What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-15 compared with 2023-05-16 · 315 added, 240 removed, 14 unchanged (98% of the section changed)

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

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

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

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

You should specifically consider the various

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

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

SEC began manufacturing aircraft components in

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

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

The following

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

statements for the years ended December 31, 2023 and 2022 and the notes to those statements included elsewhere in this report.

This discussion

contains forward-looking statements that involve risks and uncertainties.

You should specifically consider the various risk factors identified

in this report that could cause actual results to differ materially from those anticipated in these forward-looking statements.

Business Overview

We believe we are

one of the leading manufacturers of precision components and assemblies for large aerospace and defense contractors.

Our rich history

dates to 1941, producing parts for World War II fighter aircraft.

Since then, we have maintained an impeccable record with no known incidents

of part failure leading to a fatal mission.

We became a public company in 2005.

manufacture aerospace components primarily for the defense industry.

AIM and NTW, manufacture structural parts and assemblies focusing

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

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

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

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

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

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

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

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

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

a competitive bidding process.

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

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

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

assemblies for our customers.

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

We remain resolute on meeting customers’

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

new equipment in recent years.

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

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

Some of our investment expands our capabilities allowing

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

We are pleased with the positive responses

from our customers about these initiatives.

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

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

Winning a contract generally requires that we submit a

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

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

Thus, when submitting bids, we are required to

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

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

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

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

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

The cost of materials used in the aerospace industry

is highly volatile.

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

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

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

To obtain necessary raw materials at

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

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

Nevertheless, there can be no assurance that disruptions in

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

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

Changes in the available pool of labor

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

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

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

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

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

Thus, in assessing

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

mix of products sold.

Our products include

landing gear, flight controls, engine mounts and components for aircraft jet engines and ground turbines and other complex machines.

The ultimate end-user for most of our products is the U.S.

government, international governments, and commercial global airlines.

it is a small individual component for assembly by others or complete assemblies we manufacture ourselves, our high quality and extremely

reliable products are used in mission critical operations that are essential for safety of military personnel and civilians.

Although our net

sales are concentrated amongst a number of defense and aerospace prime contractors, we have cultivated long-standing relationships with

a number of their subsidiaries and/or business units.

Additionally, our net sales are generated across several high-profile platforms

and programs including:

the F-18 Hornet, the E-2 Hawkeye, the UH-60 Black Hawk Helicopters, Geared Turbo Engines (used on smaller aircraft

such as the Airbus A220 and Embraer E2), the CH-53 Helicopter, the F-35 Lighting II and the F-15 Eagle Tactical Fighter.

In many cases,

we are the sole or single supplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment

Winning a new contract award is highly competitive.

Our ability to win new contract awards generally requires us to deliver superior quality products, more quickly and with lower pricing

than our competitors.

Accordingly, we must continually invest in process improvements and capital equipment.

Recent investments in new

equipment have improved the productive capacity of our employees, increased our efficiency and speed, and expanded the size of products

we can manufacture.

We strategically operate two state-of-the-art manufacturing centers in the U.S.

This allows for rigorous oversight

of production and the adherence to stringent quality standards.

Although there is currently a shortage of skilled workers, we maintain

a highly trained and close- knit team of over 180 professionals committed to driving excellence and precision in every aspect of our operations.

Our period-to-period net sales and operating results are significantly

impacted by timing.

In addition, our gross profit is affected by a variety of factors, including the mix and complexity of products, production

efficiencies, price competition and general business operating environments.

In some cases, our gross profit is impacted by our ability

to deliver replacement parts on short notice.

Our operations have a large percentage of fixed factory overhead.

As a result, our profit margins are also highly

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

revenues are principally determined by orders from our customers for the delivery of product – which we call releases – against

LTA’s with those customers.

These long-term agreements generally have fixed prices for product with negotiated increases to reflect

a portion of the impact of inflation, though over the term of a LTA prices often increase and not all of the increase is covered b agreed

upon price protection clauses in our agreements.

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

all of these costs may vary based on the efficiency of our factory operations.

Our gross profit is highly variable due to the mix of

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

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

money, income taxes and miscellaneous income and expense.

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

These products can be replacements

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

Reductions to the Defense Department budget

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

and our revenue.

OF OPERATIONS

ended December 31, 2022 and 2021:

Financial Information:

As a result, our profit

margins are highly variable with sales volumes.

