AIR INDUSTRIES GROUP 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation 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. 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, 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. 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. 24 Our management relies upon the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway 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 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. Further, 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 issue. 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. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. 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. Change 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. ITEM 9B. OTHER INFORMATION None ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION Not Applicable 25 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Our directors and executive officers are: Name: Age Position Luciano (Lou) Melluzzo 58 President and Chief Executive Officer Michael E. Recca 72 Chief Financial Officer Michael N. Taglich 57 Chairman of the Board Robert F. Taglich 56 Director David J. Buonanno 67 Director Peter D. Rettaliata 72 Director Michael Brand 65 Director Michael D. Porcelain 54 Director Luciano (Lou) Melluzzo has been our President and Chief Executive Officer since November 15, 2017. He joined our company on September 11, 2017 as Chief Executive Officer. From November 2003 to September 2011, Mr. Melluzzo was employed in various capacities by EDAC Technologies Corporation (“EDAC”) 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. 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. Michael E. Recca has been our Chief Financial Officer since October 1, 2016. Mr. Recca has been engaged by us since September 2008 in a variety of positions related to our capital finance and acquisition programs. Most recently he served as Chief of Corporate Development & Capital Markets, a position in which he directed our acquisition program and coordinated with our lenders. Mr. Recca received a Bachelor of Arts degree from the SUNY Stony Brook and an MBA from Columbia University. Michael N. Taglich has been Chairman of our Board of Directors since September 22, 2008. He is Chairman and President of Taglich Brothers, a New York City based securities firm which he co-founded in 1992. Mr. Taglich is currently Chairman of the Board of Mare Island Dry Dock LLC, a company engaged in ship repair services, He also serves as a Director of two other public companies, Bridgeline Digital Inc. and Decision Point Systems Inc., as well as a number of private companies. Robert F. Taglich has been a director of our Company since 2008. He is a Managing Director of Taglich Brothers, which he co-founded in 1992. Prior to founding Taglich Brothers, Mr. Taglich was a Vice President at Weatherly Securities. Mr. Taglich has served in various positions in the securities brokerage industry for the past 25 years Mr. Taglich holds a Bachelor’s degree from New York University. David J. Buonanno has been a director of our Company since 2008. He is the Founder and President of Buonanno Enterprises Consulting, providing strategic management, supply chain/operations and recruitment services to aerospace and defense industry clients. Mr. Buonanno has extensive experience in manufacturing, supply management and operations. He was employed by Sikorsky Aircraft, Inc., a subsidiary of United Technologies Corporation, as Vice President, Supply Management and International Offset (from January 1997 to July 2006) and as Director, Systems Subcontracts (from November 1992 to January 1997). From May 1987 to November 1992, he was employed by General Electric Company serving as Operations Manager and Manager, Program Materials Management of GE’s Astro-Space Division. From June 1977 to May 1987, he was employed by RCA and affiliated companies. Mr. Buonanno attended Lehigh University College of Electrical Engineering and holds a B.S. in Business Administration from Rutgers University. He completed the Program for Management Development at Harvard Business School in 1996. 26 Peter D. Rettaliata has been a director of our Company since 2005. He served as our Acting President and Chief Executive Officer from March 2, 2017 to November 15, 2017 and served as our President and Chief Executive Officer from November 30, 2005 to December 31, 2014. He also served as the President of our wholly-owned subsidiary, AIM, from 1994 to 2008. Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman Aerospace 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. Michael Brand has been 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. Mr. 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. Mr. 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. In March 2021, Mr. Porcelain was elected to the Board of Directors of The Fund for Modern Court, an independent court reform organization that advocates for the improvements of the New York State Court system to ensure a diverse, highly qualified, and independent judiciary. Since 1998, he has owned and operated The Independent Adviser Corporation, a privately held company which holds the rights to use certain intellectual properties and trademarks (including various Internet websites) related to the financial planning and advisory industry. Mr. Porcelain has served as an Adjunct Professor at St. John’s University located in New York where he taught graduate level accounting courses. Mr. Porcelain has a B.S. in Business Economics from State University of Oneonta, New York, a M.S. in Accounting and an M.B.A. degree from Binghamton University. Michael N. Taglich and Robert F. 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. 27 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 31, 2022. DIRECTOR COMPENSATION Name Fees Earned or Paid In Cash ($) Stock Awards ($) (1) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Non-Qualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) Michael Taglich — 63,254 3,763 — — — 67,017 Robert Taglich — 63,254 3,763 — — — 67,017 David Buonanno 34,093 — 3,763 — — — 37,856 Michael Brand 34,093 — 3,763 — — — 37,856 Michael Porcelain — 52,021 3,763 — — — 55,784 Peter Rettaliata — 37,501 3,763 — — — 41,264 (1) 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 served. 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 . Messrs. Porcelain, Brand and Buonanno are members of the Audit Committee. Mr. 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). 