishes write-downs

to estimated net realizable value for obsolescence accordingly.

The Company also writes-down inventory to estimated net realizable value

for excess quantities, slow-moving goods, and for other impairments of value.

Prepaid Expenses and Other Current Assets

On December 23, 2020, the Company and CPI reached

an agreement to settle the working capital dispute.

The settlement provided that the escrow agent would release the balance of $ 1,380,684

remaining in the escrow account to CPI.

The Company and CPI exchanged mutual releases customary in the circumstances.

Prepaid expenses and other current assets include

purchase deposits, miscellaneous prepaid expenses and cash in escrow less a reserve.

On December 23, 2020, the Company settled its working

capital dispute with CPI, see Note 14 - Contingencies.

As a result of this settlement, the Company released the cash that was held in

escrow and therefore removed the reserve.

The changes in the reserve are shown below and discussed in Note 2 – Discontinued Operations.

Balance at Beginning of Year

Charges to Loss on Sale of Subsidiary

Balance at end of year

Valuation reserve deducted from Prepaid Expenses and Other Current Assets:

Year ended December 31, 2020

$ ( 1,770,000 )

The Company values inventory at the lower of

cost on a first-in-first-out basis or an estimated net realizable value.

The Company generally purchases raw materials and supplies uniquely

suited to the production of larger more complex parts, such as landing gear, only when non-cancellable contracts for orders have been

received for finished goods.

It occasionally produces larger more complex products, such as landing gear, in excess of purchase order

quantities in anticipation of future purchase order demand, when it is economically advantageous to do so, since historically this excess

has been used in fulfilling future purchase orders.

The Company purchases supplies and materials useful in a variety of products as deemed

necessary even though orders have not been received.

The Company periodically evaluates inventory items that are not secured by purchase

orders and establishes write-downs to estimated net realizable value.

The Company writes-down inventory to estimated net realizable value

for excess quantities, slow-moving goods, obsolescence and for other impairments of value.

Property and Equipment

7 unchanged sentences

Long-Lived and Intangible Assets

Identifiable intangible assets are amortized using

the straight-line method over the period of expected benefit.

Identifiable intangible assets are amortized

using the straight-line method over the period of expected benefit.

Long-lived assets and intangible assets subject

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Costs incurred with obtaining and executing revolving

debt arrangements are capitalized and recorded in current assets and amortized using the effective interest method over the term of the

related debt.

Costs incurred with obtaining and executing other debt arrangements are presented as a direct deduction from the carrying

value of the associated debt and also amortized using the effective interest method over the term of the related debt.

debt arrangements are capitalized and recorded in other current assets and amortized using the effective interest method over the term

of the related debt.

Costs incurred with obtaining and executing other debt arrangements are presented as a direct deduction from the

carrying value of the associated debt and also amortized using the effective interest method over the term of the related debt.

The amortization

of financing costs is included in interest and financing costs in the Consolidated Statements of Income.

of financing costs is included in interest and financing costs in the Consolidated Statements of Operations.

Contract Costs Receivable

Contract costs receivable represent costs to be

reimbursed from a terminated contract.

The Company expects to collect the receivable in the next twelve months.

Contract costs receivable

totals $ 296,000 and $ 0 as of December 31, 2022 and 2021, respectively.

Revenue Recognition

The Company accounts for revenue recognition in

accordance with accounting guidance codified as FASB ASC 606 “Revenue from Contracts with Customers” (“ASC 606”),

as amended, regarding revenue from contracts with customers.

Under the standard an entity is required to recognize revenue to depict the

transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange

for those goods.

Under ASC 606, revenue is recognized as the customer

obtains control of the goods and services promised in the contract (i.e., performance obligations).

In evaluating our contracts with our

customers under ASC 606, we have determined that there is no future performance obligation once delivery has occurred.

The Company’s revenues are primarily derived

from consideration paid by customers for tangible goods.

The Company analyzes its different goods by segment to determine the appropriate

basis for revenue recognition, as described below.

There are no material upfront costs for operations that are incurred from contracts

with customers.

The Company recognizes revenue to depict the transfer

of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for

Revenue is recognized as the customer obtains

control of the goods and services promised in the contract (i.e., performance obligations).

In evaluating our contracts with our customers,

we have determined that there is no future performance obligation once delivery has occurred.

Our revenue is generated from fixed-price contracts.

Under fixed-price

contracts, we agree to perform the specified work for a pre-determined price, which we estimate during the bidding process before the

contract is awarded.

To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more

or less profit or could incur a loss.

We evaluate the products promised in each contract at inception to

determine whether the contract should be accounted for as having one or more performance obligations.

Our contracts are typically accounted

for as one performance obligation.

We classify net sales as products on our consolidated statements of operations based on the predominant

attributes of the performance obligations.

We determine the transaction price for each contract

based on the consideration we expect to receive for the products being provided under the contract.

At the inception of a contract, we estimate the

transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on

contracts until they become legally enforceable.

Contracts can be subsequently modified to include changes in specifications, requirements

or price, which may create new or change existing enforceable rights and obligations.

Depending on the nature of the modification, we

consider whether to account for the modification as an adjustment to the existing contract or as a separate contract.

Generally, modifications

to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the

context of the contract.

Therefore, such modifications are accounted for as if they were part of the existing contract and recognized

as a cumulative adjustment to revenue.

We recognize revenue at the point in time in which

the performance obligation is fully satisfied.

This is fully satisfied when the product has shipped, which is the point in time the customer

obtains control of the product and we no longer maintain control of the product.

The Company’s rights to payments for goods

2 unchanged sentences

by contract, although terms generally include a requirement of payment within 30 to 75 days.

Payments received in advance from customers are

recorded as deferred revenue until earned, at which time revenue is recognized.

The Terms and Conditions contained in our customer purchase

orders often provide for liquidated damages in the event that a stop work order is issued prior to the final delivery.

The Company utilizes

a Returned Merchandise Authorization or RMA process for determining whether to accept returned products.

Customer requests to return products

are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt of the product.

Net sales represent

gross sales less returns and allowances.

Payments received in advance from customers are recorded as customer deposits

until earned, at which time revenue is recognized.

The Terms and Conditions contained in our customer purchase orders often provide for

liquidated damages in the event that a stop work or contract termination order is issued prior to final delivery.

While the products we

manufacture are specific to the type of aircraft that they are used on, there are alternate customers that can acquire and utilize these

The Company utilizes a Returned Merchandise Authorization or RMA process for determining whether to accept returned products.

Customer requests to return products are reviewed by the contracts department and if the request is approved, a credit is issued upon

receipt of the product.

Net sales represent gross sales less these returns and allowances.

Customer Deposits

The Company receives advance payments on certain

contracts with the remainder of the contract balance due upon the shipment of the final product once the customer inspects and approves

the product for shipment.

At that time, the entire amount will be recognized as revenue and the deposit will be applied to the customer’s

At December 31, 2022 and 2021, customer deposits

were $ 781,000 and $ 1,470,000 respectively.

The Company recognized revenue of $ 440,000 during year ended December 31, 2022, that was included

in the customer deposits balance as of December 31, 2021.

The Company recognized revenue of $ 507,000 during the year ended December 31,

2021, that was included in the customer deposits balance of $ 917,000 as of December 31, 2020.

Backlog represents executed non-cancellable contracts

that represent firm purchase orders that are deliverable over the next 18-month period.