For the past several

years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts in new capital

equipment, tooling, and processes to bolster our competitive position.

Additionally, we expanded our sales and marketing efforts, with

a sharp focus on expanding relationships with existing customers and cultivating new ones.

Fiscal 2023 marked a year of overall progress

and positioning for growth.

Looking forward to fiscal 2024, our business strategy is geared towards achieving sustainable and profitable

business growth.

We are firmly focused on securing new contract awards, improving operations and successful execution.

With total unfilled

contract values amounting to $191.9 million (including our $98.3 million in backlog and all potential orders against LTA agreements previously

awarded to us), as of December 31, 2023, we are confident in our ability to boost sales in 2024, attain profitability and improve our

financial position.

Years ended December 31, 2023 and

Selected Financial Information:

Percentage of

$ (1,722,000 )

Cost of sales

Operating expenses

Interest and financing costs

Interest expense

Other income, net

Gain on write-off of accounts payable

Provision/(Benefit) from income taxes

Net (loss) income

Provision for income taxes

$ (2,131,000 )

$ (1,076,000 )

$ (1,055,000 )

Balance Sheet Data:

Working capital

Total stockholders’ equity

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

year ended December 31, 2021.

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

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

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

December 31, 2022 and 2021, respectively.

Landing Gear Systems

States Department of Defense

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

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

at December 31, 2022 and 2021, respectively.

of Receivables

Landing Gear Systems

States Department of Defense

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

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

Consolidated gross profit

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

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

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

ended December 31, 2022 and 2021, respectively.

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

as compared to 2021.

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

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

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

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

As a percentage of consolidated net sales, operating

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

There were increase in cost related to employment costs, including

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

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

The increased costs were primarily offset by reductions in

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

Gain on write-off of Accounts Payable

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

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

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

This adjustment is recorded as Write-off of accounts payable

on the accompanying Statement of Operations.

and Financing Costs

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

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

The average interest rate charged was 4.50% and 3.50%

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

(Loss) Income

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

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

AND CAPITAL RESOURCES

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

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

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

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

debt is not due until July 1, 2026.

We are permitted to make principal payments against this debt in the amount of $250,000 per quarter

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

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

equipment leases and contractual obligations related to our normal business.

We have historically met our cash requirements with funds provided

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

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

over the next twelve months.

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

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

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

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

During December

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

For so long as the Webster

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

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

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

April 15 immediately following such Fiscal Year.

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

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

Additionally, we authorized

such payment to be made from the Revolving Loan.

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

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

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

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

As a result of recent increases in the federal funds borrowing rate, interest

rates and related expense under our Webster Facility are expected to increase from current levels, which could be significant.

such increases are not expected to materially impact our liquidity.

Nevertheless, our liquidity may be adversely impacted by various risks

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

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

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

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

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

Substantially all of these obligations are described

in the notes to our financial statements included in this report

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

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

provided by (used in)

(decrease) increase in cash and cash equivalents

Provided By Operating Activities

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

For the year ended December

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

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

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

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

Operating assets and liabilities used cash in the net amount

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

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

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

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

Used In Investing Activities

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

For the year ended December

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

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

Provided by Financing Activities

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

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

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

was $1,567,000.

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

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

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

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

Financial Statements and Supplementary Data” – “Note 8.

Debt” and “Note 9.

Operating Lease Liabilities”.

Accounting Policies and Estimates

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

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

the effect of matters that are inherently uncertain.

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

All applicable U.S.

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

in preparing the consolidated financial statements.

The preparation of consolidated financial statements requires estimates and assumptions

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

Some of those estimates are subjective

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

The following accounting policies and estimates have

been highlighted as significant because changes to certain judgements and assumptions inherent in these policies could affect our consolidated

financial statements:

Inventory Valuation, which includes the estimates and methodology used

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

In our financial statements, inventory is reflected at the

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

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

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

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

Comparison of Fiscal 2023 to 2022

Net sales in 2023 were

$51,516,000, a decrease of $1,722,000, or 3.2%, compared with $53,238,000 that we achieved in 2022.

The year-over-year decrease in net

sales was primarily due to delays in production associated with supply chain issues caused by one supplier failing to deliver raw materials

for a key program as well as overall changes in customer mix and production requirements for other key platforms and programs.