28 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; and ● 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 fiscal 2022. 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; and ● 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 fiscal 2022. 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 fiscal 2022. 29 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 parties. 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 care. 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: Stockholder Relations. 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; or ● not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic. Code of Ethics We have adopted a written code of ethics that applies to our principal executive officers, senior financial officers and persons performing similar functions. Our code of ethics is available on our website and upon written request to our corporate secretary, we will provide you with a copy, without cost. ITEM 11. EXECUTIVE COMPENSATION 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 $100,000 for all services rendered in all capacities to our company and its subsidiaries. The individuals listed in the following table are referred to herein collectively as our “Named Executive Officers.” Summary Compensation Table Name and Principal Position Year Salary ($) Bonus ($) Stock awards ($) Option awards ($) Non-equity Incentive Plan Information ($) Nonqualified deferred compensation earnings ($) All other compensation ($) Total ($) Luciano Melluzzo 2022 352,692 — — 79,600 101,500 — 10,800 (1) 544,592 President and CEO 2021 350,000 — — 207,000 148,750 — 10,800 (1) 716,550 Michael Recca 2022 251,921 — 39,800 43,500 — 5,400 (1) 340,621 CFO 2021 249,998 — — 124,000 67,750 — 5,400 (1) 447,148 (1) Represents car allowance. 30 Our executive officers named in the above table do not have employment agreements providing for a fixed term of employment. Both are employees at will, terminable at any time without any severance, other than that payable to employees generally. Executive Compensation Policies as They Relate to Risk Management The Compensation Committee and management have considered whether our compensation policies might encourage inappropriate risk taking by the Company’s executive officers and other employees. The Compensation Committee has determined that the current compensation structure aligns the interests of the executive officers with those of the Company without providing rewards for excessive risk taking by awarding a mix of fixed and performance based or discretionary bonuses with the performance-based compensation focused on profits as opposed to revenue growth. The Compensation Committee working with management adopts a plan each year intended to award members of our management including executive officers for meeting or exceeding targeted goals, The Committee believes the amounts to be paid to Messrs. Melluzzo and Recca for services rendered in fiscal 2022 are appropriate in light of the significant improvement in our financial performance 2022. Equity Awards – 2022 The following table shows the grant of stock option awards to the Named Executive Officers during 2022. GRANT OF PLAN-BASED AWARDS All Other Option Awards: Number of Grant Date Fair Value Securities Underlying of Stock and Option Name Grant Date Options (#) Awards ($) Luciano Melluzzo 4/11/2022 20,000 (1) $ 79,600 Michael Recca 4/11/2022 10,000 (1) $ 39,800 Each named executive officer was granted options to purchase the number of shares indicated at a price of $8.30 per share during a period ended March 31, 2027. Outstanding Equity Awards at 2022 Year-End The following table shows certain information regarding outstanding equity awards held by our Named Executive Officers as of December 31, 2022. Option Awards Stock Awards Name Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested Luciano Melluzzo 6,666 13,334 $ 8.30 3/31/2027 — — 18,000 6,000 12.20 7/31/2026 — — 15,000 5,000 13.90 3/31/2026 — — 20,000 20,000 27,000 — — — 10.30 8.80 15.00 3/31/2025 1/31/2024 9/30/2024 — — — — — — Michael Recca 3,333 12,500 7,500 10,000 6,667 4,166 2,500 — 8.30 12.20 13.90 10.30 3/31/2027 7/31/2026 3/31/2026 3/31/2025 — — — — — — — — 9,000 — 8.80 1/31/2024 — — 5,000 — 14.20 7/24/2024 — — 31 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. ITEM 12. 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: Number of Shares Beneficially Owned Percent Michael N. Taglich 678,642 (1) 19.37 % Robert F. Taglich 464,240 (2) 13.45 % Peter D. Rettaliata 31,954 (3) * David Buonanno 10,203 (4) * Michael Brand 16,651 (5) * Michael Porcelain 29,483 (6) * Luciano Melluzzo, President and CEO 117,334 (7) 3.49 % Michael Recca, CFO 46,500 (8) 1.41 % All Directors and Executive Officers as a group (8 persons owning shares) 1,369,262 (9) 35.29 % Beneficial Ownership of More Than 5% of Shares: Richmond Brothers, Inc. 224,238 (10) 6.88 % (10) David S. Richman 315,396 (10) 9.50 % (10) Matthew J. Curfman 232,273 (10) 7.06 % (10) * Less than 1% 32 (1) 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. (2) 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. (3) Includes 10,100 shares he may acquire upon exercise of options exercisable within 60 days. (4) Includes 5,400 shares he may acquire upon exercise of options exercisable within 60 days. (5) Includes 10,400 shares he may acquire upon exercise of options exercisable within 60 days. (6) (7) 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. (8) Represents shares he may acquire upon exercise of options exercisable within 60 days. (9) 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. (10) 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: Sole Voting Power Shared Voting Power Sole Dispositive Power Shared Dispositive Power Total Percent Richmond Brothers, Inc. (a) — — — 224,238 # 224,238 # 6.88 % RBI Private Investment II, LLC 1,534 — 1,534 — 1,534 * RBI Private Investment III, LLC 82,506 + — 82,506 + — 82,506 + 2.53 % RBI PI Manager, LLC (b) 84,040 + — 84,040 + — 84,040 + 2.58 % Richmond Brothers 401(k) Profit Sharing Plan 7,120 — 7,120 — 7,120 * David S. Richmond (c) 84,040 + 7,120 84,040 + 224,238 # 315,396 +# 9.68 % Matthew J. Curfman (d) 916 7,120 916 224,238 # 232,273 # 7.13 % (a) Held as investment advisor to certain separately managed accounts. 33 (b) Includes the shares owned by RBI Private Investment II, LLC and RBI Private Investment III, LLC. (c) 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. (d) Sole voting and dispositive power includes shares owned by Mr. Curfman. 