As of December 31, 2022, backlog relating to remaining

performance obligations in contracts was approximately $ 60,000,000 .

The Company expects to recognize revenue amounts in future periods

related to these remaining performance obligations as follows:

approximately $ 22,500,000 to $ 26,500,000 from January 1, 2023 - June 30,

2023, and approximately $ 15,000,000 to $ 18,000,000 from July 1, 2023 through December 31, 2023.

This expectation assumes that raw material

suppliers and outsourced processing is completed and delivered on-time and that the Company’s customers will accept delivery as

The Company anticipates that sales during the aforementioned periods will also include sales pursuant to contracts that are

not currently in backlog.

Use of Estimates

1 unchanged sentence

is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes.

more significant management estimates are the allowance for doubtful accounts, useful lives of property and equipment, provisions

for inventory obsolescence, accrued expenses and whether to accrue for various contingencies.

more significant management estimates are the allowance for doubtful accounts, useful lives of property and equipment, provisions for

obsolescence, excess and slow moving inventory, accrued expenses and income taxes, which

includes the determination of the valuation allowance for deferred tax assets.

Actual results could differ from those estimates.

Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Credit and Concentration Risks

2 unchanged sentences

Military Aviation.

There were three customers that represented 75.4 %

There were four customers that represented 76.5 %

of total sales, and three customers that represented 75.4 % of total sales for the years ended December 31, 2022 and 2021, respectively.

1 unchanged sentence

Percentage of Sales

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

There were three customers that represented 70.3 %

of gross accounts receivable and 80.3 % of gross accounts receivable at December 31, 2021 and 2020, respectively.

This is set forth in

the table below.

of gross accounts receivable and three customers that represented 74.7 % of gross accounts receivable at December 31, 2022 and 2021, respectively.

This is set forth in the table below.

Percentage of Receivables

Cash and Cash equivalents

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

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

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers

for the years ended December 31, 2022 and 2021:

During the year, the Company had occasionally

8 unchanged sentences

with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires that the Company recognize deferred

tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities,

using enacted tax rates in effect in the years the differences are expected to reverse.

tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and

liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.

The provision for, or benefit from, income taxes

1 unchanged sentence

Such temporary differences result primarily from the differences in the carrying value of assets and liabilities.

Future realization of

deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law.

on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable.

allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

The evaluation,

as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative,

regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing

taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential

tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.

The Company accounts for uncertainties in income

taxes under the provisions of FASB ASC 740-10-05 (the “Subtopic”).

The Subtopic clarifies the accounting for uncertainty in

income taxes recognized in an enterprise’s financial statements.

The Subtopic prescribes a recognition threshold and measurement

attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and

Earnings per share

Basic earnings per share (“EPS”) is

computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding

Future realization

of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law.

evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable.

Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized.

The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive

and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals

of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards,

and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.

The Company accounts for uncertainties in income taxes under the provisions

of FASB ASC 740 which clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.

The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a

tax position taken or expected to be taken in a tax return.

The Subtopic provides guidance on the de-recognition, classification, interest

and penalties, accounting in interim periods, disclosure and transition.

Earnings (Loss) per share

Basic earnings (loss) per share (“EPS”)

is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock outstanding

for the period.

For purposes of calculating diluted earnings per

common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first day of the

The denominator includes both the weighted-average number of shares of common stock outstanding during the period and the number

of common stock equivalents if the inclusion of such common stock equivalents is dilutive.

Dilutive common stock equivalents potentially

include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted method.

The following is the calculation of income from

continuing operations applicable to common stockholders utilized to calculate the numerator for EPS:

Income from continuing operations - Basic

For purposes of calculating diluted earnings

(loss) per common share, the numerator includes net income (loss) plus interest on convertible notes payable assumed converted as of

the first day of the period.

The denominator includes both the weighted-average number of shares of common stock outstanding during the

period and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive.

Dilutive common stock

equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using the if-converted

The following is the calculation of income applicable

to common stockholders utilized to calculate the numerator for EPS:

Net (Loss) Income – Basic

$ ( 1,076,000 )

Convertible Note Interest for Potential Note Conversion

Convertible Note debt discount for Potential Note Conversion

Income from continuing operations used to calculate earnings per share

The following is a reconciliation of the denominators of basic and

diluted EPS computations for continuing operations:

Weighted average shares outstanding used to compute basic

earnings per share

Net (Loss) Income used to calculate diluted earnings per share

$ ( 1,076,000 )

The following is a reconciliation of the denominators

of basic and diluted EPS computations:

Weighted average shares outstanding used to compute basic earnings

Effect of dilutive stock options and warrants

Effect of dilutive convertible notes payable

Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share

Effect of dilutive convertible

notes payable

Weighted average shares outstanding

and dilutive securities used to compute dilutive earnings per share

Per share amount – basic

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Stock compensation expenses for employees and directors were included in operating expenses in the accompanying

Consolidated Statements of Income.

Goodwill represents the excess of the acquisition

Consolidated Statements of Operations.

Goodwill represented the excess of the acquisition

cost of businesses over the fair value of the identifiable net assets acquired.

The goodwill amount of $ 163,000 at December 31, 2021 and

2020 relates to the acquisition of NTW.

The goodwill amount of $ 163,000 at December 31, 2021 related

to the acquisition of NTW.

The Company accounts for the impairment of goodwill

under the provisions of ASU 2017-04 (“ASU 2017-04”), “Intangibles Goodwill and Other (Topic 350):

Testing Goodwill for

Impairment.” ASU 2011-08 updated the guidance on the periodic testing of goodwill for impairment.

The updated guidance gives companies

the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit

is less than its carrying amount.

The Company performs impairment testing for goodwill

annually, or more frequently when indicators of impairment exist.

As discussed above, the Company adopted ASU 2011-08 and performs a qualitative

assessment in the fourth quarter of each year to determine whether it was more likely than not that the fair value of a reporting unit

is less than its carrying amount.

The Company determined that there has been no

impairment of goodwill at December 31, 2021 and 2020.

Simplifying the Test

for Goodwill Impairment.” ASU 2017-04 gives companies the option to perform a qualitative assessment to determine whether it is

more likely than not that the fair value of a reporting unit is less than its carrying amount.

The Company performed impairment testing for goodwill

annually, or more frequently when indicators of impairment existed.

The Company determined that the goodwill was

fully impaired at December 31, 2022.

The impairment charge of $ 163,000 is included in operating expenses in the Consolidated Statement

of Operations.

Freight out is included in operating expenses

and amounted to $ 162,000 and $ 135,000 for the years ended December 31, 2022 and 2021, respectively.

In accordance with FASB ASC 842, “Leases”

(“ASC 842”), the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with

terms longer than 12 months and classifies them as either operating or finance leases.

The lease classification affects the expense recognition

in the income statement.

Operating lease charges are recorded entirely in operating expenses.

Finance lease charges are split, where

amortization of the right-of- use asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

At the inception of an arrangement, the Company

determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of

the lease including whether the contract involves the use of a distinct identified asset, whether the Company obtains the right to substantially

all the economic benefit from the use of the asset, and whether the Company has the right to direct the use of the asset.

a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease

The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient.

For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account

for the lease and non-lease components as a single lease component.

Lease liabilities and their corresponding ROU

assets are recorded based on the present value of lease payments over the expected lease term.