The composition of

customers that exceeded 10% of our net sales in either 2023 or 2022 are shown below:

Lockheed Martin

United States Government

(A) RTX includes Collins Landing Systems and Collins Aerostructures

The composition of our net sales by platform or

program profiles for the years ended December 31, 2023 and 2022 are shown below:

Platform or Program

UH-60 Blank Hawk Helicopter

CH-53 Helicopter

F-35 Lightning II

F-15 Eagle Tactical Fighter

All other platforms

Based on the significant easing of the 2023 supply chain issue discussed

above and expected delivery dates for products used in all our other platforms and programs, we expect fiscal 2024 sales to increase as

compared to the level we achieved in 2023.

Gross Profit:

Gross profit for the year ended December 31, 2023, amounted to $7,428,000, comparable to the $7,452,000 achieved in 2022.

gross profit percentage in fiscal 2023 increased to 14.4% from the 14.0% we achieved in 2022.

This improvement can be attributable to

changes in the sales across our major platforms, shifts in product mix, and overall operating efficiencies.

Operating Expenses :

In fiscal 2023,

operating expenses totaled $7,723,000, slightly higher than the $7,646,000 recorded in 2022.

As a percentage of consolidated net sales,

operating expenses rose to 15.0%, compared to the 14.4% achieved in fiscal 2022.

The increase in both dollars and percentage was primarily

driven by higher professional fees and costs associated with the improvement of our information technology system and hardening our cyber-security

We continue to look for ways to reduce our costs and improve our operating performance and financial results.

Interest Expense:

Interest expense (which includes amortization of deferred financing costs) was $1,920,000 in fiscal 2023, an increase of $582,000

or 43.5% from $1,338,000 in 2022.

The increase is primarily attributable to an increase in the average interest rate on outstanding debt

pursuant to our Current Credit Facility which increased to 7.55% in 2023 as compared to 4.50% in 2022.

Net loss for the year ended

December 31, 2023 was $2,131,000, compared to a net loss of $1,076,000 for the year ended December 31, 2022, for the reasons discussed

LIQUIDITY AND

CAPITAL RESOURCES

As of December 31,

2023, we have debt service requirements related to:

Outstanding indebtedness under our Current Credit Facility of $15,849,000 (consisting of a Revolving Loan of $10,804,000 and a Term Loan in the amount of $5,045,000).

This debt matures on December 30, 2025, and requires us to make monthly payments of approximately $79,000 in 2024.

Related Party Notes of

approximately $6,162,000.

This debt matures on July 1, 2026.

Pursuant to the Current Credit Facility we are permitted to make principal

payments against this debt in the amount of $250,000 per quarter, as long as certain conditions are met.

Various equipment leases

and contractual obligations related to our normal business, including advances under our Solar Facility for the installation of solar

energy systems including the replacement of the existing roof at our Sterling Facility

Under the terms of the Current Credit Facility,

we are required to meet a Fixed Charge Coverage Ratio (as defined) that is determined at the end of each fiscal quarter.

This ratio is

a financial metric that we use to measure our ability to cover fixed charges such as interest and leases expenses as divided by EBITDA

(as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation and amortization.

As of December 31, 2023, we achieved a Fixed Charge Coverage Ratio of 1.31x as compared to the required ratio of 0.95x and were in full

compliance with all other covenants.

However, as of March 31, 2024, we were not in compliance with the required ratio of 1.10x.

Although we have started discussions with our

lender to receive a waiver with respect to our failure to meet the Fixed Charge Coverage Ratio at March 31, 2024, it is reasonably possible

such waiver will not be granted.

Even if such waiver is granted, we may fail to achieve the Fixed Charge Coverage Ratio in the future

or otherwise fail to meet covenants in the Current Credit Facility.

Therefore, we have classified the term loan that expires on December

30, 2025 as current as of December 31, 2023, in accordance with the guidance in ASC 470-10-45, “Debt – Other Presentation

Matters”, related to the classification of callable debt.

We are required to maintain a collection account with our lender into

which substantially all of our cash receipts are remitted.

If we were to default under our Current Credit Facility, our lender could choose

to increase the rate of interest we pay or refuse to make loans under the revolving portion of the Facility and keep the funds remitted

to the collection account.