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 of warrants. + Includes 28,000 shares which may be acquired upon exercise of warrants. * 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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 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. There 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. 34 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). Item 14. Principal Accountant Fees and Services 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, P.C. 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. On March 28, 2022, we reported that Rotenberg Meril Solomon Bertiger & Guttilla, P.C. , Certified 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. We 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 30, 2022. During fiscal year 2022, the aggregate fees which we were billed by Marcum for professional services were as follows: Year Ended December 31, 2022 Audit Fees (1) $ 340,000 Audit Related Fees (2) 21,000 Tax Fees (3) 67,000 $ 428,000 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: Year Ended December 31, Year Ended December 31, 2022 2021 Audit Fees (1) $ 45,000 $ 344,000 Audit Related Fees (2) - 3,000 Tax Fees (3) - 65,000 $ 45,000 $ 412,000 (1) 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 statements. (2) 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. (3) 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. 35 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Consolidated Financial Statements of Air Industries Group for the Year ended December 31, 2022 and 2021. (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. Exhibit No. Description 3.1 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). 3.2 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). 3.3 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). 3.4 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) 3.5 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). 4.1 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). 10.1 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) 10.2 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) 10.3 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) 10.4 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) 10.5 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) 36 10.6 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) 10.7 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). 10.8 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). 10.9 2015 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). 10.10 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). 10.11 2017 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). 10.12 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). 14.1 Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2017 filed on April 30, 2018. 21.1 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. 23.1 Consent of Marcum LLP 23.2 Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. 31.1 Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934. 31.2 Certification of principal financial officer pursuant to Rule 13a-14 or Rule 15d-14 of the Exchange Act of 1934. 32.1 Certification of principal executive officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). 32.2 Certification of principal financial officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). 37 SIGNATURES 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. Dated: May 16, 2023 AIR INDUSTRIES GROUP By: /s/ Luciano Melluzzo Luciano Melluzzo President and Chief Executive Officer (principal executive officer) By: /s/ Michael E. Recca Michael E. Recca Chief Financial Officer (principal financial and accounting officer) 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 May 16, 2023 in the capacities indicated. Signature Capacity /s/ Luciano Melluzzo President and CEO Luciano Melluzzo (principal executive officer) /s/ Michael E. Recca Chief Financial Officer Michael E. Recca (principal financial and accounting officer) /s/ Michael N. Taglich Chairman of the Board Michael N. Taglich /s/ Peter D. Rettaliata Director Peter D. Rettaliata /s/ Robert F. Taglich Director Robert F. Taglich /s/ David J. Buonanno Director David J. Buonanno /s/ Michael Brand Director Michael Brand /s/ Michael Porcelain Director Michael Porcelain 38 AIR INDUSTRIES GROUP INDEX TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 and 2021 Report of Independent Registered Public Accounting Firm ( Marcum LLP ., Saddle Brook , NJ, PCAOB ID: 688 ) F-2 Report of Independent Registered Public Accounting Firm (Rotenberg Meril Solomon Bertiger & Guttilla, P.C., Saddle Brook, NJ, PCAOB ID: 361 ) F-4 Consolidated Financial Statements: Consolidated Balance Sheets – As of December 31, 2022 and 2021 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 Consolidated Statements of Cash Flows – For the Years Ended December 31, 2022 and 2021 F- 8 Notes to Consolidated Financial Statements F-10 F- 1 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 the accompanying consolidated 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 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. We are 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. 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) 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. F- 2 Revenue Recognition Description of the Matter 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 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 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 Marcum LLP Saddle Brook, New Jersey May 16, 2023 F- 3 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. We are 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. Rotenberg Meril Solomon Bertiger & Guttilla, P.C. Saddle Brook, New Jersey March 25, 2022 F- 4 AIR INDUSTRIES GROUP Consolidated Balance Sheets December 31, December 31, 2022 2021 ASSETS Current Assets Cash $ 281,000 $ 627,000 Accounts Receivable, Net of Allowance for Doubtful Accounts of $ 281,000 and $ 594,000 9,483,000 10,473,000 Inventory 31,821,000 29,532,000 Prepaid Expenses and Other Current Assets 307,000 226,000 Contract Costs Receivable 296,000 - Prepaid Taxes 28,000 22,000 Total Current Assets 42,216,000 40,880,000 Property and Equipment, Net 8,593,000 8,404,000 Operating Lease Right-Of-Use-Assets 2,473,000 3,018,000 Deferred Financing Costs, Net, Deposits and Other Assets 532,000 960,000 Goodwill - 163,000 TOTAL ASSETS $ 53,814,000 $ 53,425,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Debt - Current Portion $ 14,477,000 $ 14,112,000 