The implicit rate within our operating

leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date

to determine the present value of lease payments.

The determination of the Company’s incremental borrowing rate requires judgment.

The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate, adjusted for various factors

including level of collateralization, term and currency to align with the terms of the lease.

The operating lease ROU asset also includes

any lease prepayments, offset by lease incentives.

An option to extend the lease is considered in

connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option.

terminate is considered unless it is reasonably certain we will not exercise the option.

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU No.

Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s

Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the complexity associated

with applying GAAP for certain financial instruments with characteristics of liabilities and equity.

For convertible instruments, ASU

2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information

transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance on the basis

of feedback from financial statement users.

ASU 2020-06 is effective for fiscal years, and interim periods in those fiscal years, beginning

after December 15, 2021 (effective January 1, 2022 for the Company).

The Company does not expect that the adoption of this new accounting

guidance will have a material effect on its financial statements.

On January 21, 2021, the Company adopted ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify

various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740

and also clarifies and amends existing guidance to improve consistent application.

The adoption of ASU 2019-12 did not have a material

effect on its financial statements.

Effective January 1, 2022, the Company adopted

2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts

in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06), which is intended to address issues identified as a result of the

complexity associated with applying accounting principles generally accepted in the United States of America for certain financial instruments

with characteristics of liabilities and equity.

For convertible instruments, ASU 2020-06 reduces the number of accounting models for

convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to

the disclosures for convertible instruments and earnings-per-share guidance on the basis of feedback from financial statement users.

The adoption of ASU 2020-06 did not have a material effect on the Company’s financial statements.

In June 2016, the FASB issued ASU No.

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on most financial assets and certain other instruments.

Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses,

rather than as a direct write-down of the amortized cost basis of a financial asset.

The impairment allowance is a valuation account deducted

from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset.

new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate

at each reporting date.

Under ASU 2016-13 credit impairment is recognized as an allowance for credit

losses, rather than as a direct write-down of the amortized cost basis of a financial asset.

The impairment allowance is a valuation

account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial

Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s

current estimate at each reporting date.

The new guidance provides no threshold for recognition of impairment allowance.

Therefore, entities must also

measure expected credit losses on assets that have a low risk of loss.

For instance, trade receivables that are either current or not

yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the

Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13.

Therefore, entities

must also measure expected credit losses on assets that have a low risk of loss.

For instance, trade receivables that are either current

or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard,

the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13.

ASU 2016-13 is effective

for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies.

Early adoption is permitted.

The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements.

10 unchanged sentences

ended December 31, 2022 and 2021 is as follows:

Balance at Beginning of Year

Charged to Costs and Expenses

Deductions from Reserves

Balance at End of Year

Year ended December 31, 2021 Allowance for Doubtful Accounts

Year ended December 31, 2022 Allowance for

Doubtful Accounts

Year ended December 31, 2021 Allowance for Doubtful Accounts

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Machinery and Equipment

Finance Lease Machinery and Equipment

Finance Lease ROU Assets - Machinery and Equipment

Tools and Instruments

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Accrued Payroll

Accrued Interest - related parties

Accrued Interest - others

Accrued Expenses - other

Accounts Payable and accrued expenses

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.

SALE AND LEASEBACK TRANSACTION

On October 24, 2006, the Company consummated a

Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New York (the “Bay

On October 24, 2006, the Company consummated

a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay Shore, New York (the “Bay

Shore Property”) for a purchase price of $ 6,200,000 .

4 unchanged sentences

The gain is included in Other Income in the accompanying Consolidated Statements

of Operations.

The unrecognized portion of the gain in the amount of $ 143,000 and $ 181,000 as of December 31, 2022 and 2021, respectively,

2 unchanged sentences

the provisions of FASB ASC 840-40, “Leases-Sale-Leaseback Transactions.”

Simultaneous with the closing of the sale of the

Bay Shore Property, the Company entered into a 20-year triple- net lease (the “Lease”) expiring in September 2026 with the

purchaser for the property.

Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year, and thereafter

increases 3% per year.

Simultaneous with the closing of the sale of

the Bay Shore Property, the Company entered into a 20 -year triple- net lease (the “Lease”) expiring in September 2026 with

the purchaser for the property.

Base annual rent is approximately $ 540,000 for the first five years, $ 560,000 for the sixth year, and

thereafter increases 3 % per year.

The Lease grants the Company an option to renew the Lease for an additional period of five years .

The Company has

on deposit with the purchaser $89,000 as security for the performance of its obligations under the Lease.

In addition, at December 31,

2021, the Company had on deposit $150,000 with the purchaser as security for the completion of certain repairs and upgrades to the Bay

Shore Property.

In 2020, the landlord utilized the amounts on deposit to install air conditioning throughout the manufacturing facility.

At December 31, 2021, this amount was included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the accompanying

Consolidated Balance Sheets.

Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated with the operation

of the facilities, including, without limitation, insurance, taxes and maintenance.

The lease also contains customary representations,

warranties, obligations, conditions and indemnification provisions and grants the purchaser customary remedies upon a breach of the lease

by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency in future rent.

– Operating Lease Liabilities.

NOTES PAYABLE, RELATED PARTY NOTES

PAYABLE AND FINANCE LEASE OBLIGATIONS

Notes payable, related party notes payable and

finance lease obligations consist of the following:

Revolving credit note payable to Webster Bank (F/K/A Sterling National Bank) (“Webster”)

Company has on deposit with the purchaser $ 89,000 as security for the performance of its obligations under the Lease.

In addition, at

December 31, 2021, the Company had on deposit $ 150,000 with the purchaser as security for the completion of certain repairs and upgrades

to the Bay Shore Property.

In 2020, the landlord utilized the amounts on deposit to install air conditioning throughout the manufacturing

At December 31, 2022, this amount was included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the

accompanying Consolidated Balance Sheets.

Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated

with the operation of the facilities, including, without limitation, insurance, taxes and maintenance.

The lease also contains customary

representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary remedies upon

a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency in future

See Note 9 – Operating Lease Liabilities.

Debt consists of the following:

Revolving loan to Webster Bank (“Webster”)

Term loan, Webster

2 unchanged sentences

Related party notes payable

Current portion of notes payable, related party notes payable and finance lease obligations

Current portion

( 14,477,000 )

( 14,112,000 )

Notes payable, related party notes payable and finance lease obligations, net of

current portion

Long Term Portion

Webster Bank (F/K/A Sterling National Bank)

On December 31, 2019, the Company entered into

a loan facility (“Webster Facility”) with Webster expiring on December 30, 2022.

The loan facility originally provided for

a $ 16,000,000 revolving loan (“Webster revolving line of credit”) and a term loan (“Webster term loan”).

In 2020, the Company entered into the First Amendment

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

The terms of the amendment increased the Term Loan to $5,685,000.

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.

Additionally, the date by

which certain subordinated third-party notes need to be extended was changed from September 30, 2020 to November 30, 2020.

paid an amendment fee of $20,000.

On June 14, 2021, the Company 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

For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal

year the Company 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 close of the fiscal year immediately following such fiscal year.

The amount of

the Excess Cash Flow payment for the year ended December 31, 2020 was calculated to be $558,750.

Per the terms of the Second Amendment,

the Excess Cash Flow was payable in three instalments of $186,250 on each of June 15, 2021, June 30, 2021, and September 15, 2021.

of September 30, 2021, the Company paid this in full.

