What changed in this filing

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Item 9A. Controls and Procedures

2024-04-15 compared with 2023-05-16 · 991 added, 1667 removed, 327 unchanged (89% of the section changed)

CONTROLS AND PROCEDURES

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.

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

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, 2023 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 when required.

Report on Internal Control over Financial Reporting

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

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

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

effectiveness of our internal controls over financial reporting.

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

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

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

provide reasonable assurance that transactions are recorded

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

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

and provide reasonable assurance regarding the prevention

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

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

Also, projections of any

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

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

Our management relies upon

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

Commission (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

Section 404 of the Sarbanes-Oxley Act of 2002

requires that management document and test the Company’s internal control over financial reporting and include in this Form 10-K

a report on management’s assessment of the effectiveness of our internal control over financial reporting.

Management is responsible for establishing and

maintaining adequate internal control over financial reporting.

Internal control 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;

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;

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.

Management assessed the effectiveness of our internal

control over financial reporting as of December 31, 2023.

In making this assessment, management used criteria set forth by the Committee

of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013).

In connection with their review of our internal

control over financial reporting as of December 31, 2023, our Chief Executive Officer and Chief Financial Officer have concluded that

our internal controls over financial reporting were not effective as of December 31, 2023 as a result of a material weakness identified

in 2022 that was considered to not yet be remediated because we have not completed our effectiveness testing.

Both in 2023 and 2022, we outsourced certain information

technology (“IT”) related functions to a third-party vendor.

In 2022, we 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 IT systems

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

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

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

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

we 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 were unable to verify and validate

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

financial IT applications and underlying data account records.

We also identified a material weakness

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

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

a potential material misstatement.

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

results and updated it methodology.

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

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

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

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

each of the material weaknesses identified above.

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

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

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

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

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

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

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

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

registered public accounting firm in this annual report.

in Internal Control over Financial Reporting

There have not been any changes

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

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

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

OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our directors and executive officers are:

Luciano (Lou) Melluzzo

President and Chief Executive Officer

Chief Financial Officer

Chairman of the Board

Michael Brand

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

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.

been our Chief Financial Officer since October 1, 2016.

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.

Recca received a Bachelor of Arts

degree from the SUNY Stony Brook and an MBA from Columbia University.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

In March 2021, Mr.

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.

Porcelain has served as

an Adjunct Professor at St.

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

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

in Accounting and an M.B.A.

degree from Binghamton

Taglich and Robert

Taglich are brothers.

All directors hold office

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

Officers are elected by

and serve at the discretion of the Board of Directors.

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

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

Information Concerning the Board of Directors

Board Leadership Structure and Risk Oversight

The Board does not have a

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

The Board has determined that a non-employee

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

This structure ensures a greater role of non-employee

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

priorities and procedures.

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

day-to-day operations.

The Board of Directors as

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

and managed appropriately.

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

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

Members of the Company’s senior management team

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

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

Additional review or reporting on risks is

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

Board Independence

Our Board of Directors has

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

meaning of NYSE American Rule 803A(2).

Director Compensation

Non-employee Directors are

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

Each Director also is entitled

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

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

of his duties as a Director.

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

for our directors.

The following table sets forth

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

DIRECTOR COMPENSATION

Non-Qualified

Michael Taglich

Robert Taglich

David Buonanno

Michael Brand

Michael Porcelain

Peter Rettaliata

Director fees paid in shares.

Board Meetings;

Committees and Membership

The Board of Directors held

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

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

We maintain the following

committees of the Board of Directors:

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

Each committee is

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

Each committee acts

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

Copies of the committee

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

Audit Committee .

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

Porcelain serves as Chairman of the Audit Committee and also qualifies

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

The Board has determined

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

requirements under NYSE American Rule 803A(2).

Our Audit Committee is responsible

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

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

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

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

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

providing to the Board additional information

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

The Audit Committee held four meetings during

Compensation Committee .

Our Compensation Committee is composed of Messrs.

Rettaliata, Brand and Buonanno.

The Compensation Committee

is responsible for:

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

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

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

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

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

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

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

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

preparing an annual report on executive compensation

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

The Compensation Committee held two meetings during

Nominating Committee .

Our Nominating Committee is composed of Messrs.

Rettaliata, Brand and Porcelain.

The purpose of the Nominating Committee is to seek and

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

The Nominating Committee held one meeting during

The Nominating Committee will

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

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

A candidate must be willing

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

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

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

of a public company.

Stockholders may contact the

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

This correspondence

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

Committee so chooses.

Stockholder Communications

Any stockholder who desires

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

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

Depending on the subject matter, our stockholder

relations personnel will:

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

forward the communication to the appropriate management personnel;

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

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

Code of Ethics

We have adopted a written

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

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

In fiscal 2023, we implemented new IT controls

that required our third-party vendor to make only changes to our IT systems with specific authorization and a requirement that such change

be monitored, in real-time by an employee of our company that is familiar with the changes that are being made by our third-party vendor.

Although we implemented this change in the second half of fiscal 2023, we have not yet had a sufficient period of time to perform testing

to conclude that the control was operating effectively.

As such, because our testing of effectiveness is ongoing and not yet complete,

we consider this material weakness not to be remediated as of December 31, 2023.

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

During the fourth quarter of 2023, we implemented

several new changes in internal control over financial reporting including:

(a) new IT controls that require our third-party vendor to

make only changes to our IT systems with specific authorization by our IT department and a requirement that such changes be monitored,

in real-time by an employee of our company that is familiar with the changes that are being made, (b) enhanced review of our inventory

reserve policy to ensure that aged-inventory is appropriately reviewed for obsolescence and excess, and (c) we engaged a new third-party

tax consulting firm and implemented new company-level controls over our tax footnote preparation.

Except for these items, 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, 2023, which is the subject of this report, that have

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

REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION

EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required

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

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

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

Luciano Melluzzo

President and CEO

Michael Recca

Represents car allowance.

Our executive officers named

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

Both are employees at will, terminable

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

Executive Compensation Policies as They Relate to Risk Management

The Compensation Committee

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

officers and other employees.

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

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

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

The Compensation Committee

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

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

Melluzzo and Recca for services rendered in fiscal

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

Equity Awards – 2022

The following table shows

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

GRANT OF PLAN-BASED AWARDS

Luciano Melluzzo

Michael Recca

Each named executive officer was granted options

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

Outstanding Equity Awards at 2022 Year-End

The following table shows

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

Option Awards

Unexercisable

Equity Incentive

Unearned Shares,

Units or Other

Rights That Have

Equity Incentive Plan

Payout Value of

Unearned Shares,

Units or Other Rights

That Have Not Vested

Luciano Melluzzo

Michael Recca

Equity Incentive Plans

We have five equity incentive

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

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

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

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

The 2022 Equity Incentive Plan authorizes grants

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

the 2017 Equity Incentive Plan authorizes grants

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

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

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

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

by our stockholders approved in July 2013.

The Plans permit the Company

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

The Plans are administered

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

We adopted the Plans to provide

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

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

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

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The following table sets forth

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

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

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

Except as otherwise indicated,

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

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

As of May 10, 2023, we had outstanding

3,259,367 shares of Common Stock.

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

Shore, New York 11706

Directors and Executive Officers:

David Buonanno

Michael Brand

Michael Porcelain

Luciano Melluzzo, President and CEO

Michael Recca, CFO

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

1,369,262 (9)

Beneficial Ownership of More Than 5% of Shares:

Richmond Brothers, Inc.

Includes 410,690 shares owned by Mr.

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

Includes 242,584 shares owned by Mr.

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

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

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

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

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

within 60 days.

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

within 60 days.

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

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

The information set forth below is based on the amended

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

By virtue of their Joint

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

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

The beneficial ownership of each of

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

Richmond Brothers, Inc.

RBI Private Investment II, LLC

RBI Private Investment III, LLC

RBI PI Manager, LLC (b)

Richmond Brothers 401(k) Profit Sharing Plan

Held as investment advisor to certain separately managed accounts.

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

Sole voting and dispositive power includes shares owned by Mr.

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

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

and the Profit Sharing Plan.

Sole voting and dispositive power includes shares owned by Mr.

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

and the Profit Sharing Plan.

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

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

* Less than 1 percent

The address for Richmond Brothers, Inc.,

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

Profit Sharing Plan, David S.

Richmond and Matthew J.

Curfman is 3568 Wildwood Avenue, Jackson, Michigan 49202.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

Our Policy Concerning Transactions with Related Persons

Under Item 404 of SEC Regulation

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

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

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

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

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

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

or indirect material interest.

We recognize that transactions

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

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

other than the best interests of our Company and stockholders.