Accounts Payable and Accrued Expenses 7,542,000 6,723,000 Operating Lease Liabilities - Current Portion 778,000 686,000 Deferred Gain on Sale - Current Portion 38,000 38,000 Customer Deposits 781,000 1,470,000 Liability Related to the Sale of Future Proceeds from Disposition of Subsidiary - 59,000 Deferred payroll tax liability - CARES Act - 314,000 Total Current Liabilities 23,616,000 23,402,000 Long Term Liabilities Debt - Net of Current Portion 4,629,000 2,838,000 Subordinated Notes Payable - Related Party 6,162,000 6,412,000 Operating Lease Liabilities - Net of Current Portion 2,463,000 3,241,000 Deferred Gain on Sale - Net of Current Portion 105,000 143,000 TOTAL LIABILITIES 36,975,000 36,036,000 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 3,000 3,000 Additional Paid-In Capital 82,446,000 81,920,000 Accumulated Deficit ( 65,610,000 ) ( 64,534,000 ) TOTAL STOCKHOLDERS’ EQUITY 16,839,000 17,389,000 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 53,814,000 $ 53,425,000 See Notes to Consolidated Financial Statements F- 5 AIR INDUSTRIES GROUP Consolidated Statements of Operations For the Years Ended December 31, 2022 2021 Net Sales $ 53,238,000 $ 58,939,000 Cost of Sales 45,786,000 48,686,000 Gross Profit 7,452,000 10,253,000 Operating Expenses 7,646,000 7,766,000 (Loss) Income from Operations ( 194,000 ) 2,487,000 Interest and Financing Costs ( 851,000 ) ( 805,000 ) Interest Expense - Related Parties ( 487,000 ) ( 460,000 ) Other Income, Net 139,000 405,000 Gain on write-off of accounts payable 317,000 - (Loss) Income before Provision for Income Taxes ( 1,076,000 ) 1,627,000 Provision for Income Taxes - - Net (Loss) Income $ ( 1,076,000 ) $ 1,627,000 (Loss) Income per share – Basic $ ( 0.33 ) $ 0.51 (Loss) Income per share – Diluted $ ( 0.33 ) $ 0.45 Weighted Average Shares Outstanding – basic 3,227,116 3,204,937 Weighted Average Shares Outstanding – diluted 3,227,116 3,642,418 See Notes to Consolidated Financial Statements F- 6 AIR INDUSTRIES GROUP Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2022 and 2021 Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balance, January 1, 2021 3,190,698 $ 3,000 $ 81,267,000 $ ( 66,161,000 ) $ 15,109,000 Common Stock issued for directors fees 16,981 - 210,000 - 210,000 Stock Options exercised 5,122 - - - - Stock Compensation Expense - - 443,000 - 443,000 Net Income - - - 1,627,000 1,627,000 Balance, December 31, 2021 3,212,801 $ 3,000 $ 81,920,000 $ ( 64,534,000 ) $ 17,389,000 Common Stock issued for directors fees 27,849 - 216,000 - 216,000 Common Stock issued in conjunction with reverse split 7,287 - - - - Stock Compensation Expense - - 310,000 - 310,000 Net Loss - - - ( 1,076,000 ) ( 1,076,000 ) Balance, December 31, 2022 3,247,937 $ 3,000 $ 82,446,000 $ ( 65,610,000 ) $ 16,839,000 See Notes to Consolidated Financial Statements F- 7 AIR INDUSTRIES GROUP Consolidated Statements of Cash Flows For the Years Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) Income $ ( 1,076,000 ) $ 1,627,000 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation of property and equipment 2,522,000 2,803,000 Non-cash employee compensation expense 310,000 443,000 Non-cash directors compensation 216,000 210,000 Non-cash other income recognized ( 94,000 ) ( 326,000 ) Non-cash interest expense 35,000 98,000 Non-cash gain on accounts payable write-off ( 317,000 ) - Amortization of Right-of-Use Assets 545,000 492,000 Deferred gain on sale of real estate ( 38,000 ) ( 38,000 ) Bad debt recovery ( 313,000 ) ( 86,000 ) Loss on impairment of goodwill 163,000 - Amortization of deferred financing costs 65,000 150,000 Changes in Operating Assets and Liabilities (Increase) Decrease in Operating Assets: Accounts receivable 1,303,000 ( 1,589,000 ) Inventory ( 2,289,000 ) 2,588,000 Prepaid expenses and other current assets ( 81,000 ) ( 53,000 ) Prepaid taxes ( 6,000 ) ( 7,000 ) Deposits and other assets ( 194,000 ) ( 193,000 ) Increase (Decrease) in Operating Liabilities: Accounts payable and accrued expenses 1,136,000 ( 1,594,000 ) Operating lease liabilities ( 686,000 ) ( 701,000 ) Customer deposits ( 439,000 ) 553,000 Deferred payroll tax liability - CARES Act ( 314,000 ) ( 313,000 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 448,000 4,064,000 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 2,361,000 ) ( 1,364,000 ) NET CASH USED IN INVESTING ACTIVITIES ( 2,361,000 ) ( 1,364,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from (payments for) revolving loan - Webster Bank 916,000 ( 3,193,000 ) Proceeds from note payable - term note - Webster Bank 2,823,000 - Payments of term note - Webster Bank ( 1,609,000 ) ( 1,371,000 ) Payment of deferred finance costs ( 20,000 ) Payment of subordinated notes payable - related party ( 250,000 ) - Payments of finance lease obligations ( 284,000 ) ( 5,000 ) Payments of loan payable - financed asset ( 9,000 ) ( 9,000 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,567,000 ( 4,578,000 ) NET DECREASE IN CASH ( 346,000 ) ( 1,878,000 ) CASH AT BEGINNING OF YEAR 627,000 2,505,000 CASH AT END OF YEAR $ 281,000 $ 627,000 See Notes to Consolidated Financial Statements F- 8 AIR INDUSTRIES GROUP Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued) 2022 2021 Supplemental cash flow information Cash paid during the year for interest $ 1,295,000 $ 1,206,000 Cash paid during the year for taxes $ 6,000 $ 7,000 Supplemental disclosure of non-cash investing and financing activities Acquisition of financed lease asset $ 350,000 $ - Capitalization of related party note interest to principal $ - $ 400,000 See Notes to Consolidated Financial Statements F- 9 AIR INDUSTRIES GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Air Industries Group is a Nevada corporation (“AIRI”). 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. (“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. 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 integrated. 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. Liquidity 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. F- 10 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. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Accounts Receivable Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. 