Additionally, the Company paid an amendment fee of $ 10,000 .

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.

On December 7, 2021, the Company 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, the Company is now allowed,

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

The Company paid an amendment fee of $75,000 pursuant

to this amendment which is included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Consolidated Balance

Sheets and is amortized over the term of the loan.

The terms of the Webster Facility require that,

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

with the Fiscal Quarter ending March 31, 2020.

In addition, the Company is limited in the amount of Capital Expenditures it can make.

As of December 31, 2021, and 2020, the Company was in compliance with all loan covenants.

The Webster Facility also restricts the amount

of dividends the Company may pay to its stockholders.

Substantially all of the Company’s assets are pledged as collateral under

the Webster Facility.

The aggregate payments for the term note at December

31, 2021 are as follows:

The Company has a loan facility (“Webster Facility”) with Webster

Bank that expires on December 30, 2025 .

The Webster Facility, which was entered into on December 31, 2019, was amended several times,

and now provides for a $ 20,000,000 revolving loan (“Revolving Line of Credit”), a $ 5,000,000 term loan (“Term Loan”)

and a $ 2,000,000 Equipment Line of Credit, which as it is drawn upon is added to the balance of the Term Loan.

As of December 31, 2022, there was $ 1,122,000

remaining available under the equipment line of credit.

The below table shows the timing of payments due under the Term Loan:

For the year ending

2 unchanged sentences

December 31, 2025

Webster Term Loan payable

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Total long-term portion of Webster Term Loan payable

Under the terms of the Webster Facility, both the Webster

revolving line of credit and the Webster term loan bear interest at a rate equal to the sum of a Base Rate plus an Applicable

The Base rate is the greater of (a) 3.5 % and (b) the rate per annum published from time to time in the “Money

Rates” table of the Wall Street Journal as the base or prime rate for corporate loans.

The Webster credit agreement provides

for several alternative rates if in the future the Wall Street Journal no longer publishes a base or prime rate.

The Applicable

Margin is minus 0.65 %.

In both 2021 and 2020 the average interest paid was 3.5 %.

As of December 31, 2021, the Company’s 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 .

Interest expense for the year ending December 31, 2021 amounted to $ 704,000 for this credit facility.

As of December 31, 2020, the Company’s debt

to Webster in the amount of $ 21,207,000 consisted of the Webster revolving line of credit note in the amount of $ 15,649,000 and the Webster

term loan in the amount of $ 5,558,000 .

Interest expense for the year ending December 31, 2020 amounted to $ 586,000 for the Webster facility.

As of December 31, 2022, our debt to Webster in the amount of $ 18,748,000

consisted of the Webster Revolving Loan in the amount of $ 13,352,000 and the Webster term loan in the amount of $ 5,396,000 which includes

$ 878,000 of what was drawn on the equipment line of credit.

Interest expense related to the Webster Facility

amounted to approximately $ 780,000 and $ 704,000 for the years ended December 31, 2022 and 2021, respectively.

The below summarizes historical amendments to

the Webster Facility and various terms:

In 2020, the Company entered into the First Amendment

to the Webster Facility which increased the Term Loan to $ 5,685,000 and required the Company to make monthly principal installments in

the amount of $ 67,679 beginning on December 1, 2020.

Other minor modifications were made and the Company paid an amendment fee of $ 20,000 .

In June 2021, the Company entered into the Second

Amendment to the Webster Facility, which clarified the definition and calculation of Excess Cash Flow, and to confirm the due date of

the required payment of the Excess Cash Flow.

For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined)

is a positive number for any fiscal year the Company 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

In connection with these changes, the Company paid an amendment fee of $ 10,000 .

The Company made Excess Cash Flow payments of $ 558,750

in 2021 (for the fiscal year ended December 31, 2020) and $ 854,000 in April 2022 (for fiscal year ended December 31, 2021).

the Company 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, the Company 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.

On December 7, 2021, the Company entered into

the Third Amendment to the Webster Facility (“Third Amendment”).

The purpose of the amendment was to provide a maturity date

for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022.

Such amendment also increased

the Revolving Line of Credit to its current limit of $ 20,000,000 (up from the original $ 16,000,000 ) and also provided for a similar increase

in the inventory sublimit to $ 14,000,000 (up from the original $ 11,000,000 ).

The Third Amendment, also allows the Company, subject to

certain limitations, to begin amortizing $ 250,000 of its related party subordinated notes payable each quarter as long as certain conditions

In connection with these changes, the Company paid an amendment fee of $ 75,000 .

On May 17, 2022, the Company entered into the

Fourth Amendment to the Webster Facility (“Fourth Amendment”).

The purpose of the amendment was to increase the Term Loan

to $ 5,000,000 , generating proceeds of $ 1,945,000 , 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 the Company can draw upon from time to time to finance

purchases of machinery and equipment, thereby increasing the amount of capital expenditures that the Company may make each year.

principal payments are $ 59,524 per month commencing in June 2022 with a balloon payment due on December 30, 2025.

In connection with

these changes, the Company paid an amendment fee of $ 20,000 .

On December 15, 2022, the Company made a draw

against the capital expenditure line of credit in the amount of $ 877,913 .

The principal payments are $ 10,451 per month commencing in

February 2023 with a balloon payment due on December 30, 2025 .

On January 4, 2023, the Company made an additional

draw against the capital expenditure line of credit in the amount of $ 739,500 .

The principal payments are $ 8,804 per month commencing

in March 2023 with a balloon payment due on December 30, 2025 .

Under the terms of the Webster Facility, both

the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii)

a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal

(or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate

for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum.

average interest rate charged was 4.50 % and 3.50 % for the years ended December 31, 2022 and 2021, respectively.

Amendment fees paid in connection with the Webster

Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance

Sheets and are amortized over the term of the loan.

In connection with the Webster Facility, the

Company is required to maintain a defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter.

Facility limits the amount of Capital Expenditures and dividends the Company can pay to its stockholders.

Substantially all of the Company’s

assets are pledged as collateral under the Webster Facility.

As of December 31, 2022, the Company was in compliance

with all financial loan covenants.

However, the Company was in default of its covenant to provide its audited financial statements to

Webster bank within ninety (90) days of its fiscal year end.

The Company has subsequently received a waiver from the bank for this default.

Finance Lease Obligations

The Company entered into a Finance lease in December

of 2021 for the purchase of new manufacturing equipment.

The obligation for the Finance lease as of December 31, 2021 is $ 262,000 .

lease has an imputed interest rate of 4.2 % per annum and is payable monthly with the final payment due on December 17, 2026.

The Company entered into a finance lease in November of 2022 for the

purchase of new manufacturing equipment.

The obligation for the finance lease totaled $ 328,000 as of December 31, 2022.

The lease has

an imputed interest rate of 7.48 % per annum and is payable monthly with the final payment due in September of 2026.

The Company entered into a finance lease in December of 2021 for the

purchase of new manufacturing equipment.

The obligation for the finance lease totaled $ 0 and $ 263,000 as of December 31, 2022 and 2021,

respectively.

The lease had an imputed interest rate of 4.2 % per annum and was payable monthly with the final payment due on December

In connection with the Fourth Amendment to the Webster Facility, this finance lease was paid in full.