The Audit Committee of the

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

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

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

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

There were no transactions completed by us since

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

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

Taglich pursuant to a subordinated note.

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

involved exceeds $120,000.

Board Independence

Our Board of Directors has

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

meaning of NYSE American Rule 803A(2).

The information required

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

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required

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

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

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required

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

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

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,

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

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

auditing functions.

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

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

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

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

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

During fiscal year 2022, the

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

Audit Fees (1)

Audit Related Fees (2)

During fiscal year 2021 and

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

Audit Fees (1)

Audit Related Fees (2)

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

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

accountant for statutory and regulatory filings.

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

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

financial reporting consultations billed as audit services.

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

for 2022 and 2021, respectively.

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

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

Fees for tax compliance, tax advice and planning.

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

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

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

following exhibits are included as part of this report.

The information required

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

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

AND FINANCIAL STATEMENT SCHEDULES

Consolidated Financial

Statements of Air Industries Group for the Year ended December 31, 2023 and 2022.

The following exhibits

are included as part of this report.

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

8 unchanged sentences

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

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

of Change filed with the Secretary of State of Nevada to effectuate reverse stock split (incorporated herein by reference to Exhibit

3.01 to the Company’s Report on Form 8-K filed October 18, 2022).

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

4 unchanged sentences

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

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

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

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

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

Pledge Agreement dated as of December 31, 2019 with Sterling National Bank (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 6, 2020)

First Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed November 9, 2020)

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

2 unchanged sentences

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

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

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

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

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).

Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 99.1 to the Company’s

Current Report on Form 8-K filed August 10, 2023).

Amendment to Loan and Security Agreement with Sterling National Bank (incorporated herein by reference to Exhibit 99.1 to the Company’s

Current Report on Form 8-K filed November 27, 2023).

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

6 unchanged sentences

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

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).

Equity Incentive Plan As Amended and Restated as of May 23, 2023 (incorporated herein by reference to Appendix A to the Company’s

Proxy Statement on Schedule 14A filed August 4, 2023).

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

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

Insider Trading Policies

and Procedures

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

1 unchanged sentence

Consent of Marcum LLP

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

Certification of principal executive officer pursuant to Rule 13a-14 or Rule 15d-14 of Securities Exchange Act of 1934.

4 unchanged sentences

Section 1350).

XBRL Instance Document.

XBRL Taxonomy Extension Schema Document.

XBRL Taxonomy Extension Calculation Linkbase Document.

XBRL Taxonomy Extension Definition Linkbase Document.

XBRL Taxonomy Extension Label Linkbase Document.

XBRL Taxonomy Extension Presentation Linkbase Document.

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

Policy Relating to Recovery of Erroneously Awarded Compensation

Inline XBRL Instance Document.

Inline XBRL Taxonomy Extension Schema Document.

Inline XBRL Taxonomy Extension Calculation Linkbase

Inline XBRL Taxonomy Extension Definition Linkbase

Inline XBRL Taxonomy Extension Label Linkbase Document.

Inline XBRL Taxonomy Extension Presentation Linkbase

Cover Page Interactive Data File (formatted as Inline

XBRL and contained in Exhibit 101).

* Filed herewith

** Furnished herewith

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

on its behalf by the undersigned, thereunto duly authorized.

INDUSTRIES GROUP

April 15, 2024

AIR INDUSTRIES GROUP

Luciano Melluzzo

1 unchanged sentence

(principal executive officer)

Scott Glassman

Chief Financial Officer

1 unchanged sentence

Pursuant to the requirements

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

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

15, 2024 in the capacities indicated.

President and CEO

Luciano Melluzzo

executive officer)

Financial Officer

financial and accounting officer)

(principal executive officer)

Chief Financial Officer

Scott Glassman

(principal financial and accounting officer)

Chairman of the Board

Michael Brand

Michael Porcelain

INDUSTRIES GROUP

INDEX TO CONSOLIDATED FINANCIAL

December 31, 2022 and 2021

AIR INDUSTRIES

TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

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

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

Consolidated Financial Statements:

1 unchanged sentence

Consolidated Statements of Operations – For the Years Ended December 31, 2023 and 2022 F-4

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

Consolidated Statements of Changes in Stockholders’ Equity – For the Years Ended December 31, 2023 and 2022 F-5

Consolidated Statements of Cash Flows – For the Years Ended December 31, 2023 and 2022 F-6

Notes to Consolidated Financial Statements F-8

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

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.

Opinion on the

Financial Statements

We have audited the accompanying consolidated balance

sheets of Air Industries Group and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated

statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December

31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the

consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,

2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023,

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

Explanatory Paragraph – Going Concern

The accompanying consolidated financial statements

have been prepared assuming that the Company will continue as a going concern.

As more fully described in Note 1, for the period ending

March 31, 2024, the Company was not in compliance with the financial covenants required under the terms of its current credit facility,

and it is reasonably possible that the Company will not receive a waiver and may fail to meet these financial covenants in future periods.

The Company is required to maintain a collection account with its lender into which substantially all of the Company’s cash receipts

are remitted.

If the Company’s lender were to cease lending and keep the funds remitted to the collection account, the Company would

lack the funds to continue its operations.

Failure to receive a waiver or meet the financial covenants in future periods raise substantial

doubt about the Company’s ability to continue as a going concern.

Management’s plans in regard to these matters are also described

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

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

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

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

federal securities law and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

These consolidated financial statements are

the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s

consolidated financial statements based on our audits.

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

We conducted our audits 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

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated

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 audits, we are required to obtain an understanding

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

1 unchanged sentence

Accordingly, we express no such opinion.

Our 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.

Our audits included performing procedures to assess

the risks of material misstatement of the consolidated 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

consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide

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.

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.

Critical audit matters are matters arising from

the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee

(1) relate to accounts or disclosures that are material to the consolidatedfinancial statements and (2) involved our especially

challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ Marcum LLP

We have served as the Company’s auditor

1 unchanged sentence

February 1, 2022).

/s/ Marcum LLP

Saddle Brook, New Jersey

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Air Industries Group

Opinion on the Financial Statements

We have audited, before the effects of the adjustment

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

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

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

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

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

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

We were not engaged to audit, review, or apply

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

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

Those adjustments were audited

by Marcum LLP.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

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

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

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

federal securities law and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

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

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

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

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

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

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

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

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

to those risks.

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

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

the overall presentation of the financial statements.

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

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

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

Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

Saddle Brook, New Jersey

March 25, 2022

AIR INDUSTRIES GROUP

April 15, 2024

INDUSTRIES GROUP

Consolidated Balance Sheets

Current Assets

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

Prepaid Expenses and Other Current Assets

Accounts Receivable, Net of Allowance for Credit Loss of $ 344,000 and $ 281,000

Prepaid Expenses and Other

Current Assets

Contract Costs Receivable

Prepaid Taxes

Total Current Assets

Property and Equipment, Net

Property and Equipment,

Finance Lease Right-of-Use-Assets

Operating Lease Right-of-Use-Assets

Deferred Financing Costs, Net, Deposits and Other Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Financing Costs, Net, Deposits and Other Assets

LIABILITIES AND STOCKHOLDERS’

Current Liabilities

Debt - Current Portion

Accounts Payable and Accrued Expenses

Operating Lease Liabilities - Current Portion

Deferred Gain on Sale - Current Portion

Customer Deposits

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

Deferred payroll tax liability - CARES Act

Accounts Payable and Accrued

Operating Lease Liabilities

Deferred Gain on Sale - Leaseback

Total Current Liabilities

Long Term Liabilities

Debt - Net of Current Portion

Subordinated Notes Payable - Related Party

Operating Lease Liabilities - Net of Current Portion

Deferred Gain on Sale - Net of Current Portion

TOTAL LIABILITIES

Commitments and Contingency (see Note 13)

Subordinated Notes - Related

Operating Lease Liabilities

Gain on Sale – Leaseback

Commitments and Contingencies

(see Note 12)

Stockholders’ Equity

Preferred Stock, par value $ .001 - Authorized 3,000,000 shares, 0 shares outstanding, at both December 31, 2023 and December 31, 2022.