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, 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. F- 11 Property and Equipment Property and equipment are carried at cost net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred. Property, equipment, and improvements are depreciated using the straight-line method over the estimated useful lives of the assets or the particular improvements. Expenditures for repairs and improvements in excess of $ 10,000 that add to the productive capacity or extend the useful life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in earnings. Long-Lived and Intangible Assets Identifiable intangible assets are amortized using the straight-line method over the period of expected benefit. Long-lived assets and intangible assets subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to fair value. Deferred Financing Costs Costs incurred with obtaining and executing revolving 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 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 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 those goods. 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. F- 12 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 transferred to customers are conditional only on the passage of time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 75 days. 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 products. 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 invoice. 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 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 scheduled. 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 In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. The 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. F- 13 Credit and Concentration Risks A large percentage of the Company’s revenues are derived from a small number of customers for U.S. Military Aviation. 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. This is set forth in the table below. Customer Percentage of Sales 2022 2021 1 29.3 % 37.2 % 2 21.4 % 25.7 % 3 14.3 % 12.5 % 4 11.5 % * * 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 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 December 31, December 31, Customer 2022 2021 1 33.1 % 50.3 % 2 23.6 % 12.7 % 3 13.6 % ** 4 * 11.7 % * Customer was less than 10 % of accounts receivable at December 31, 2022 ** Customer 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: Product December 31, 2022 December 31, 2021 Military $ 43,993,000 $ 51,559,000 Commercial 9,245,000 7,380,000 Total $ 53,238,000 $ 58,939,000 Cash During the year, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced any losses on these accounts. F- 14 Major Suppliers The Company has several key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business could be severely harmed. Income Taxes The Company accounts for income taxes in accordance 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. The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. 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. We 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 (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 method. F- 15 The following is the calculation of income applicable to common stockholders utilized to calculate the numerator for EPS: December 31, December 31, 2022 2021 Net (Loss) Income – Basic $ ( 1,076,000 ) $ 1,627,000 Add: Convertible Note Interest for Potential Note Conversion - 322,000 Add: Convertible Note debt discount for Potential Note Conversion - - Net (Loss) Income used to calculate diluted earnings per share $ ( 1,076,000 ) $ 1,949,000 The following is a reconciliation of the denominators of basic and diluted EPS computations: December 31, December 31, 2022 2021 Weighted average shares outstanding used to compute basic earnings per share 3,227,116 3,204,937 Effect of dilutive stock options and warrants - 31,737 Effect of dilutive convertible notes payable - 405,743 Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share 3,227,116 3,642,417 Per share amount – basic $ ( 0.33 ) $ 0.51 Per share amount – diluted $ ( 0.33 ) $ 0.45 The following securities have been excluded from the calculation as the exercise price was greater than the average market price of the common shares: December 31, December 31, 2022 2021 Stock Options 245,466 118,350 Warrants 28,000 122,721 273,466 241,071 Stock-Based Compensation The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing reported market value. Stock compensation expense for employees amounted to $ 310,000 and $ 443,000 for the years ended December 31, 2022 and 2021, respectively. Stock compensation expense for directors amounted to $ 216,000 and $ 210,000 for the years ended December 31, 2022 and 2021, respectively. Stock compensation expenses for employees and directors were included in operating expenses in the accompanying Consolidated Statements of Operations. F- 16 Goodwill 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 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): 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 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. Leases 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. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. 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. An option to terminate is considered unless it is reasonably certain we will not exercise the option. F- 17 Recently Issued Accounting Pronouncements Effective January 1, 2022, the Company adopted ASU No. 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. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss 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. 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. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements. The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements. Note 3. ACCOUNTS RECEIVABLE The components of accounts receivable at December 31, are detailed as follows: December 31, 2022 December 31, 2021 Accounts Receivable Gross $ 9,764,000 $ 11,067,000 Allowance for Doubtful Accounts ( 281,000 ) ( 594,000 ) Accounts Receivable Net $ 9,483,000 $ 10,473,000 The allowance for doubtful accounts for the years ended December 31, 2022 and 2021 is as follows: Balance at Charged to Deductions Balance at Beginning of Costs and from End of Year Expenses Reserves Year Year ended December 31, 2022 Allowance for Doubtful Accounts $ 594,000 $ 16,000 $ 329,000 $ 281,000 Year ended December 31, 2021 Allowance for Doubtful Accounts $ 964,000 $ 134,000 $ 504,000 $ 594,000 F- 18 Note 4. INVENTORY The components of inventory at December 31, consisted of the following: December 31, December 31, 2022 2021 Raw Materials $ 4,198,000 $ 3,410,000 Work In Progress 20,848,000 20,926,000 Finished Goods 10,748,000 8,350,000 Reserve ( 3,973,000 ) ( 3,154,000 ) Total Inventory $ 31,821,000 $ 29,532,000 Note 5. PROPERTY