Finance Lease cost:

Amortization of ROU assets

Interest on lease liabilities

Total Lease Costs

Other Information:

Cash Paid for amounts included in the measurement lease liabilities:

Financing cash flow from finance lease obligations

Supplemental disclosure of non-cash activity

Acquisition of finance lease ROU asset

Weighted Average Remaining Lease Term - in years

Weighted Average Discount rate - %

As of December 31, 2022, the aggregate future

minimum finance lease payments, including imputed interest are as follows:

minimum Finance lease payment, including imputed interest are as follows:

For the year ending

3 unchanged sentences

December 31, 2026

Total future minimum finance lease payments

3 unchanged sentences

Loans Payable – Financed Assets

The Company financed the purchase a delivery vehicle

in July 2020.

The Company financed the purchase a delivery

vehicle in July 2020.

The loan obligation totaled $ 30,000 and $ 39,000 as of December 31, 2022 and 2021, respectively.

The loan bears no interest

and a final payment is due and payable for all unpaid principal on July 20, 2026.

The loan bears

no interest and a final payment is due and payable for all unpaid principal on July 20, 2026.

Annual maturities of this loan are as follows:

the year ending

For the year ending

December 31, 2023

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and are due on July 1, 2026.

Approximately $2,732,000 of the related party subordinated notes can be converted at the option of the holder

into Common Stock of the Company at $1.50 per share, while the remaining $2,080,000 of the related party subordinated notes can be converted

at the option of the holder into common stock of the Company at $0.93 per share.

There are no principal payments due on these notes.

the terms of the Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations, to begin amortizing

a portion of this subordinated debt.

The note holders and the principal balance of the notes as amended on January 1, 2021 are shown below:

Approximately $ 2,732,000 of the related party convertible subordinated notes can be converted at the option

of the holder into Common Stock of the Company at $ 15.00 per share, while the remaining $ 2,080,000 of the related party convertible subordinated

notes can be converted at the option of the holder into common stock of the Company at $ 9.30 per share.

There are no principal payments

due on these notes.

Under the terms of the Third Amendment to the Webster Facility, the Company is now allowed, subject to certain limitations,

to make principal payments of $ 250,000 per quarter of this subordinated debt.

During the year ended December 31, 2022, a principal

payment of $ 250,000 was made against the Subordinated Notes due to Michael Taglich.

This payment was made pursuant to the conditions

set forth in the Third Amendment to the Webster Facility.

The note holders and the principal balance of

the notes of December 31, 2022 are shown below:

Michael Taglich,

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Subordinated Notes

The interest rate on the Convertible Subordinated

Notes in the principal amount of $2,732,000 bear interest at a rate of 6%, and in the principal amount of $2,080,000 bear interest at

a rate of 7%.

The Subordinated Notes in the amount of $1,600,000 bear interest at the rate of 12% .

For the years ended December 31, 2021 and 2020,

no principal payments have been made on these notes and the principal balances remain unchanged from the table above.

Interest expense

for the years ended December 31, 2021 and 2020 on all related party notes payable was $ 460,000 and $ 781,000 , respectively.

In May 2020, AIM, NTW and Sterling entered into

SBA Loans with Webster as the lender in an aggregate principal amount of $2,414,000, which was forgiven by the SBA in December of 2020.

Each SBA Loan was evidenced by a Note.

Subject to the terms of the Note, the SBA Loans bore interest at a fixed rate of one percent (1%)

per annum, with the first six months of interest deferred, had an initial term of two years, and was unsecured and guaranteed by the SBA.

At least 60% of the proceeds of each Loan must be used for payroll and payroll-related costs, in accordance with the applicable provisions

of the federal statute authorizing the loan program administered by the SBA and the rules promulgated thereunder (the “Loan Program”).

December 2020, the Company was notified that the loans and all interest accrued thereon had been forgiven.

The Company elected to treat the SBA Loans as

debt under FASB ASC 470.

As such, the Company derecognized the liability when the loans were forgiven and the Company was legally released

from the loans.

Interest expense for the years ended December

31, 2022 and 2021 on all related party notes payable was $ 487,000 and $ 460,000 , respectively.

Approximately $2,732,000 of these notes

have an annual rate of interest of 6%, $2,080,000 have an annual interest rate of 7% and $1,600,000 have an annual interest rate of 12%.

OPERATING LEASE LIABILITIES

The Company has operating and finance leases for

leased office and manufacturing facilities and equipment leases.

The Company leases certain machinery and equipment under finance leases

and leases its offices and manufacturing facilities under operating leases.

The leases have remaining lease terms of one to six years,

some of which include options to extend or terminate the leases.

The Company has operating leases for leased office

and manufacturing facilities.

The leases have remaining lease terms of one to five years , some of which include options to extend or terminate

Operating lease cost:

Total lease cost

Other Information

Cash paid for amounts included in the measurement lease liability:

Operating cash flow from operating leases

Weighted Average Remaining Lease Term - in years

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December 31, 2026

Total future minimum lease payments

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Total long term portion of operating lease maturities

On April 29, 2021 the Company entered into an

agreement to surrender possession of the premises of the former corporate office, located in Hauppauge, NY.

The Company made a one-time

payment of 40 % of the remaining balance due to the landlord as of May 1, 2021, approximately $ 37,000 .

The Company had previously recognized

a lease impairment of $ 275,000 to its Operating Lease Right-of-Use-Asset for the year-ended December 31, 2019.

NTW’s warehouse lease was terminated in

May 2020 by its landlord under the terms of its lease agreement.

Additionally, the Company entered into a new lease agreement for warehouse

space in Bohemia, NY.

The new lease term commenced on April 1, 2020 and expires on May 31, 2025.

During the first year of the lease, the

monthly rent is $10,964 and increases 3% each year thereafter.

The final two months are equal installments of $1,746.

Rent expense for the years ended December 31,

2021 and 2020 was $ 1,069,000 and $ 1,173,000 , respectively.

LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION

OF SUBSIDIARY

LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM

DISPOSITION OF SUBSIDIARY

In connection with the sale of the Company’s

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The timing of the payments is based upon the net sales of AMK.

If the Purchasers have not received the entire Remaining Amount by March

31, 2023, they have the right to demand payment of their pro rata portion of the unpaid Remaining Amount from the Company (“Put

To the extent the Purchasers exercise their Put Right, the remaining payments from Meyer will be retained by the Company.

The Company recognized $ 94,000 and $ 326,000 of

non-cash income for the years ended December 31, 2022 and 2021, respectively, reflected in “other income, net” on the Consolidated

statements of income and recorded $ 98,000 and $ 122,000 of related non-cash interest expense related to the Purchase Agreement for the

years ended December 31, 2021 and 2020, respectively.

Statements of Operations and recorded $ 35,000 and $ 98,000 of related non-cash interest expense related to the Purchase Agreement for

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

The table below shows the activity within the

liability account for the years ended December 31, 2022 and 2021:

December 31, 2021

December 31, 2020

Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning

Liabilities related to sale of future proceeds

from disposition of subsidiaries - beginning balance

Non-Cash other income recognized

Non-Cash interest expense recognized

Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance

Liabilities related to sale of future proceeds from disposition

of subsidiary - ending balance

unamortized transaction costs

Liability related to sale of future proceeds from disposition of subsidiary,

Liability related to sale of future

proceeds from disposition of subsidiary, net

STOCKHOLDERS’ EQUITY

Common Stock – Issuance of Securities

In January 2020, the Company issued and sold 419,597

shares of its common stock for gross proceeds of $ 984,000 pursuant to a Form S-3 filed on October 10, 2019 as updated on January 15, 2020.