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

Common Stock - Par Value $ .001 - Authorized 6,000,000 shares, 3,303,045

and 3,247,937 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively

Additional Paid-In Capital

Accumulated Deficit

( 67,741,000 )

( 65,610,000 )

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

Consolidated Statements

of Operations

STOCKHOLDERS’ EQUITY

LIABILITIES AND STOCKHOLDERS’ EQUITY

See Notes to Consolidated

Financial Statements

INDUSTRIES GROUP

Consolidated Statements of Operations

For the Years Ended December 31,

1 unchanged sentence

Operating Expenses

(Loss) Income from Operations

Interest and Financing Costs

Loss from Operations

Interest Expense

( 1,448,000 )

Interest Expense - Related Parties

1 unchanged sentence

Gain on write-off of accounts payable

(Loss) Income before Provision for Income Taxes

Loss before Benefit From Income Taxes

( 2,131,000 )

( 1,076,000 )

Provision for Income Taxes

Net (Loss) Income

(Loss) Income per share – Basic

(Loss) Income per share – Diluted

Weighted Average Shares Outstanding – basic

Weighted Average Shares Outstanding – diluted

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

Consolidated Statements

of Stockholders’ Equity

$ ( 2,131,000 )

$ ( 1,076,000 )

Loss per share - Basic and diluted

Weighted-Average Shares Outstanding - Basic and diluted

See Notes to Consolidated

Financial Statements

INDUSTRIES GROUP

Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2023 and 2022

3 unchanged sentences

Common Stock issued for directors fees

Stock Options exercised

Stock Compensation Expense

Common Stock issued in conjunction with reverse split

S tock-based-compensation-employees

( 1,076,000 )

Balance, December 31, 2022

1 unchanged sentence

Common Stock issued for directors fees

Common Stock issued in conjunction with reverse split

Stock Compensation Expense

Stock-based-compensation-employees

( 2,131,000 )

2 unchanged sentences

$ ( 67,741,000 )

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

Consolidated Statements

of Cash Flows For the Years Ended December 31,

See Notes to Consolidated

Financial Statements

INDUSTRIES GROUP

Statements of Cash Flows

For the Years Ended December 31, 2023

CASH FLOWS FROM OPERATING ACTIVITIES

Net (Loss) Income

$ ( 2,131,000 )

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

$ ( 1,076,000 )

Adjustments to reconcile net loss to net cash provided by operating activities

Depreciation of property and equipment

Non-cash employee compensation expense

Non-cash directors compensation

Stock-based compensation

Non-cash other income recognized

1 unchanged sentence

Non-cash gain on accounts payable write-off

Amortization of Right-of-Use Assets

Deferred gain on sale of real estate

Bad debt recovery

Amortization of Finance Lease Right-of-Use Assets

Amortization of Operating Lease Right-of-Use Assets

Deferred gain on sale-leaseback

Loss on sale of equipment

Allowance for Credit Loss

Loss on impairment of goodwill

4 unchanged sentences

( 2,289,000 )

Prepaid expenses and other current assets

6 unchanged sentences

Customer deposits

Deferred payroll tax liability - CARES Act

NET CASH PROVIDED BY OPERATING ACTIVITIES

Deferred payroll tax liability

NET CASH PROVIDED BY OPERATING

CASH FLOWS FROM INVESTING ACTIVITIES

2 unchanged sentences

( 2,361,000 )

NET CASH USED IN INVESTING ACTIVITIES

Proceeds from sale of property and equipment

NET CASH USED IN INVESTING

( 2,112,000 )

1 unchanged sentence

CASH FLOWS FROM FINANCING ACTIVITIES

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

Note payable - revolver - net - Current Credit Facility

( 2,548,000 )

Proceeds from note payable - term note - Webster Bank

Payments of term note - Webster Bank

Proceeds from term loan - Current Credit Facility

Proceeds from term loan - Solar Facility

Payments of term loan - Current Credit Facility

( 1,113,000 )

( 1,609,000 )

Payment of deferred finance costs

Payment of subordinated notes payable - related party

Payments of deferred Financing Costs

Payment of subordinated note payable - related party

Payments of finance lease obligations

Payments of loan payable - financed asset

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

( 4,578,000 )

NET DECREASE IN CASH

Payments of loan payable -

financed asset

NET CASH (USED IN) PROVIDED

BY FINANCING ACTIVITIES

( 2,685,000 )

NET INCREASE (DECREASE) IN CASH

CASH AT BEGINNING OF YEAR

CASH AT END OF YEAR

See Notes to Consolidated Financial Statements

See Notes to Consolidated

Financial Statements

AIR INDUSTRIES GROUP

Consolidated Statements

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

Consolidated Statements of Cash Flows

For the Years Ended December 31, (Continued)

Supplemental cash flow information

Cash paid during the year for interest

Cash paid during the year for taxes

Supplemental disclosure of non-cash investing and financing activities

Cash paid during the year for income

Supplemental Disclosure of non-cash investing and finance

Acquisition of financed lease asset

Capitalization of related party note interest to principal

See Notes to Consolidated Financial Statements

AIR INDUSTRIES GROUP

NOTES TO CONSOLIDATED FINANCIAL

ORGANIZATION AND BASIS OF PRESENTATION

See Notes to Consolidated

Financial Statements

AIR INDUSTRIES

TO CONSOLIDATED FINANCIAL STATEMENTS

AND BASIS OF PRESENTATION

Air Industries Group is a Nevada corporation

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

As of and for the years ended December 31, 2023 and 2022, the accompanying consolidated financial statements

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

2 unchanged sentences

(“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.

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.

Principal Business

The Company is a leading manufacturer of precision

assemblies and components for large aerospace and defense prime contractors.

Its products include landing gears, flight controls, engine

mounts and components for aircraft jet engines, ground turbines and other complex machines.

Most of its machined components and assemblies

are integral to high-profile platforms and named programs including the F-18 Hornet, the E2D Hawkeye, the UH-60 Black Hawk Helicopter,

the Geared Turbo-Fan Engine, the CH-53 Helicopter, the F-35 Lighting II (also known as the Joint Strike Fighter) and the F-15 Eagle Tactical

Our direct customers are primarily large aerospace

and defense prime contractors.

The ultimate end-users for most of our products are the U.S.

Government, international governments, and

commercial global airlines.

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 the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States

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

Historically the Company operated its businesses

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

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

The CMS segment specialized in flight critical components including

flight controls and landing gear.

The TEC segment focused on manufacturing components for jet engines.

Along with its operating subsidiaries,

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

In recent years the Company integrated and consolidated

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

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

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

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

growth opportunities it sees in the aerospace and defense market.

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

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

reporting segments.

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

reportable operating segment.

Since 2022, the

Company makes decisions about resources to be allocated and assesses performance based on one integrated business and reports its results

as one segment.

All of its operations are integrated, share manufacturing facilities and use most, if not all, of the same sales and

marketing functions.

Going Concern and Management’s Plan

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.

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

one year after the date that the consolidated 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

if management concludes 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 do not alleviate substantial doubt about its ability

to continue as a going concern.

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

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

over the following year.

The global outbreak of COVID-19 negatively impacted

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

While operations substantially returned to normal in fiscal

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

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

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

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

Based on the Company’s current best estimates of

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

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

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

statements are issued.

Reverse Stock Split

On October 4, 2022, the Company announced a reverse

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

The reverse stock split was effective

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

All share and per share amounts of

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

As result of the reverse stock

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

See Note 11 – Stockholders’

Equity for more information.

SUMMARY OF SIGNIFICANT ACCOUNTING

Principles of Consolidation

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

During 2023, the

Company generated $ 4,862,000 of cash from operating activities as compared to only $ 448,000 in fiscal 2022.

It also made $ 1,113,000 of

required payments pursuant to its Current Credit Facility and reduced total debt in 2023 by $ 1,958,000 .

As of December 31, 2023, the Company met all the

financial and business covenants required under the terms of its Current Credit Facility including achieving a Fixed Charge Coverage Ratio

of 1.31 x compared to the required ratio of 0.95 x.

The terms of all outstanding indebtedness are discussed further in “Note 8.

For the period ending March 31, 2024 the Company was not in compliance with the required ratio of 1.10x.

Management’s plans are to increase net sales

for fiscal 2024 as compared to fiscal 2023.

The Company believes that these plans are supported by the Company’s backlog which,

as of December 31, 2023, stood at $ 98.3 million.

Further, it anticipates receiving additional funded orders in 2024 pursuant to Long-Term

Agreements (“LTA”) agreements from its key customers as well as new customers.

With this visibility, the Company is confident

in its ability to generate sufficient cash flow to make required principal payments of $ 944,000 to its lender.

Although the Company has begun discussions to

obtain a waiver of the failure to meet the Fixed Coverage Charge Ratio at March 31, 2024, it is reasonably possible that it will not be

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

to meet covenants in the Current Credit Facility.

Therefore, the Company has classified the term loan that expires on December 30, 2025

as current as of December 31, 2023, in accordance with the guidance in Accounting Standards Codification (“ASC”) 470-10-45,

“Debt – Other Presentation Matters”, related to the classification of callable debt.