AND EQUIPMENT The components of property and equipment at December 31, consisted of the following: December 31, December 31, 2022 2021 Land $ 300,000 $ 300,000 Buildings and Improvements 1,789,000 1,723,000 Machinery and Equipment 23,566,000 22,013,000 Finance Lease ROU Assets - Machinery and Equipment 375,000 375,000 Tools and Instruments 13,744,000 12,866,000 Automotive Equipment 266,000 200,000 Furniture and Fixtures 290,000 290,000 Leasehold Improvements 941,000 882,000 Computers and Software 604,000 583,000 Total Property and Equipment 41,875,000 39,232,000 Less: Accumulated Depreciation ( 33,282,000 ) ( 30,828,000 ) Property and Equipment, net $ 8,593,000 $ 8,404,000 Depreciation expense for the years ended December 31, 2022 and 2021 was approximately $ 2,522,000 and $ 2,803,000 , respectively. Assets held under finance lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under finance leases is included in depreciation expense for 2022 and 2021. Accumulated depreciation on these assets was approximately $ 0 and $ 36,000 as of December 31, 2022 and 2021, respectively. Note 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The components of accounts payable and accrued expenses at December 31, are detailed as follows: December 31, 2022 December 31, 2021 Accounts Payable $ 6,442,000 $ 5,460,000 Accrued Payroll 674,000 852,000 Accrued Expenses - other 426,000 411,000 Accounts Payable and accrued expenses $ 7,542,000 $ 6,723,000 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. The Company 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. F- 19 Note 7. 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 Shore Property”) for a purchase price of $ 6,200,000 . The Company realized a gain on the sale of $ 1,051,000 of which $ 300,000 was recognized during the year ended December 31, 2006. The remaining $ 751,000 is being recognized ratably over the remaining term of the twenty - year lease at approximately $ 38,000 per year. 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, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance Sheets. The Company accounted for these transactions under 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. 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, 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 rent. See Note 9 – Operating Lease Liabilities. Note 8. Debt Debt consists of the following: December 31, December 31, 2022 2021 Revolving loan to Webster Bank (“Webster”) $ 13,352,000 $ 12,456,000 Term loan, Webster 5,396,000 4,192,000 Finance lease obligations 328,000 263,000 Loans payable - financed assets 30,000 39,000 Related party notes payable 6,162,000 6,412,000 Subtotal 25,268,000 23,362,000 Less: Current portion ( 14,477,000 ) ( 14,112,000 ) Long Term Portion $ 10,791,000 $ 9,250,000 Webster Bank (F/K/A Sterling National Bank) (“Webster”) 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. F- 20 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 Amount December 31, 2023 $ 1,037,000 December 31, 2024 840,000 December 31, 2025 3,584,000 Webster Term Loan payable 5,461,000 Less: debt issuance costs ( 65,000 ) Total Webster Term Loan payable, net of debt issuance costs 5,396,000 Less: Current portion of Webster Term Loan payable ( 1,037,000 ) Total long-term portion of Webster Term Loan payable $ 4,359,000 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 year. 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). As required, 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 are met. 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. The 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 . F- 21 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. The 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. The Webster 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 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 17, 2026. In connection with the Fourth Amendment to the Webster Facility, this finance lease was paid in full. Year Ended Year Ended December 31, December 31, 2022 2021 Finance Lease cost: Amortization of ROU assets $ - $ 36,000 Interest on lease liabilities 2,182 - Total Lease Costs $ 2,182 $ 36,000 Other Information: Cash Paid for amounts included in the measurement lease liabilities: Financing cash flow from finance lease obligations $ 284,000 $ 5,000 Supplemental disclosure of non-cash activity Acquisition of finance lease ROU asset $ 350,000 $ - December 31, December 31, 2022 2021 Weighted Average Remaining Lease Term - in years 3.9 5.0 Weighted Average Discount rate - % 7.48 % 4.20 % As of December 31, 2022, the aggregate future minimum Finance lease payment, including imputed interest are as follows: For the year ending Amount December 31, 2023 $ 100,000 December 31, 2024 100,000 December 31, 2025 100,000 December 31, 2026 77,000 Total future minimum finance lease payments 377,000 Less: imputed interest ( 49,000 ) Less: Current portion ( 79,000 ) Long-term portion $ 249,000 F- 22 Loans Payable – Financed Assets 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. Annual maturities of this loan are as follows: For the year ending Amount December 31, 2023 $ 9,000 December 31, 2024 9,000 December 31, 2025 9,000 December 31, 2026 3,000 Loans Payable - financed assets 30,000 Less: Current portion ( 9,000 ) Long-term portion $ 21,000 Related Party Notes Payable Taglich Brothers, Inc. is a corporation co-founded by two directors of the Company, Michael and Robert Taglich. Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received cash and equity compensation for their services. From 2016 through 2020, the Company entered into various subordinated notes payable and convertible subordinated notes payable with Michael and Robert Taglich. These notes resulted in proceeds to the Company totaling $ 6,550,000 . In connection with these notes, Michael and Robert were issued a total of 35,508 shares of common stock and Taglich Brothers, Inc. was issued promissory notes totaling $ 554,000 for placement agency fees. At December 31, 2020, related party notes payable totaled $ 6,012,000 and accrued interest totaled $ 400,000 . On January 1, 2021, the related party subordinated notes due to Michael and Robert Taglich and Taglich Brothers, Inc., were amended to include all accrued interest through December 31, 2020 in the principal balance of the notes. Per the terms of the Webster Facility, these notes remain subordinate to the Webster Facility and are due on July 1, 2026. 