Costs of the sale amounted to $ 145,000 .

During the year ended December 31, 2020, the Company

issued 1,830,631 shares of common stock to convert third party subordinated debt totaling $ 2,589,000 to equity.

During the year ended December 31, 2020, the Company

issued 178,405 shares of common stock in payment of director’s fees totaling $ 211,000 .

During the year ended December 31, 2021, the Company

issued 169,811 shares of common stock in payment of directors’ fees totaling $ 210,000 .

During the year ended December 31, 2021, the Company

issued 51,224 shares of common stock for the cashless exercise of stock options.

On October 4, 2022 the Company announced a reverse

stock split of its authorized, issued and outstanding shares of common stock at a ratio of 1-for-10.

The reverse stock split was effective

on October 18, 2022, and its common stock began trading on a post-split-adjusted basis at that time.

As result of the reverse stock split

there were no fractional shares issued and all holders were rounded up to the next whole share.

An additional 7,287 shares were issued

to account for this.

As such all references to shares and per share price has been adjusted to retrospectively account for this transaction.

Common Stock – Issuances of Securities

The Company issued 27,849 and 16,981 shares totaling

$ 216,000 and $ 210,000 for the years ended December 31, 2022 and 2021, respectively.

Additionally, the Company issued 5,122 shares of common

stock upon the cashless exercise of stock options during the year ended December 30, 2022.

During the first quarter of 2023, the Company

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EMPLOYEE BENEFITS PLANS

The Company employs both union and non-union employees

and maintains several benefit plans.

Substantially the entire workforce at AIM is subject

to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the “Union”).

The Agreement was

renewed as of December 31, 2021 and expires on December 31, 2024 and covers all of AIM’s production personnel, of which there are

approximately 131 people.

AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the United

Services Worker’s Security Fund.

This is the only pension benefit required by the Agreement and the Company is not obligated for

any future defined benefit to retirees.

The Agreement contains a “no-strike” clause, whereby, during the term of the Agreement,

the Union will not strike and AIM will not lockout its employees.

Medical benefits for union employees are provided through a policy with

Insperity Services, Inc.

The Company employs both union and non-union

employees and maintains several benefit plans.

Substantially the entire workforce at AIM is

subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the “Union”).

The Agreement

was renewed as of December 31, 2021 and expires on December 31, 2024 and covers all of AIM’s production personnel, of which there

are approximately 131 people.

AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the

United Services Worker’s Security Fund.

This is the only pension benefit required by the Agreement and the Company is not obligated

for any future defined benefit to retirees.

The Agreement contains a “no-strike” clause, whereby, during the term of the

Agreement, the Union will not strike and AIM will not lockout its employees.

Medical benefits for union employees are provided through

a policy with Insperity Services, Inc.

(“Insperity”), the costs of which are substantially borne by the Company.

In addition, the Company

is obligated to make contributions for union dues and a security fund (defined contribution plan) for the benefit of each union employee.

Contributions to the security fund amounted to $ 147,000 and $ 134,000 for the years ended December 31, 2021 and 2020, respectively.

The Company accounts for its Union retirement

plan under ASU No.

2011-09, “Compensation - Retirement Benefits-Multiemployer Plans (Subtopic 715-80):

Disclosures about an Employer’s

Participation in a Multiemployer Plan” (“ASU 2011-09”).

ASU 2011-09 requires additional disclosures about an employer’s

participation in a multiemployer pension plan.

ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans.

the Company is obligated to make contributions for union dues and a security fund (defined contribution plan) for the benefit of each

union employee.

Contributions to the security fund amounted to $ 155,000 and $ 147,000 for the years ended December 31, 2022 and 2021,

respectively.

The Union’s retirement plan is a defined contribution plan.

As such, the Company is not responsible for the obligations of other

companies in the Union’s retirement plan and no further disclosures are required.

such, the Company is not responsible for the obligations of other companies in the Union’s retirement plan.

All of the Company’s employees are covered

under a co-employment agreement with Insperity, a professional employer organization that provides out-sourced human resource services.

The Company has a defined contribution plans under

The Company has defined contribution plans under

Section 401(k) of the Internal Revenue Code (the “Plans”).

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The Company does not match any contributions that employees may make to the Plans.

CONTINGENCIES

A number of actions have been commenced against

the Company by vendors, landlords and former landlords, including a third party claim as a result of an injury suffered on a portion of

a leased property not occupied by the Company.

As certain of these claims represent amounts included in accounts payable they are not

specifically discussed herein.

On October 2, 2018, Contract Pharmacal Corp.

Pharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with

respect to the property that was formerly occupied by its subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York.

In the action Contract

Pharmacal sought damages for an amount in excess of $ 1,000,000 for the Company’s failure to make the entire premises available by

the Sublease commencement date.

respect to the property that was formerly occupied by the Company’s former subsidiary WMI, at 110 Plant Avenue, Hauppauge, New York.

In the action Contract Pharmacal sought damages for an amount in excess of $ 1,000,000 for the Company’s failure to make the entire

premises available by the Sublease commencement date.

On July 8, 2021, the Court denied Contract Phamacal’s motion for summary judgement.

In the Order,

the court granted Contract Pharmacal’s Motions to drop its claim for specific performance and to amend its Complaint to reduce its

claim for damages to $ 700,000 .

In the Order, the court granted Contract Pharmacal’s Motions to drop its claim for specific performance and to amend its Complaint

to reduce its claim for damages to $ 700,000 .

Subsequently, Contact Pharmacal moved to amend its Complaint.

The Company opposed this and

the Court denied the request to amend the Complaint.

Contract Pharmacal filed a Motion to reargue which the Court denied on November 30,

2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company will oppose.

Company disputes the validity of the claims asserted by Contract Pharmacal, continues to believe it has a meritorious defense to those

claims and intends to dispute the validity of the claim asserted by Contract Pharmacal.

On December 20, 2018, the Company completed the

sale of all of the outstanding shares of its subsidiary, WMI, to CPI.

There ensued a dispute with CPI regarding amounts it claimed were

due based upon the value it ascribed to the inventory as of the closing date.

On December 23, 2020 the Company and CPI reached an agreement

to settle the working capital dispute.

Pursuant to the settlement, the escrow agent released to CPI the balance of $ 1,380,684 remaining

in the escrow account which had been established at the closing and the Company and CPI exchanged mutual releases customary in the circumstances.

From time to time the Company may be engaged in

various lawsuits and legal proceedings in the ordinary course of business.

On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company

The Company disputes the validity of the claims asserted by Contract Pharmacal and intends contest them vigorously.

From time to time the Company may be engaged

in various lawsuits and legal proceedings in the ordinary course of business.

The Company is currently not aware of any legal proceedings

the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its business,

financial condition or operating results.

There are no proceedings in which any of the Company’s directors, officers or affiliates,

or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse to our interest.

The provision for (benefit from) income taxes

as of December 31, is set forth below:

Federal tax refund

$ ( 1,416,000 )

Total (Benefit from) Expense for Income Taxes

( 1,412,000 )

Net (Benefit from) Provision for Income Taxes

$ ( 1,412,000 )

the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its

business, financial condition or operating results.

There are no proceedings in which any of the Company’s directors, officers

or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse

to our interest.