The Company is required to maintain

a collection account with its lender into which substantially all cash receipts are remitted.

If we were to default under the Current

Credit Facility, the Company’s lender could choose to increase the rate of interest 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, it would

adversely impact the Company’s operating results.

If the lender were to cease making new loans under the revolving facility, the

Company would lack the funds to continue operations.

The rights granted to the lender under the Current Credit Facility combined with

the reasonable possibility that the Company might fail to meet covenants in the future raise substantial doubt about its ability to continue

as a going concern for the one year commencing as of the date of issuance of this report.

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.

do not include any adjustments relating to the recoverability and classification of recorded assets or the classification of liabilities

that might be necessary should the Company be unable to continue as a going concern.

Reverse Stock

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

All share and per share amounts of its common stock presented have been retroactively adjusted to reflect the 1-for-10 reverse

As result of the reverse stock split there were no fractional shares issued and all holders were rounded up to the next

See Note 10 – Stockholders’ Equity for more information.

SUMMARY OF SIGNIFICANT ACCOUNTING

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.

Accounts receivable are carried at the original

invoice amount less an estimate made for credit losses based on a review of all outstanding amounts on a quarterly basis.

Management determines

the allowance for credit losses by regularly evaluating individual customer receivables and considering a customer’s financial condition,

credit history, current economic conditions and other relevant factors, including specific reserves for certain accounts.

Accounts receivable

are written off when deemed uncollectible.

Bad debt expenses are recorded in operating expenses on the consolidated statements

of operations.

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.

The Company values

inventory at the lower of cost on a or an estimated net realizable value.

The Company periodically evaluates inventory items not secured

by backlog and establishes write-downs to estimated net realizable value for excess quantities, slow-moving goods, obsolescence and for

other impairments of value.

Property and equipment

Property and equipment are carried at cost net

of accumulated depreciation and amortization.

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.

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

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.

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 Assets

Long-lived 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 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 expense in the Consolidated Statements

of Operations.

Contract Costs

Contract costs receivable represent costs to be reimbursed from a terminated

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.

Contract costs receivable totals $ 296,000 at both December

31, 2023 and 2022.

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

Revenue is recognized as the customer obtains

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

In evaluating our contracts with our customers,

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

Our revenue is generated from fixed-price contracts.

Under fixed-price

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

contract is awarded.

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

or less profit or could incur a loss.

We evaluate the products promised in each contract at inception to

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

Our contracts are typically accounted

for as one performance obligation.

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

attributes of the performance obligations.

We determine the transaction price for each contract

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

At the inception of a contract, we estimate the

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

contracts until they become legally enforceable.

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

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

Depending on the nature of the modification, we

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

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

Our contracts are typically accounted for as one performance obligation.

We classify net sales as products on our consolidated

statements of operations based on the predominant attributes of the performance obligations.

We determine the

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

At the inception

of a contract, we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised

options) or follow-on contracts until they become legally enforceable.

Contracts can be subsequently modified to include changes in specifications,

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

Depending on the nature of the modification,

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

Generally, modifications

3 unchanged sentences

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

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.

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.

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 .

Customer Deposits

The Company receives advance payments on certain

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

the product for shipment.

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

At December 31, 2022 and 2021, customer deposits

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

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

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

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

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

Backlog represents executed non-cancellable contracts

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

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, 2023 and 2022, customer deposits were $ 3,557,000 and

$ 781,000 , respectively.

The Company recognized revenue of $ 461,000 during year ended December 31, 2023, that was included in the customer

deposits balance as of December 31, 2022.

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

included in the customer deposits balance of $ 1,470,000 as of December 31, 2021.

Backlog represents the value of orders received pursuant to our Long-Term

Agreements (“LTA”) or spot orders pursuant to a customer purchase order.

As of December 31, 2023, 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.

performance obligations on contracts was approximately $ 98.3 million.

The Company estimates that a substantial portion of this backlog

will be recognized as net sales during the next twenty-four-months, with the rest thereafter.

This expectation assumes that raw material

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

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

not currently in backlog.

The Company anticipates that sales during the aforementioned periods will also include sales from expected new orders that

are not in our 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.

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.

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

Actual results could differ from those estimates.

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

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.

Percentage of Sales

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

There were three customers that represented 70.3 %

of gross accounts receivable and 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

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

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

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers

for the years ended December 31, 2022 and 2021:

During the year, the Company had occasionally

Changes in facts and circumstances may result in revised estimates, which are

recorded in the period in which they become known.

Credit and Concentration

A large percentage of the Company’s revenues are derived directly

from large aerospace and defense prime contractors for which the ultimate end-user is the U.S.

Government, international governments or

commercial airlines.

The composition of customers that exceeded

10% of 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 customers that exceed 10% of

accounts receivable in either 2023 or 2022 are shown below:

of Net Receivables

Lockheed Martin

(A) RTX includes Collins Landing Systems and Collins Aerostructures

Disaggregation

The following table summarizes revenue

from contracts with customers for the years ended December 31, 2023 and 2022:

For the years ended December 31, 2023 and 2022, the Company had occasionally

maintained balances in its bank accounts that were in excess of the FDIC limit.

1 unchanged sentence

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.

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.

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 utilizes

sole-source suppliers to supply raw materials or other parts that used in production.

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.

The Company accounts for income taxes in accordance with accounting

guidance now codified as Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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, 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.

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

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

The following is the calculation of income applicable

to common stockholders utilized to calculate the numerator for EPS:

Net (Loss) Income – Basic

$ ( 1,076,000 )

Convertible Note Interest for Potential Note Conversion

Convertible Note debt discount for Potential Note Conversion

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

$ ( 1,076,000 )

The following is a reconciliation of the denominators

of basic and diluted EPS computations:

Weighted average shares outstanding used to compute basic earnings

Effect of dilutive stock options and warrants

Effect of dilutive convertible

notes payable

Weighted average shares outstanding

and dilutive securities used to compute dilutive earnings per share

Per share amount – basic

Per share amount – diluted

The following securities have been excluded from

the calculation as the exercise price was greater than the average market price of the common shares:

Earnings (Loss)

Basic earnings (loss) per share (“EPS”) is computed by

dividing the net loss 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.

The following securities

have been excluded from the calculation as the exercise price was greater than the average market price of the common shares:

Stock Options

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.

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 is included in operating expenses

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

In accordance with FASB ASC 842, “Leases”

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

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

The lease classification affects the expense recognition

in the income statement.

The following securities

have been excluded from the calculation because the effect of including these potential shares was anti-dilutive due to the net loss

incurred during these periods:

Stock Options

Convertible notes payable

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.

compensation expense for employees amounted to $ 283,000 and $ 310,000 for the years ended December 31, 2023 and 2022, respectively.

compensation expense for directors amounted to $ 200,000 and $ 216,000 for the years ended December 31, 2023 and 2022, respectively.

compensation expenses for employees and directors were included in operating expenses in the accompanying consolidated statements of operations.

Goodwill represented the excess of the acquisition cost of businesses

over the fair value of the identifiable net assets acquired.

In accordance with the provisions of Accounting Standards Update (“ASU”)

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

Simplifying the Test for Goodwill Impairment”,

the Company determined that the goodwill was fully impaired at December 31, 2022 and recorded an impairment charge of $ 163,000 is which

included in operating expenses in the consolidated statements of operations.

Freight out is

included in operating expenses and amounted to $ 87,000 and $ 162,000 for the years ended December 31, 2023 and 2022, respectively.

In accordance with FASB ASC 842, “Leases” (“ASC 842”),

the Company records a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months

and classifies them as either operating or finance leases.

The lease classification affects the expense recognition in the consolidated

statement of operations.

Operating lease charges are recorded entirely in operating expenses.

Finance lease charges are split, where

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

At the inception of an arrangement, the Company

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

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

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

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

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

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

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

Lease liabilities and their corresponding ROU

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

The implicit rate within our operating

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

to determine the present value of lease payments.

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

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

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

The operating lease ROU asset also includes

any lease prepayments, offset by lease incentives.

An option to extend the lease is considered in

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

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

Recently Issued Accounting Pronouncements

Effective January 1, 2022, the Company adopted

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

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

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

with characteristics of liabilities and equity.

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

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

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

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

In June 2016, the FASB issued ASU No.

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

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.

ACCOUNTS RECEIVABLE

The components of accounts receivable at December

31, are detailed as follows:

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 of 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.

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

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

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

Reclassification

Certain amounts in the consolidated notes to the financial statements

have been reclassified to conform to the current year presentation.