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, Robert Taglich, Taglich Brothers, Chairman Director Inc. Total Convertible Subordinated Notes $ 2,666,000 $ 1,905,000 $ 241,000 $ 4,812,000 Subordinated Notes 1,000,000 350,000 - 1,350,000 Total $ 3,666,000 $ 2,255,000 $ 241,000 $ 6,162,000 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%. F- 23 Note 9. OPERATING LEASE LIABILITIES 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 the leases. Year Ended Year Ended December 31, December 31, 2022 2021 Operating lease cost: $ 972,000 $ 1,069,000 Total lease cost $ 972,000 $ 1,069,000 Other Information Cash paid for amounts included in the measurement lease liability: Operating cash flow from operating leases $ 1,006,000 $ 977,000 December 31, December 31, 2022 2021 Weighted Average Remaining Lease Term - in years 3.64 4.53 Weighted Average discount rate - % 8.89 % 8.89 % The aggregate undiscounted cash flows of operating lease payments, with remaining terms greater than one year are as follows: Amount December 31, 2023 $ 1,038,000 December 31, 2024 1,070,000 December 31, 2025 992,000 December 31, 2026 729,000 Total future minimum lease payments 3,829,000 Less: discount ( 588,000 ) Total operating lease maturities 3,241,000 Less: current portion of operating lease liabilities ( 778,000 ) Total long term portion of operating lease maturities $ 2,463,000 Note 10. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY In connection with the sale of the Company’s wholly-owned subsidiary, AMK Welding, Inc. (“AMK”) to Meyer Tool, Inc., (“Meyer”) in 2017, Meyer was obligated to pay the Company within 30 days after the end of each calendar quarter, commencing April 1, 2017, an amount equal to five ( 5 %) percent of the net sales of AMK for that quarter until the aggregate payments made to the Company (the “Meyer Agreement”) equals $ 1,500,000 (the “Maximum Amount”). In order to increase liquidity, on January 15, 2019, the Company entered into a “Purchase Agreement” with 15 accredited investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to which the Company assigned to the Purchasers all of its rights, title and interest to the remaining $ 1,137,000 of the $ 1,500,000 in payments due from Meyer for the sale of AMK (the “Remaining Amount”) for an immediate payment of $ 800,000 , including $ 100,000 from each of Michael and Robert Taglich, and $ 75,000 for the benefit of the children of Michael Taglich. The timing of the payments is based upon the net sales of AMK. F- 24 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 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, 2022 December 31, 2021 Liabilities related to sale of future proceeds from disposition of subsidiaries - beginning balance $ 59,000 $ 322,000 Non-Cash other income recognized ( 94,000 ) ( 360,000 ) Non-Cash interest expense recognized 35,000 97,000 Liabilities related to sale of future proceeds from disposition of subsidiary - ending balance - 59,000 Less: unamortized transaction costs - ( 3,000 ) Liability related to sale of future proceeds from disposition of subsidiary, net $ - $ 56,000 Note 11. STOCKHOLDERS’ EQUITY 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 issued 12,331 shares of common stock in payment of directors’ fees totaling $ 54,000 . F- 25 Note 12. EMPLOYEE BENEFITS PLANS The Company employs both union and non-union employees and maintains several benefit plans. Union 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 $ 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. Others 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 defined contribution plans under Section 401(k) of the Internal Revenue Code (the “Plans”). Pursuant to the Plans, qualified employees may contribute a percentage of their pre-tax eligible compensation to the Plan. The Company does not match any contributions that employees may make to the Plans. Note 13. CONTINGENCY On October 2, 2018, Contract Pharmacal Corp. (“Contract 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 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 . 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, 2021. On March 10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate Division which the Company has opposed. 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. F- 26 Note 14. INCOME TAXES The provision for income taxes for the years ended December 31, 2022 and 2021, is set forth below: Current and Deferred Year Ended December 31, 2022 Year Ended December 31, 2021 Federal $ - $ - States - - 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 for the years ended December 31, 2022 and 2021 is set forth below: Year Ended December 31, 2022 Year Ended December 31, 2021 As Revised U.S. statutory income tax rate 21.0 % 21.0 % State taxes, net of federal benefit 4.1 % 4.1 % Permanent difference, overaccruals, and non-deductible items ( 6.9 )% 6.3 % Change in state rate 0.7 % 8.3 % Deferred tax valuation allowance ( 18.4 )% ( 38.7 )% Other ( .5 )% ( 1.0 )% Total 0.00 % 0.00 % The components of net deferred tax assets at December 31, are set forth below: December 31, December 31, 2022 2021 As Revised Deferred tax assets: Current: Net operating loss $ 5,075,000 $ 4,959,000 Allowance for doubtful accounts 71,000 149,000 Inventory - IRC 263A adjustment 411,000 377,000 Stock based compensation - options and restricted stock 183,000 183,000 Capitalized engineering costs 331,000 430,000 Amortization - NTW Transaction 359,000 445,000 Inventory reserve 932,000 790,000 Deferred gain on sale of real estate 36,000 45,000 Accrued expenses 30,000 18,000 Disallowed interest 1,663,000 1,576,000 Operating lease liabilities 814,000 984,000 Total deferred tax asset before valuation allowance 9,905,000 9,956,000 Valuation allowance ( 7,701,000 ) ( 7,503,000 ) Total deferred tax asset after valuation allowance 2,204,000 2,453,000 Deferred tax liabilities: Property and equipment ( 1,583,000 ) ( 1,697,000 ) Operating Lease ROU assets ( 621,000 ) ( 756,000 ) Total deferred tax liabilities ( 2,204,000 ) ( 2,453,000 ) Net deferred tax asset $ - $ - 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. F- 27 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. 