The provision for income taxes for the years ended

December 31, 2022 and 2021, is set forth below:

Current and Deferred

Total Provision for Income Taxes

The following is a reconciliation of our income

tax rate computed using the federal statutory rate to our actual income tax rate as of December 31,

tax rate computed using the federal statutory rate to our actual income tax rate for the years ended December 31, 2022 and 2021 is set

statutory income tax rate

Permanent difference, over accruals, and non-deductible items

Rate change and provision to return true-up

Expired stock options

State taxes, net of federal benefit

Permanent difference, overaccruals, and non-deductible items

Change in state rate

Deferred tax valuation allowance

Cares Act Refund

The components of net deferred tax assets at December 31, 2021 and

2020 are set forth below:

The components of net deferred tax assets at

December 31, are set forth below:

Deferred tax assets:

Net operation loss

Net operating loss

Allowance for doubtful accounts

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Disallowed interest

Right of Use Asset

Total non-current deferred tax asset before valuation allowance

Operating lease liabilities

Total deferred tax asset before valuation allowance

Valuation allowance

1 unchanged sentence

( 7,503,000 )

Total non-current deferred tax asset after valuation allowance

Total deferred tax asset after valuation allowance

Deferred tax liabilities:

2 unchanged sentences

( 1,697,000 )

Operating Lease ROU assets

Total deferred tax liabilities

2 unchanged sentences

Net deferred tax asset

During the years ended December 31, 2021 and 2020,

the Company recorded a valuation allowance equal to its net deferred tax assets.

The Company determined that due to a recent history of

net losses, that at this time, sufficient uncertainty exists regarding the future realization of these deferred tax assets through future

taxable income.

If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized,

the valuation allowances will be reduced or eliminated.

With a full valuation allowance, any change in the deferred tax asset or liability

is fully offset by a corresponding change in the valuation allowance.

At December 31, 2021 and 2020, the Company provided a valuation

allowance on its net deferred tax assets of $ 9,628,000 and $ 9,394,000 , respectively.

As of December 31, 2021, the Company had a Federal

net operating loss carry forward of approximately $ 29,100,000 , of which $ 22,800,000 expires in years through 2037 and $ 6,300,000 that do

During the year ended December 31, 2022, the Company

determined that certain attributes of Deferred Tax Assets and Liabilities were incorrect for December 31, 2021 and 2020.

See Note 16 for

further information.

During the years ended December 31, 2022 and 2021, the Company recorded

a valuation allowance equal to its net deferred tax assets.

The Company determined that due to a recent history of net losses, at this

time sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income.

the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances

will be reduced or eliminated.

With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a

corresponding change in the valuation allowance.

At December 31, 2022 and 2021, the Company provided a valuation allowance on its net

deferred tax assets of $ 7,701,000 and $ 7,503,000 , respectively.

As of December 31, 2022, the Company had a

Federal net operating loss carry forward of approximately $ 22,420,000 , of which approximately $ 12,220,000 expires from 2023 through

2037 and $ 10,200,000 does not expire.

In addition, the Company has net operating loss carry forwards from various states of

approximately $ 22,600,000 which expire from 2035 through 2042.

At December 31, 2022 and 2021, the Company had

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tax positions are related to tax years that remain subject to examination by the relevant tax authorities.

The Company files federal and

state income tax returns in jurisdictions with varying statutes of limitations.

The 2018 through 2021 tax years generally remain subject

to examination by federal and state tax authorities.

As a result of the passage of the CARES Act, the

Company received $ 1,416,000 from the filing of a net operating loss carryback claim in 2020.

The Company is currently evaluating the impact

of other provisions of the CARES Act on its accounting for income taxes and does not believe it has a material impact at this time.

The Company files federal

and state income tax returns in jurisdictions with varying statutes of limitations.

The 2019 through 2022 tax years generally remain

subject to examination by federal and state tax authorities.

In August 2022, the Inflation Reduction Act of

2022, (the “IRA”), was signed into law which includes a stock buyback excise tax of 1 % on share repurchases, which will

apply to net stock buybacks after December 31, 2022.

We do not expect this to have a material impact if and when share repurchases

STOCK OPTIONS AND WARRANTS

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Stock Options

In July 2017, the Board of Directors adopted the

Company’s 2017 Equity Incentive Plan (“2017 Plan”) which authorized the grant of rights with respect to up to 1,200,000

The 2017 Plan was approved by affirmative vote of the Company’s stockholders on October 3, 2017.

During the year ended December 31, 2021, the Company

granted options to purchase 847,500 shares of common stock to certain of its employees and directors.

The weighted average fair value

of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions:

risk free interest rate

of 0.35 % to 0.83 %;

expected volatility factors of 73.2 % to 75.2 %;

expected dividend yield of 0 %;

and expected life of 2.5 to 4 years.

During the year ended December 31, 2020, the Company

granted options to purchase 560,000 shares of common stock to certain of its employees and directors.

The weighted average fair value

of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions:

risk free interest rate

of 0.22 % to 1.61 %;

expected volatility factors of 71.5 % to 75.4 %;

expected dividend yield of 0 %;

and expected life of 2.5 to 4 years.

In June 2022, the shareholders of the Company

approved the adoption of the Company’s 2022 Equity Incentive Plan (“2022 Plan”) which authorized the grant of rights

with respect to up to 100,000 shares.

During the years ended December 31, 2022 and 2021, the Company granted

options to purchase 62,000 and 84,750 shares of common stock, respectively, to certain of its employees and directors.

The Company recorded stock based compensation expense

of $ 443,000 and $ 308,000 in its Consolidated Statements of Income for the years ended December 31, 2021 and 2020, respectively, and

such amounts were included as a component of general and administrative expense.

of $ 310,000 and $ 443,000 in its Consolidated Statements of Operations for the years ended December 31, 2022 and 2021, respectively,

and such amounts were included as a component of operating expenses.

The fair values of stock options granted were

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using the “simplified method” permitted by Staff Accounting Bulletin No.

In addition to the inputs referenced above regarding

the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture rates that are revised prospectively

according to forfeiture experience.

In addition to the inputs referenced above

regarding the option pricing model, the Company adjusts the stock-based compensation expense for estimated forfeiture rates that are

revised prospectively according to forfeiture experience.

The stock volatility factor is based on the Company’s experience.

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Exercisable at December 31, 2022

Issuance of Stock Options

Issued in 2022

On January 31, 2022, the Company granted certain

employees, stock options to purchase an aggregate of 3,000 shares of the Company’s common stock at a price of $ 8.50 per share.

options expire on the fifth anniversary of the grant date and vest over a term of three years .

On April 6, 2022, the Company granted to its directors,

stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $ 8.40 per share.

expire on the fifth anniversary of the grant date and vest over a term of one year .

On April 11, 2022, the Company granted to certain

members of management and certain employees, stock options to purchase an aggregate of 53,000 shares of the Company’s common stock

at a price of $ 8.40 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of three years .

Issued in 2021

On January 11, 2021, the Company granted to its

directors, stock options to purchase an aggregate of 7,000 shares of the Company’s common stock at a price of $ 13.20 per share.

The options expire on the seventh anniversary of the grant date and vested over a term of one year .

On March 24, 2021, the Company granted to certain

members of management and certain employees, stock options to purchase an aggregate of 32,750 shares of the Company’s common stock

at a price of $ 13.90 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of three years .