The Right of use asset - finance lease has been reclassified from

the classification of Fixed Assets at December 31, 2022.

Such reclassifications do not impact the Company’s previously

reported financial position or results of operations.

Recently Issued

Accounting Pronouncements

In June 2016, the FASB issued ASU No 2016-13, “Financial Instruments

- Credit Losses:

2016-13”) to improve information on credit losses for financial assets and investment in leases

that are not accounted for at fair value through net income (loss).

ASU 2016-13 replaces the previous incurred loss impairment methodology

with a methodology that reflects expected credit losses.

Effective January 1, 2023, the Company adopted ASU 2016-13 which did not have

a material effect on the Company’s consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09

"Income Taxes (Topic 740):

Improvements to Income Tax Disclosures" related to improvements to income tax disclosures.

The amendments

in this update require enhanced jurisdictional and other disaggregated disclosures for the effective tax rate reconciliation and income

The amendments in this update are effective for fiscal years beginning after December 15, 2024.

The adoption of this pronouncement

is not expected to have a material impact on the Company's 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.

The components

of accounts receivable at December 31, are detailed as follows:

Accounts Receivable Gross

Allowance for Doubtful Accounts

Allowance for Credit Losses

Accounts Receivable Net

The allowance for doubtful accounts for the years

ended December 31, 2022 and 2021 is as follows:

Year ended December 31, 2022 Allowance for

Doubtful Accounts

Year ended December 31, 2021 Allowance for Doubtful Accounts

The components of inventory at December 31, consisted

of the following:

The allowance for

credit losses for the years ended December 31, 2023 and 2022 is as follows:

Year ended December 31, 2023 Allowance for Credit Losses

Year ended December 31, 2022 Allowance for Credit Losses

The components

of inventory at December 31, consisted of the following:

Raw Materials

Work In Progress

Finished Goods

( 3,973,000 )

( 3,154,000 )

Semi - Finished Goods

Final – Finished Goods

Total Inventory

PROPERTY AND EQUIPMENT

The components of property and equipment at December

31, consisted of the following:

The components

of property and equipment at December 31, consisted of the following:

Buildings and Improvements

Machinery and Equipment

Finance Lease ROU Assets - Machinery and Equipment

Tools and Instruments

1.5 - 7 years

Automotive Equipment

1 unchanged sentence

Leasehold Improvements

Term of lease

Computers and Software

4 unchanged sentences

Property and Equipment, net

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.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The components of accounts payable and accrued

expenses at December 31, are detailed as follows:

Depreciation expense

for the years ended December 31, 2023 and 2022 was approximately $ 2,268,000 and $ 2,522,000 , respectively.

Assets held under finance lease

obligations are depreciated over the shorter of their related lease terms or their estimated productive lives.

PAYABLE AND ACCRUED EXPENSES

The components

of accounts payable and accrued expenses at December 31, are detailed as follows:

Accounts Payable

2 unchanged sentences

Accounts Payable and accrued expenses

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

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

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

This adjustment is recorded as Write-off of accounts payable

on the accompanying Statement of Operations.

SALE AND LEASEBACK TRANSACTION

On October 24, 2006, the Company consummated

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

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 .

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

In addition, at

December 31, 2021, the Company had on deposit $ 150,000 with the purchaser as security for the completion of certain repairs and upgrades

to the Bay Shore Property.

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

At December 31, 2022, this amount was included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the

accompanying Consolidated Balance Sheets.

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

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

The lease also contains customary

representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary remedies upon

a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for any deficiency in future

During the year ended December 31, 2022, the Company reviewed all old

outstanding payables that were not paid and based on the statute of limitations concluded that certain claims would no longer be enforceable.

The Company determined that approximately $ 317,000 of aged payables fell into this category.

This adjustment is recorded as write-off

of accounts payable in the accompanying consolidated statement of operations.

SALE-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 $ 105,000 and $ 143,000 as of December 31,

2023 and 2022, 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 lease (the “Lease”) expiring in September 2026 with the purchaser for the property.

annual rent is approximately $ 540,000 for the first five years , $ 560,000 for the sixth year, and thereafter increases 3 % per year.

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

The Company has on deposit with the landlord

$ 89,000 as security for the performance of its obligations under the Lease.

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 landlord

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.

Debt consists of the following:

Revolving loan to Webster Bank (“Webster”)

Term loan, Webster

Indebtedness to third parties consists of the following:

Current Credit Facility – Revolving loan

Current Credit Facility – Term loan

Solar Credit Facility

Finance lease obligations

Loans Payable - financed assets

Related party notes payable

Current portion

2 unchanged sentences

Long-Term Portion

Webster Bank (F/K/A Sterling National Bank)

The Company has a loan facility (“Webster Facility”) with Webster

Bank that expires on December 30, 2025 .

The Webster Facility, which was entered into on December 31, 2019, was amended several times,

and now provides for a $ 20,000,000 revolving loan (“Revolving Line of Credit”), a $ 5,000,000 term loan (“Term Loan”)

and a $ 2,000,000 Equipment Line of Credit, which as it is drawn upon is added to the balance of the Term Loan.

As of December 31, 2022, there was $ 1,122,000

remaining available under the equipment line of credit.

The below table shows the timing of payments due under the Term Loan:

Current Credit

The Company has

a credit facility (“Current Credit Facility”) with Webster Bank that expires on December 30, 2025 .

This 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.

The loan is secured by a lien on substantially all of the assets of the Company.

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 of $ 512,000 required 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 of $ 440,000 required on December 30, 2025 .

As of December 31, 2023, there is $ 10,804,000 outstanding under the

Revolving Line of Credit and $ 5,045,000 under the Term Loan, inclusive of amounts drawn under the Equipment Line of Credit.

Additionally,

there was $ 382,000 remaining available under the Equipment Line of Credit.

As discussed in Note 1, the Company was not in

compliance with a required covenant as of March 31, 2024.

There is no assurance that the Company will be able obtain a waiver of its failure

to meet this covenant or will be able to meet its financial covenants in one of the upcoming fiscal quarters over the next twelve months,

therefore, in accordance with the guidance in ASC 470-10-45, related to the classification of callable debt, the entire term loan has

been classified as short term as of December 31, 2023.

The below table shows the timing of payments due under the

For the year ending

1 unchanged sentence

December 31, 2025

Webster Term Loan payable

Term Loan payable

debt issuance costs

Total Webster Term Loan payable, net of debt issuance costs

Current portion of Webster Term Loan payable

Total Term Loan payable, net of debt issuance costs

Current portion of Term Loan payable

( 5,045,000 )

Total long-term portion of Webster Term Loan payable

As of December 31, 2022, our debt to Webster in the amount of $ 18,748,000

consisted of the Webster Revolving Loan in the amount of $ 13,352,000 and the Webster term loan in the amount of $ 5,396,000 which includes

$ 878,000 of what was drawn on the equipment line of credit.

Interest expense related to the Webster Facility

amounted to approximately $ 780,000 and $ 704,000 for the years ended December 31, 2022 and 2021, respectively.

The below summarizes historical amendments to

the Webster Facility and various terms:

In 2020, the Company entered into the First Amendment

to the Webster Facility which increased the Term Loan to $ 5,685,000 and required the Company to make monthly principal installments in

the amount of $ 67,679 beginning on December 1, 2020.

Other minor modifications were made and the Company paid an amendment fee of $ 20,000 .

In June 2021, the Company entered into the Second

Amendment to the Webster Facility, which clarified the definition and calculation of Excess Cash Flow, and to confirm the due date of

the required payment of the Excess Cash Flow.

For so long as the Webster term loan remains outstanding, if Excess Cash Flow (as defined)

is a positive number for any fiscal year the Company shall pay to Webster an amount equal to the lesser of (i) twenty-five percent ( 25 %)

of the Excess Cash Flow for such fiscal year and (ii) the outstanding principal balance of the term loan.

Such payment shall be made to

Webster and applied to the outstanding principal balance of the term loan, on or prior to the April 15 immediately following such fiscal

In connection with these changes, the Company paid an amendment fee of $ 10,000 .

The Company made Excess Cash Flow payments of $ 558,750

in 2021 (for the fiscal year ended December 31, 2020) and $ 854,000 in April 2022 (for fiscal year ended December 31, 2021).

the Company provided the calculation for the Excess Cash Flow payment of $ 208,000 for fiscal year ended December 31, 2022 to Webster prior

to the April 15, 2023 deadline for such payment.

Additionally, the Company authorized such payment to be made from the Revolving Loan.

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

On December 7, 2021, the Company entered into

the Third Amendment to the Webster Facility (“Third Amendment”).