If the lender were to raise the rate of interest we pay, it would adversely impact our operating results.

the lender were to cease making new loans under our revolving facility, we would lack the funds to continue our operations.

granted to our lender under the Current Credit Facility combined with the possibility that we might fail to meet covenants in the future

raise substantial doubt about our ability to continue as a going concern for the one year commencing as of the issuance of the opinion

of our auditors contained in this report.

The following is a brief discussion of recent

amendments to the Current Credit Facility (all of which have been filed with the SEC):

● On May 17, 2022, we entered into a Fourth Amendment that increased

the Term Loan to $5,000,000 and reduced our monthly principal repayments requirements.

It also provided for the establishment of a Capital

Expenditure Line in the amount of $2,000,000 on which we can draw upon to purchase machinery and equipment.

In 2022, we borrowed $878,000,

and in 2023, we borrowed $739,500 against this Capital Expenditure Line.

In connection with this amendment, we paid a fee of $20,000.

August 4, 2023, we entered into a Fifth Amendment that waived a default caused by our failure

to meet the required Fixed Coverage Charge Ratio for the fiscal quarter ended March 31, 2023.

Additionally, the amendment provided for a revised Fixed Coverage Charge Ratio for the fiscal

quarters ending June 30, 2023 and September 30, 2023 and increased the amount of purchase

money secured debt (or finance leases) we are allowed to have outstanding at any time to

In connection with this amendment, we paid a fee of $10,000.

● On November 20, 2023, we entered into a Sixth Amendment that waived

defaults caused by the failure by us to achieve the Fixed Charge Coverage Ratio of the Fifth Amendment and because we purchased capital

expenditures (as defined) in excess of permitted amounts.

This amendment further revised the Fixed Charge Coverage Ratio by requiring

it to be calculated on a rolling period basis and not be less than, (a) 1.10x (as calculated on a six-months basis) for the fiscal quarter

ending March 31, 2024, (b) 1.20x (as calculated on a nine-months basis) for the fiscal quarter ending June 30, 2024, and (c) 1.25 (as

calculated on a twelve-months basis) for all fiscal quarters beginning with September 30, 2024, until the Current Credit Facility expires.

This amendment also increased our ability to make additional capital expenditures up to a limit of $2,500,000 in any fiscal year.

In connection

with this amendment, we paid a fee of $20,000.

Although navigating the current business landscape

remains challenging and it is difficult to predict period-to-period financial performance, we believe we will be able to meet our financial

obligations for the foreseeable future.

However, if we are unable to obtain a waiver from our lender and they were to cease lending, we

would not be able meet our financial obligations.

As of December 31, 2023, we have borrowing capacity of approximately $9,830,000 under

the Revolving Loan (including $383,000 pursuant to the Capital Expenditure Line).

In addition to required

Term Loan payments of approximately $948,000 in fiscal 2024, we may have to make additional payments.

For so long as the Term Loan under

the Current Credit Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal year, we are obligated

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

of the Term Loan.

Such payment shall be applied to the outstanding principal balance of the Term loan, on or prior to the April 15 immediately

following such fiscal year.

For the fiscal year ended December 31, 2023, based on the calculation there was no Excess Cash Flow payment

In addition to the

outstanding indebtedness under the Current Credit Facility and Related Party Notes, we have various equipment leases and contractual

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

Our material cash requirements are for debt service,

capital expenditures and funding working capital.

We have historically met these requirements with funds provided by a combination of

cash generated from operating activities and cash generated from equity and debt financing transactions.

Based on our current revenue

visibility and strength of our backlog, we believe that we have sufficient liquidity to meet our cash requirements.

However, if we are

unable to obtain a waiver from our lender and they were to cease lending we may not have sufficient liquidity to meet our cash requirements

for the next twelve months from the date of issuance of our consolidated financial statements included in this Report.

The following table

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

Cash provided by (used in)

Operating activities

Investing activities

Financing activities

Net increase (decrease) in cash

Cash Provided By Operating Activities

For the year ended

December 31, 2023, we generated cash flows from operations of $4,862,000 as compared to only $448,000 for fiscal 2022.

The substantial increase

in cash flows was driven by a significant reduction in working capital required during fiscal 2023, primarily the reduction of both accounts

receivable and inventory levels.

We also benefited from increased customer deposits primarily due to an advance payment by a customer

to be used for the procurement of long lead time raw materials expected to be utilized during 2024.