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, 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 no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2022, and 2021, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions. In certain cases, the Company’s uncertain 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 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 occur. Note 15. STOCK OPTIONS AND WARRANTS Stock-Based Compensation Stock Options 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 $ 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 estimated using the Black-Sholes option-pricing model with the following assumptions for the years ended December 31: 2022 2021 Risk-free interest rates 1.38 % - 2.73 % 0.31 % - 0.83 % Expected life (in years) 2.50 - 4.00 2.50 - 4.00 Expected volatility 71.6 % - 72.0 % 73.2 % - 75.2 % Dividend yield 0.00 % 0.00 % Weighted-average grant date fair value per share $ 3.97 $ 6.01 The expected life is the number of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or forfeiture. Expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin No. 107. 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. F- 28 A summary of the status of the Company’s stock options as of December 31, 2022 and 2021, and changes during the two years then ended are presented below. Wtd. Avg. Exercise Options Price Balance, January 1, 2021 185,900 $ 15.60 Granted during the year 84,750 13.00 Exercised during the year ( 11,000 ) 10.41 Terminated/Expired during the year ( 12,800 ) 61.70 Balance, December 31, 2021 246,850 $ 12.54 Granted during the year 62,000 8.40 Exercised during the year - - Terminated/Expired during the year ( 5,800 ) 12.04 Balance, December 31, 2022 303,050 $ 11.70 Exercisable at December 31, 2022 245,466 $ 12.07 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. The 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. The options 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 outstanding stock options at December 31, 2022: Range of Exercise Price Number Outstanding Wtd. Avg, Life Wtd. Avg. Exercise Price $ 8.40 - $ 15.60 303,050 2.7 years $ 11.70 F- 29 The following table summarizes information about exercisable stock options at December 31, 2022: Range of Exercise Price Number Exercisable Wtd. Avg, Life Wtd. Avg. Exercise Price $ 8.40 - $ 15.60 246,466 2.4 years $ 12.07 As of December 31, 2022, there was $ 95,000 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over the remaining weighted average vesting period of 1.3 years. 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 options. The weighted average fair value of options granted during the years ended December 31, 2022 and 2021 was $ 8.40 and $ 6.00 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $ 0 and $ 100,000 respectively. The total fair value of shares vested during the years ended December 31, 2022 and 2021 was $ 316,000 and $ 339,000 , respectively. Warrants During both the years ended December 31, 2022 and 2021, the Company did not issue any warrants. The following tables summarize the Company’s outstanding warrants as of December 31, 2022 and changes during the two years then ended: Wtd. Avg. Wtd. Avg. Remaining Exercise Contractual Warrants Price Life (years) Balance, January 1, 2021 218,290 $ 29.00 1.43 Granted during the period - - - Terminated/Expired during the period ( 67,569 ) - - Balance, December 31, 2021 150,721 $ 21.94 0.75 Granted during the period - - - Terminated/Expired during the period ( 122,721 ) $ 23.75 - Balance, December 31, 2022 28,000 $ 14.00 0.75 Exercisable at December 31, 2022 28,000 $ 14.00 0.75 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. Note 16. 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. F- 30 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 31, 2021: Year Ended December 31, Year Ended December 31, 2021 As Reported Adjustment 2021 As Revised U.S. statutory income tax rate 21.0 % 0.0 % 21.0 % State taxes, net of federal benefit 5.1 % ( 1.0 )% 4.1 % Permanent difference, overaccruals, and non-deductible items ( 40.4 )% 46.7 % 6.3 % Change in state rate 0.0 % 8.3 % 8.3 % Deferred tax valuation allowance 14.3 % ( 53.0 )% ( 38.7 )% Other 0.0 % ( 1.0 )% ( 1.0 )% Total 0.0 % 0.0 % 0.0 % The table below summarizes the revisions to the attributes of the Deferred Tax Assets as of December 31, 2021: December 31, December 31, 2021 As Reported Adjustment 2021 As Revised Deferred tax assets: Net operating loss $ 6,737,000 $ ( 1,778,000 ) $ 4,959,000 Allowance for doubtful accounts 155,000 ( 6,000 ) 149,000 Inventory - IRC 263A adjustment 394,000 ( 17,000 ) 377,000 Stock based compensation - options and restricted stock 393,000 ( 210,000 ) 183,000 Capitalized engineering costs 449,000 ( 19,000 ) 430,000 Amortization - NTW Transaction 442,000 3,000 445,000 Inventory reserve 824,000 ( 34,000 ) 790,000 Deferred gain on sale of real estate 47,000 ( 2,000 ) 45,000 Accrued expenses 204,000 ( 186,000 ) 18,000 Disallowed interest 1,286,000 290,000 1,576,000 Operating lease liability 235,000 749,000 984,000 Capital loss carryforward 88,000 ( 88,000 ) - Total non-current deferred tax asset before valuation allowance 11,254,000 ( 1,298,000 ) 9,956,000 Valuation allowance ( 9,628,000 ) 2,125,000 ( 7,503,000 ) Total non-current deferred tax asset after valuation allowance 1,626,000 827,000 2,453,000 Deferred tax liabilities: Property and equipment ( 1,626,000 ) ( 71,000 ) ( 1,697,000 ) Operating lease ROU assets - ( 756,000 ) ( 756,000 ) Total deferred tax liabilities ( 1,626,000 ) ( 827,000 ) ( 2,453,000 ) Net deferred tax asset $ - $ - $ - F- 31 The table below summarizes the revisions to the attributes of the Deferred Tax Assets as of December 31, 2020: December 31, December 31, 2020 As Reported Adjustment 2020 As Revised Deferred tax assets: Net operating loss $ 6,594,000 $ ( 1,422,000 ) $ 5,172,000 Allowance for doubtful accounts 252,000 ( 3,000 ) 249,000 Inventory - IRC 263A adjustment 341,000 ( 3,000 ) 338,000 Stock based compensation - options and restricted stock 277,000 ( 73,000 ) 204,000 Capitalized engineering costs 336,000 228,000 564,000 Deferred Rent 4,000 - 4,000 Amortization - NTW Transaction 495,000 ( 73,000 ) 422,000 Inventory reserve 1,250,000 ( 579,000 ) 671,000 Deferred gain on sale of real estate 132,000 ( 1,000 ) 131,000 Accrued expenses 158,000 ( 158,000 ) - Disallowed interest 1,813,000 ( 18,000 ) 1,795,000 Operating lease liability 292,000 905,000 1,197,000 Total non-current deferred tax asset before valuation allowance 11,944,000 ( 1,197,000 ) 10,747,000 Valuation allowance ( 9,394,000 ) 1,262,000 ( 8,132,000 ) Total non-current deferred tax asset after valuation allowance 2,550,000 65,000 2,615,000 Deferred tax liabilities: Property and equipment ( 2,150,000 ) 443,000 ( 1,707,000 ) Operating lease ROU assets - ( 908,000 ) ( 908,000 ) Other ( 400,000 ) 400,000 - Total deferred tax liabilities ( 2,550,000 ) ( 65,000 ) ( 2,615,000 ) Net deferred tax asset $ - $ - $ - Note 17. 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. F-32