The purpose of the amendment was to provide a maturity date

for the Webster Facility of December 30, 2025 as compared to the original maturity date of December 30, 2022.

Such amendment also increased

the Revolving Line of Credit to its current limit of $ 20,000,000 (up from the original $ 16,000,000 ) and also provided for a similar increase

in the inventory sublimit to $ 14,000,000 (up from the original $ 11,000,000 ).

The Third Amendment, also allows the Company, subject to

certain limitations, to begin amortizing $ 250,000 of its related party subordinated notes payable each quarter as long as certain conditions

In connection with these changes, the Company paid an amendment fee of $ 75,000 .

On May 17, 2022, the Company entered into the

Fourth Amendment to the Webster Facility (“Fourth Amendment”).

The purpose of the amendment was to increase the Term Loan

to $ 5,000,000 , generating proceeds of $ 1,945,000 , reduce the monthly principal installments to be made in respect to the term loan, and

establish a capital expenditure line of credit in the amount of $ 2,000,000 which the Company can draw upon from time to time to finance

purchases of machinery and equipment, thereby increasing the amount of capital expenditures that the Company may make each year.

principal payments are $ 59,524 per month commencing in June 2022 with a balloon payment due on December 30, 2025.

In connection with

these changes, the Company paid an amendment fee of $ 20,000 .

On December 15, 2022, the Company made a draw

against the capital expenditure line of credit in the amount of $ 877,913 .

The principal payments are $ 10,451 per month commencing in

February 2023 with a balloon payment due on December 30, 2025 .

On January 4, 2023, the Company made an additional

draw against the capital expenditure line of credit in the amount of $ 739,500 .

The principal payments are $ 8,804 per month commencing

in March 2023 with a balloon payment due on December 30, 2025 .

Under the terms of the Webster Facility, both

the Webster revolving line of credit and the Webster term loan will bear an interest rate equal to the greater of (i) 3.50% and (ii)

a rate per annum equal to the rate per annum published from time to time in the “Money Rates” table of the Wall Street Journal

(or such other presentation within The Wall Street Journal as may be adopted hereafter for such information) as the base or prime rate

for corporate loans at the nation’s largest commercial bank, less sixty-five hundredths (-0.65%) of one percent per annum.

average interest rate charged was 4.50 % and 3.50 % for the years ended December 31, 2022 and 2021, respectively.

Amendment fees paid in connection with the Webster

Facility are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying Condensed Consolidated Balance

Sheets and are amortized over the term of the loan.

In connection with the Webster Facility, the

Company is required to maintain a defined Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter.

Facility limits the amount of Capital Expenditures and dividends the Company can pay to its stockholders.

Substantially all of the Company’s

assets are pledged as collateral under the Webster Facility.

As of December 31, 2022, the Company was in compliance

with all financial loan covenants.

However, the Company was in default of its covenant to provide its audited financial statements to

Webster bank within ninety (90) days of its fiscal year end.

The Company has subsequently received a waiver from the bank for this default.

Finance Lease Obligations

The Company entered into a finance lease in 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,

Total long-term portion of Term Loan payable

Interest expense related to the Current Credit

Facility amounted to approximately $ 1,391,000 and $ 780,000 for the years ended December 31, 2023 and 2022, respectively.

Interest expense

includes the amortization of deferred finance costs of $ 68,000 and $ 65,000 in 2023 and 2022, respectively.

As of December 31, 2023, the Company was in full

compliance with all financial covenants.

The below summarizes various terms of the Current Credit Facility (all of which are described

in full in various SEC filings):

● The Company is required to maintain a defined Fixed Charge Coverage Ratio at the end of each Fiscal Quarter on a rolling basis.

As of December 31, 2023, the Company achieved a Fixed Charge Coverage Ratio of 1.31 x compared to the required 0.95 x.

● For so long as the Term Loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year the Company shall pay 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 applied to the outstanding principal balance of the Term Loan, on or prior to the April 15 immediately following such fiscal year.

The Company made an Excess Cash Flow $ 195,000 for fiscal year ended December 31, 2022.

For the Fiscal year ended December 31, 2023, based on the calculation there is no Excess Cash Flow payment required.

● Both the Revolving Line of Credit and the 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 7.55 % and 4.50 % for the years ended December 31, 2023 and 2022,

respectively.

The lease had an imputed interest rate of 4.2 % per annum and was payable monthly with the final payment due on December

In connection with the Fourth Amendment to the Webster Facility, this finance lease was paid in full.

● The Current Credit 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.

The below summarizes

historical amendments to the Current Credit Facility

● On May 17, 2022, the Company entered into a Fourth Amendment that increased the Term Loan to $ 5,000,000 and reduced monthly principal repayments requirements.

It also provided for the establishment of a Capital Expenditure Line in the amount of $ 2,000,000 which the Company can draw upon to purchase machinery and equipment.

In 2022, the Company borrowed $ 878,000 , and in 2023, it borrowed $ 739,500 against the Capital Expenditure Line.

In connection with this amendment, the Company paid an amendment fee of $ 20,000 .

● On August 4, 2023, the Company entered into a Fifth Amendment that waived a default caused by the failure by the Company to meet the required Fixed Charge Coverage Ratio for the fiscal quarter ended March 31, 2023.

Additionally, the amendment provided for a revised Fixed Charge Ratio for the fiscal quarters ending June 30, 2023, and September 30, 2023, and increased the amount of purchase money secured debt (such as finance leases) the Company is allowed to have outstanding at any time to $ 2,000,000 .

In connection with this amendment, the Company paid an amendment fee of $ 10,000 .

● On November 20, 2023, the Company entered into a Sixth Amendment that waived defaults caused by our failure to achieve the required 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) 1.10 x (as calculated on a six-months basis) for the fiscal quarter ending March 31, 2024 (b) 1.20 x (as calculated on a nine-months basis) for the fiscal quarter ending June 30, 2024, and (iv) 1.25 (as calculated on a twelve-months basis) for all other fiscal quarters.

This amendment also increased the Capital Expenditure limit to $ 2,500,000 in any fiscal year.

In connection with these changes, the Company paid an amendment of $ 20,000 .

All amendment fees paid in connection with the Current Credit Facility

that are for a future benefit of the Company are included in Deferred Financing Costs, Net, Deposits and Other Assets, in the accompanying

consolidated balance sheets and are amortized over the term of the loan.

As of December

31, 2023, the Company has borrowing capacity of approximately $ 9,830,000 under the Revolving Loan (including $ 383,000 pursuant to the

Capital Expenditure Line.

On August 16, 2023, the Company entered into a

financing agreement (“Solar Credit Facility”) with Green Bank, a quasi-public agency of the State of Connecticut, for the

installation of solar energy systems including replacing the existing roof (“Project”) at its Sterling facility.

are made by Green Bank upon its approval of costs incurred on the Project up to $ 934,553 .

As of December 31, 2023, an advance of $ 393,233

had been made including the payment of Green Bank’s closing costs of $ 25,233 .

Interest accrues at the rate of 5 % on advances and

is capitalized and added to the outstanding principal of the loan.

Upon project completion, the cumulative total of the advances and capitalized

interest will convert to a 20 -year level payment term loan with interest accruing at the rate of 5.75 %.

Semi-annual payments are projected

to be approximately $ 41,000 inclusive of interest over the 20-year term.

Finance Lease

The Company entered

into a finance lease in November of 2022 for the purchase of new manufacturing equipment.

Additionally, during May of 2023, the Company

entered into an additional finance lease for the purchase of additional manufacturing equipment.

The obligations for the finance leases

totaled $ 884,000 and $ 328,000 as of December 31, 2023 and 2022, respectively.

The leases have an average imputed interest rate of 7.31 %

per annum and are payable monthly with the final payments due between September of 2026 and May of 2030.

Finance Lease cost:

4 unchanged sentences

Cash Paid for amounts included in the measurement lease liabilities:

Financing cash flow from finance lease obligations

Financing cash flow from finance

lease obligations

Supplemental disclosure of non-cash activity

Acquisition of finance lease ROU asset

Acquisition of finance lease

Weighted Average Remaining Lease Term - in years

Weighted Average Discount rate - %

As of December 31, 2022, the aggregate future

minimum Finance lease payment, including imputed interest are as follows:

As of December 31, 2023, the aggregate future minimum finance lease

payment , including imputed interest are as follows:

For the year ending

3 unchanged sentences

December 31, 2027

December 31, 2028

Total future minimum finance lease payments

2 unchanged sentences

Long-term portion

Loans Payable – Financed Assets

The Company financed the purchase a delivery

vehicle in July 2020.