Investing Activities

We continue to make significant investments to enhance our competitiveness

and market position.

Cash used in investing activities of $2,112,000 and $2,361,000, in 2023 and 2022, respectively, was for new property

and equipment.

We continue to make

strategic investments in capital equipment to enhance our competitiveness.

The investments in 2023 and 2022 increased production efficiency

and speed, while maintaining closer tolerances.

They also expanded the size of products we can manufacture.

We expect to invest approximately

$2,000,000 in 2024 for new or upgraded equipment.

Cash Provided

by Financing Activities

For the year ended

December 31, 2023, cash used in financing activities was $2,685,000.

During fiscal 2023, we reduced borrowings under our Current Credit

Facility by $2,921,000 (consisting of net reduction in Revolving Loan borrowings of $2,548,000 and a net decrease of $373,000 against

the Term Loan).

We also made payments of $123,000 pursuant to financing lease obligations and $9,000 on a loan payable.

During fiscal

2023, we also took advances of $393,000 against the Solar Facility including originations fees of $25,000.

For the year ended

December 31, 2022, cash provided by financing activities was $1,567,000.

During fiscal 2022, we increased borrowings under our Current

Credit Facility by $2,130,000 (consisting of a net increase in Revolving Loan borrowings of $916,000 and a net increase of $1,214,000

against the Term loan).

We also made payments of $284,000 pursuant to financing lease obligations.

$250,000 of Related Loan principal

repayments, and $9,000 on a loan payable.

During fiscal 2022, we paid $20,000 of amendment fees.

Critical Accounting Estimates

A critical accounting estimate is one that is

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

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

Use of Estimates.

The preparation of financial statements in accordance

with generally accepted accounting principles in the U.S.

requires us to make estimates and assumptions that affect the reported amounts

of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported

amounts of revenues and expenses during the reporting period.

The financial statements include estimates based on currently available

information and our judgment as to the outcome of future conditions and circumstances.

Significant estimates in these financial statements

include, inventory valuation, useful lives and impairment of long-lived assets, income tax provision, and allowance for credit losses.

Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the

financial statements and actual results could differ from the estimates and assumptions.

Below is a description of our critical accounting estimates:

Valuation, which includes the estimates and methodology used in accounting for the transition of production costs to inventory

In our consolidated financial statements, inventory is reflected at the lower of cost or net realizable value.

Company periodically evaluates inventory items not secured by backlog and establishes write-downs to estimated net realizable

value for excess quantities, slow-moving goods (defined as goods which do not have an open order and have not had movement for

two years), obsolescence and for other impairments of value.

Impairment of Long-Lived Assets.

We review long-lived assets for impairment

whenever events or changes in circumstances indicate that the carrying value of the corresponding asset group may not be realizable.

an evaluation is required, the estimated future undiscounted cash flows associated with the asset group are compared to the asset group’s

carrying amount to determine if an impairment of such asset is necessary.

This requires us to make long-term forecasts of the future revenues

and costs related to the asset groups subject to review.

Forecasts require assumptions about demand for our products and future market

Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized.

Future events and unanticipated changes to assumptions could require a provision for impairment in a future period.

The effect of any

impairment would be reflected in operating income in the Consolidated Statements of Operations.

In addition, we estimate the useful lives

of our long-lived assets periodically review these estimates to determine whether these lives are appropriate.

Income Taxes.

We account for income taxes under the asset and

liability method, based on the income tax laws in the United States.

This approach requires the recognition of deferred tax assets and

liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets

and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse.

Developing the provision

for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies,

including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for

deferred tax assets.

The Company has recorded a valuation allowance in the current and prior years to reduce deferred tax assets to zero.

If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded

amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made.

We will continue

to assess the adequacy of the valuation allowance on a quarterly basis.

Our judgments and tax strategies are subject to audit by various

taxing authorities.

Allowance for Credit Loss on Accounts Receivable.

We account for Credit

Losses on Accounts Receivable using ASU No 2016-13, “Financial Instruments – Credit Losses (Topic326):

Measurement of Credit

Loss on Financial Instruments.” Under this ASU, accounts receivable must be evaluated on a forward-looking “expected loss”

model, which will generally result in the earlier recognition of allowances for credit losses.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

disclosure is required in response to this Item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements

STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

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

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What changed 10-K

Item 7. Management’s Discussion and Analysis