On July 30, 2021, the Company granted to certain

members of management and certain employees, stock options to purchase an aggregate of 41,500 shares of the Company’s common stock

at a price of $ 12.20 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of one to three years .

On January 11, 2021, the Company granted to its

directors, stock options to purchase an aggregate of 7,000 shares of the Company’s common stock at a price of $ 13.20 per share.

The options expire on the seventh anniversary of the grant date and vested over a term of one year .

The following table summarizes information about

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Range of Exercise Price

Exercise Price

$ 8.40 - $ 15.60

The following table summarizes information about

exercisable stock options at December 31, 2021:

The following table summarizes information about exercisable stock options at December 31, 2022:

Range of Exercise Price

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The aggregate intrinsic value at December 31,

2022 was based on the Company’s closing stock price of $ 4.25 was $ 0 .

The aggregate intrinsic value at December 31,

2021 was based on the Company’s closing stock price of $ 9.10 was approximately $ 12,000 .

The aggregate intrinsic value was calculated

based on the positive difference between the closing market price of the Company’s Common Stock and the exercise prices of the underlying

based on the positive difference between the closing market price of the Company’s Common Stock and the exercise prices of the

underlying options.

The weighted average fair value of options granted

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Balance, January 1, 2021

Granted during the year

Terminated/Expired during the year

Granted during the period

Terminated/Expired during the period

Balance, December 31, 2021

Granted during the year

Terminated/Expired during the year

Granted during the period

Terminated/Expired during the period

Balance, December 31, 2022

Exercisable at December 31, 2022

SEGMENT REPORTING

In accordance with FASB ASC 280, “Segment

Reporting” (“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments.

Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by

the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company follows ASC 280, which establishes

standards for reporting information about operating segments in annual and interim financial statements, and 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 the Company has operated its businesses

and reported its results as two separate segments with AIM and NTW comprising the Complex Machining segment (“CMS”) and SEC

as the Turbine & Engine Component segment (“TEC”).

Our CMS segment specializes in flight critical components including

flight controls and landing gear.

The TEC segment focuses on manufacturing components for jet engines.

Along with its operating subsidiaries,

the Company reports the results of our corporate division as an independent segment.

In recent years the Company 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.

The Company 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.

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

we see in the A&D market.

In early fiscal 2022, the Company 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 the first quarter ending March 31, 2022, the Company will present its operations as one reportable operating segment.

The accounting policies of each of the segments

are the same as those described in Note 3 – Summary of Significant Accounting Policies.

Intersegment transfers are recorded at the

transferors’ cost, and there is no intercompany profit or loss on intersegment transfers.

We evaluate performance based on revenue,

gross profit contribution and assets employed.

Financial information about the Company’s

reporting segments for the years ended December 31, 2021 and 2020 are as follows:

Year Ended December 31,

COMPLEX MACHINING

Income before benefit from income taxes

TURBINE ENGINE COMPONENTS

Loss before benefit from income taxes

The aggregate intrinsic value at both December

31, 2022 and 2021 was $ 0 based on the Company’s closing stock price of $ 4.15 and $ 9.10 , respectively.

Revision of Previously Issued Consolidated

Financial Statement

Due to errors discovered in the Company’s

2020 tax return, the Company revised certain previously issued disclosures related to the components of its deferred tax assets and liabilities

and valuation allowance as of December 31, 2021 and 2020.

Additionally, the Company has revised the reconciliation of its income tax rate

computed using the federal statutory rate for the year ended December 31, 2021.

The errors related primarily to the misapplication of

the carryback of net operating losses under the CARES Act provision and mathematical errors related to the Company’s inventory reserve.

Since the Company provided a full valuation allowance on its net deferred tax assets, there was no impact to the Consolidated Balance

Sheet as of December 31, 2021 and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the year ended

December 31, 2021.

As a result of the errors, the Company will be amending its 2020 and 2021 income tax returns.

The Company had previously disclosed that its net operating loss carry

forward as of December 31, 2021 was $ 29,100,000 .

The proper amount that should have been disclosed was $ 21,971,000 .

Along with this finding,

the Company further reviewed its disclosure of the rate reconciliation and deferred tax calculation along with the valuation allowance

of its net deferred tax assets.

Other items that were corrected in the disclosure included disallowed interest, stock based compensation

and operating lease liability along with the associated operating lease ROU assets.

The below table summarizes the revisions to the

reconciliation of our income tax rate computed using the federal statutory rate to our actual income tax rate for the year ended December

statutory income tax rate

State taxes, net of federal benefit

Permanent difference, overaccruals, and non-deductible items

Change in state rate

Deferred tax valuation allowance

The table below summarizes the revisions to the attributes of the Deferred

Tax Assets as of December 31, 2021:

Deferred tax assets:

Net operating loss

$ ( 1,778,000 )

Allowance for doubtful accounts

Inventory - IRC 263A adjustment

Stock based compensation - options and restricted stock

Capitalized engineering costs

Amortization - NTW Transaction

Inventory reserve

Deferred gain on sale of real estate

Accrued expenses

Disallowed interest

Operating lease liability

Capital loss carryforward

Total non-current deferred tax asset before valuation allowance

( 1,298,000 )

Income (Loss) before benefit from income taxes

Benefit from Income Taxes

Valuation allowance

( 9,628,000 )

Loss from Discontinued Operations, net of taxes

( 7,503,000 )

Total non-current deferred tax asset after valuation allowance

Deferred tax liabilities:

Property and equipment

( 1,626,000 )

( 1,697,000 )

Operating lease ROU assets

Total deferred tax liabilities

( 1,626,000 )

( 2,453,000 )

Net deferred tax asset

The table below summarizes the revisions to the attributes of the Deferred

Tax Assets as of December 31, 2020:

Deferred tax assets:

Net operating loss

$ ( 1,422,000 )

Allowance for doubtful accounts

Inventory - IRC 263A adjustment

Stock based compensation - options and restricted stock

Capitalized engineering costs

Deferred Rent

Amortization - NTW Transaction

Inventory reserve

Deferred gain on sale of real estate

Accrued expenses

Disallowed interest

Operating lease liability

Total non-current deferred tax asset before valuation allowance

( 1,197,000 )

Valuation allowance

( 9,394,000 )

( 8,132,000 )

Total non-current deferred tax asset after valuation allowance

Deferred tax liabilities:

Property and equipment

( 2,150,000 )

( 1,707,000 )

Operating lease ROU assets

Total deferred tax liabilities

( 2,550,000 )

( 2,615,000 )

Net deferred tax asset

Subsequent Events

On April 18, 2023, we received a notice from NYSE

American (the “Exchange”) stating that the Company is not in compliance with the continued listing standards of the Exchange

under the timely filing criteria included in Section 1007 of the NYSE American Company Guide because the Company failed to file by the

extended due date of April 17, 2023, its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”).

In accordance with Section 1007 of the Company

Guide, the Company will have six months from the date of the filing delinquency, or until October 17, 2023 (the “Initial Cure Period”),

to file the Form 10-K with the Securities and Exchange Commission.

If the Company fails to file the Form 10-K during the Initial Cure

Period, the Exchange may, in its sole discretion, provide an additional six-month cure period depending on the Company’s specific

circumstances.

Upon filing of the Form 10-K the Company will cure this delinquency.

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 9A. Controls and Procedures