Loans Payable

– Financed Assets

The Company financed

the purchase a delivery vehicle in July 2020.

The loan obligation totaled $ 22,000 and $ 30,000 as of December 31, 2023 and 2022, 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:

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

For the year ending

2 unchanged sentences

December 31, 2026

Loans Payable - financed assets

1 unchanged sentence

Long-term portion

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,

Related Party Indebtedness

Taglich Brothers,

is a corporation co-founded by two directors of the Company, Michael and Robert Taglich.

Taglich Brothers,

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 (together referred to as

“Related Party Notes”) with Michael and Robert Taglich which generated proceeds to the Company totaling $ 6,550,000 .

In connection

with issuance, 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.

The Related Party

Notes outstanding as of December 31, 2023 consists of:

Convertible Subordinated Notes

Subordinated Notes

Interest expense for the years ended December

31, 2022 and 2021 on all related party notes payable was $ 487,000 and $ 460,000 , respectively.

Approximately $2,732,000 of these notes

have an annual rate of interest of 6%, $2,080,000 have an annual interest rate of 7% and $1,600,000 have an annual interest rate of 12%.

OPERATING LEASE LIABILITIES

The Company has operating 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

Of the $ 6,162,000 ,

approximately $ 2,732,000 bears an annual rate of interest of 6 %, $ 2,080,000 bears an annual rate of 7 % and $ 1,350,000 bears an annual

interest rate of 12 %.

Interest expense for the years ended December 31, 2023 and 2022 was $ 472,000 and $ 487,000 , respectively.

Approximately $ 2,732,000 of the 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 convertible

subordinated notes can be converted at the option of the holder into common stock of the Company at $ 9.30 per share.

The remaining $ 1,350,000

is not convertible.

There are no principal payments due on these notes prior to July 1, 2026.

The Related Party

Notes are subordinate to outstanding debt pursuant to the Current Credit Facility and mature on July 1, 2026.

The Company is

allowed, subject to certain limitations, to make principal payments of $ 250,000 to reduce the value of outstanding Related Party Notes

During the year ended December 31, 2022, a principal payment of $ 250,000 was made against the Related Party Notes due to Michael

No payments were made in fiscal 2023.

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.

Operating lease cost:

1 unchanged sentence

Other Information

Cash paid for amounts included in the measurement lease liability:

Operating cash flow from operating leases

Cash paid for amounts included in the measurement

lease liability:

Operating cash flow from operating

Weighted Average Remaining Lease Term - in years

Weighted Average discount rate - %

The aggregate undiscounted cash flows of operating

lease payments, with remaining terms greater than one year are as follows:

December 31, 2023

The aggregate undiscounted

cash flows of operating lease payments, with remaining terms greater than one year are as follows:

December 31, 2024

5 unchanged sentences

Total long-term portion of operating lease maturities

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.

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:

Liabilities related to sale of future proceeds

from disposition of subsidiaries - beginning balance

Non-Cash other income recognized

Non-Cash interest expense recognized

Liabilities related to sale of future proceeds from disposition

of subsidiary - ending balance

unamortized transaction costs

Liability related to sale of future

proceeds from disposition of subsidiary, net

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 .

EMPLOYEE BENEFITS PLANS

The Company employs both union and non-union

employees and maintains several benefit plans.

Substantially the entire workforce at AIM is

subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the “Union”).

The Agreement

was renewed as of December 31, 2021 and expires on December 31, 2024 and covers all of AIM’s production personnel, of which there

are approximately 131 people.

AIM is required to make a monthly contribution to each of the Union’s United Welfare Fund and the

United Services Worker’s Security Fund.

This is the only pension benefit required by the Agreement and the Company is not obligated

for any future defined benefit to retirees.

The Agreement contains a “no-strike” clause, whereby, during the term of the

Agreement, the Union will not strike and AIM will not lockout its employees.

Medical benefits for union employees are provided through

a policy with Insperity Services, Inc.

(“Insperity”), the costs of which are substantially borne by the Company.

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.

such, the Company is not responsible for the obligations of other companies in the Union’s retirement plan.

All of the Company’s employees are covered

under a co-employment agreement with Insperity, a professional employer organization that provides out-sourced human resource services.

The Company has 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.

STOCKHOLDERS’

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

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.

– Issuances of Securities

The Company issued 55,108 and 27,849 shares of

common stock totaling $ 200,000 and $ 216,000 in payment of Director’s fees for the years ended December 31, 2023 and 2022, respectively.

Such expense is included in Operating Expenses in the consolidated statements of operations.

During the first

quarter of 2024, the Company issued 12,323 shares of common stock in payment of Director’s fees totaling $ 38,000 .

BENEFITS PLANS

The Company employs

both union and non-union employees and maintains several benefit plans.

Our AIM subsidiary

has a collective bargaining agreement with the United Service Workers, IUJAT, Local 355 (the “Union”).

This agreement is

effective until December 31, 2024 and covers the majority of AIM’s 125 personnel.

The Company is not required to make a monthly

contribution to Union’s United Welfare Fund and the United Services Worker’s Security Fund, the sole pension benefit for

covered employees.

The Company is not obligated to provide any future defined benefits.

The Company is obligated to make contributions

for union dues and a security fund (defined contribution plan) for the benefit of each union employee.

Contributions to the security

fund amounted to $ 147,000 and $ 155,000 for the years ended December 31, 2023 and 2022, 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

Medical benefits

for union employees are provided through a policy with Insperity Services, Inc.

(“Insperity”), a professional employer organization

that provides out-sourced human resource services.

The cost of such benefits are substantially borne by the Company.

The collective

bargaining agreement contains a “no-strike” clause and a “no-lock-out” clause.

The Company believes it maintains

good relationships with the Union and expects to renew the collective bargaining agreement before it expires.

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.

AND CONTINGENCIES

On October 2, 2018, Contract Pharmacal Corp.

Pharmacal”) commenced an action, relating to a Sublease entered into between the Company and Contract Pharmacal in May 2018 with

respect to the property that was formerly occupied by 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.

(“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 .

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.

The Company opposed 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

The Company disputes the validity of the claims asserted by Contract Pharmacal and intends contest them vigorously.

From time to time the Company may be engaged

in various lawsuits and legal proceedings in the ordinary course of business.

The Company is currently not aware of any legal proceedings

the ultimate outcome of which, in its judgment based on information currently available, would have a material adverse effect on its

business, financial condition or operating results.

There are no proceedings in which any of the Company’s directors, officers

or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material interest adverse

to our interest.

The provision for income taxes for the years ended

December 31, 2022 and 2021, is set forth below:

Current and Deferred

10, 2022, Contract Pharmacal filed an appeal to the Court’s decision with the Appellate.

The Appellate Division upheld the denial

of Contract Pharmacal’s motion for summary judgement and upheld the denial of its motion to amend its Complaint.

The Company disputes

the validity of the claims asserted by Contract Pharmacal and intends to contest them vigorously.

From time to time

the Company may be engaged in various lawsuits and legal proceedings in the ordinary course of business.

The Company is currently not

aware of any legal proceedings the ultimate outcome of which, in its judgment based on information currently available, would have a

material adverse effect on its business, financial condition or operating results.

There are no proceedings in which any of the Company’s

directors, officers or affiliates, or any registered or beneficial stockholder of its common stock, is an adverse party or has a material

interest adverse to our interest.

The provision for

income taxes for the years ended December 31, 2023 and 2022, is set forth below:

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

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, 2023 and 2022 is set forth below:

statutory income tax rate

State taxes, net of federal benefit

Permanent difference, overaccruals, and non-deductible items

Permanent difference and non-deductible items

Change in state rate

Deferred tax valuation allowance

The components of net deferred tax assets at

December 31, are set forth below:

The components

of net deferred tax assets at December 31, are set forth below:

Deferred tax assets:

Net operating loss

Allowance for doubtful accounts

Net operation loss carryforwards

Allowance for credit loss

Inventory - IRC 263A adjustment

11 unchanged sentences

( 7,701,000 )

Total deferred tax asset after valuation allowance

Total deferred tax asset, net of valuation allowance

Deferred tax liabilities

Property and equipment

( 1,114,000 )

( 1,583,000 )

Operating Lease ROU assets

Property and equipment

Total deferred tax liabilities

2 unchanged sentences

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.

During the years ended December 31, 2022 and 2021, the Company recorded

a valuation allowance equal to its net deferred tax assets.

The Company determined that due to a recent history of net losses, at this

time sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income.

the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances

will be reduced or eliminated.

With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a

corresponding change in the valuation allowance.

At December 31, 2022 and 2021, the Company provided a valuation allowance on its net

deferred tax assets of $ 7,701,000 and $ 7,503,000 , respectively.

As of December 31, 2022, the Company had a

Federal net operating loss carry forward of approximately $ 22,420,000 , of which approximately $ 12,220,000 expires from 2023 through

2037 and $ 10,200,000 does not expire.

In addition, the Company has net operating loss carry forwards from various states of

approximately $ 22,600,000 which expire from 2035 through 2042.

At December 31, 2022 and 2021, the Company had

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.

During the years ended December 31, 2023 and 2022,

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

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, 2023 and 2022, the Company provided a valuation

allowance on its net deferred tax assets of $ 7,903,000 and $ 7,701,000 , respectively.

The Company’s valuation allowance increased

by $ 202,000 and $ 198,000 for the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, the Company had a Federal

net operating loss carry forward of approximately $ 22,363,000 , of which approximately $ 14,719,000 expires from 2024 through 2037 and

$ 7,643,000 does not expire.

In addition, the Company has net operating loss carryforwards from various states of approximately $ 4,7783,000

which expire starting in 2035.

The utilization

of the Company’s net operating losses may be subject to a U.S.

federal limitation due to the “change in ownership provisions”

under Section 382 of the Internal Revenue Code and other similar limitations in various state jurisdictions.

Such limitations may result

in a reduction of the amount of net operating loss carryforwards in future years and possibly the expiration of certain net operating

loss carryforwards before their utilization.

At December 31,

2023 and 2022, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

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, 2023, and 2022, 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 2020 through 2023 tax

years generally remain subject to examination by federal and state tax authorities.

In August 2022, the Inflation Reduction Act of

2022, (the “IRA”), was signed into law which includes a stock buyback excise tax of 1 % on share repurchases, which will

apply to net stock buybacks after December 31, 2022.

We do not expect this to have a material impact if and when share repurchases

STOCK OPTIONS AND WARRANTS

Stock-Based Compensation

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.

OPTIONS AND WARRANTS

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.

In September 2023, the shareholders of the Company

approved the amendment to the 2022 Equity Incentive Plan (“2022 Plan”) to increase the number of shares authorized to be

issued under the plan by 250,000 shares, from 100,000 shares to 350,000 shares.

Additionally, this amendment to the 2022 Plan specified

that the Company may grant Restricted Stock Units under the 2022 Plan.

During the years

ended December 31, 2023 and 2022, the Company granted options to purchase 190,000 and 62,000 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:

for certain employees and members of the Company’s Board of Directors of $ 482,000 and $ 526,000 in its consolidated statements of operations

for the years ended December 31, 2023 and 2022, 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

Risk-free interest rates

4 unchanged sentences

71.6 % - 72.0 %

73.2 % - 75.2 %

Dividend yield

Weighted-average grant date fair value per share

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.

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.

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.

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.

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

A summary of the

status of the Company’s stock options as of December 31, 2023 and 2022, and changes during the two years then ended are presented

Balance, January 1, 2022

Granted during the year

Exercised during the year

Terminated/Expired during the year

Granted during the period

Exercised during the period

Terminated/Expired during the period

Balance, December 31, 2022

Granted during the year

Exercised during the year

Terminated/Expired during the year

Granted during the period

Exercised during the period

Terminated/Expired during the period

Balance, December 31, 2023

Exercisable at December 31, 2023

Issuance of Stock Options

Stock Options

Issued in 2023

On January 31, 2022, the Company granted certain

employees, stock options to purchase an aggregate of 3,000 shares of the Company’s common stock at a price of $ 8.50 per share.

options expire on the fifth anniversary of the grant date and vest over a term of three years .

On April 6, 2022, the Company granted to its directors,

stock options to purchase an aggregate of 6,000 shares of the Company’s common stock at a price of $ 8.40 per share.

expire on the fifth anniversary of the grant date and vest over a term of one year .

On April 11, 2022, the Company granted to certain

members of management and certain employees, stock options to purchase an aggregate of 53,000 shares of the Company’s common stock

at a price of $ 8.40 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of three years .

On May 23, 2023,

the Company granted options to its directors and certain members of management and employees, stock options to purchase an aggregate

of 108,620 shares of the Company’s common stock at a price of $ 3.43 per share.

The options expire on the June 30, 2028 and vested

On June 2, 2023,

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 $ 3.50 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of one year .

On June 2, 2023,

the Company granted to certain members of management and employees, stock options to purchase an aggregate of 75,000 shares of the Company’s

common stock at a price of $ 3.50 per share.

The options expire on the fifth anniversary of the grant date and vest over a term of three

Issued in 2022

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

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 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

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 .

The following table

summarizes information about outstanding stock options at December 31, 2023:

Range of Exercise

Wtd.Avg, Life

$3.46 - $15.60

The following table summarizes information about exercisable stock options at December 31, 2022:

The following table

summarizes information about exercisable stock options at December 31, 2022:

Range of Exercise Price

Exercise Price

Wtd.Avg, Life

$8.40 - $15.60

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 .

As of December

31, 2023, 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, 2023 was based on the Company’s closing stock price of $ 3.25 was $ 0 .

The aggregate intrinsic value at December

6 unchanged sentences

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.

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:

during the years ended December 31, 2023 and 2022 was $ 0 .

The total fair value of shares vested during the years ended December 31, 2023

and 2022 was $ 417,000 and $ 316,000 , respectively.

During both the

years ended December 31, 2023 and 2022, the Company did not issue any warrants.

The following tables

summarize the Company’s outstanding warrants as of December 31, 2023 and changes during the two years then ended:

Balance, January 1, 2022

6 unchanged sentences

Exercisable at December 31, 2023

The aggregate intrinsic value at both December

31, 2022 and 2021 was $ 0 based on the Company’s closing stock price of $ 4.15 and $ 9.10 , respectively.

Revision of Previously Issued Consolidated

Financial Statement

Due to errors discovered in the Company’s

2020 tax return, the Company revised certain previously issued disclosures related to the components of its deferred tax assets and liabilities

and valuation allowance as of December 31, 2021 and 2020.

Additionally, the Company has revised the reconciliation of its income tax rate

computed using the federal statutory rate for the year ended December 31, 2021.

The errors related primarily to the misapplication of

the carryback of net operating losses under the CARES Act provision and mathematical errors related to the Company’s inventory reserve.

Since the Company provided a full valuation allowance on its net deferred tax assets, there was no impact to the Consolidated Balance

Sheet as of December 31, 2021 and the Consolidated Statements of Operations, Cash Flows and Stockholders’ Equity for the year ended

December 31, 2021.

As a result of the errors, the Company will be amending its 2020 and 2021 income tax returns.

The Company had previously disclosed that its net operating loss carry

forward as of December 31, 2021 was $ 29,100,000 .

The proper amount that should have been disclosed was $ 21,971,000 .

Along with this finding,

the Company further reviewed its disclosure of the rate reconciliation and deferred tax calculation along with the valuation allowance

of its net deferred tax assets.

Other items that were corrected in the disclosure included disallowed interest, stock based compensation

and operating lease liability along with the associated operating lease ROU assets.

The below table summarizes the revisions to the

reconciliation of our income tax rate computed using the federal statutory rate to our actual income tax rate for the year ended December

statutory income tax rate

State taxes, net of federal benefit

Permanent difference, overaccruals, and non-deductible items

Change in state rate

Deferred tax valuation allowance

The table below summarizes the revisions to the attributes of the Deferred

Tax Assets as of December 31, 2021:

Deferred tax assets:

Net operating loss

$ ( 1,778,000 )

Allowance for doubtful accounts

Inventory - IRC 263A adjustment

Stock based compensation - options and restricted stock

Capitalized engineering costs

Amortization - NTW Transaction

Inventory reserve

Deferred gain on sale of real estate

Accrued expenses

Disallowed interest

Operating lease liability

Capital loss carryforward

Total non-current deferred tax asset before valuation allowance

( 1,298,000 )

Valuation allowance

( 9,628,000 )

( 7,503,000 )

Total non-current deferred tax asset after valuation allowance

Deferred tax liabilities:

Property and equipment

( 1,626,000 )

( 1,697,000 )

Operating lease ROU assets

Total deferred tax liabilities

( 1,626,000 )

( 2,453,000 )

Net deferred tax asset

The table below summarizes the revisions to the attributes of the Deferred

Tax Assets as of December 31, 2020:

Deferred tax assets:

Net operating loss

$ ( 1,422,000 )

Allowance for doubtful accounts

Inventory - IRC 263A adjustment

Stock based compensation - options and restricted stock

Capitalized engineering costs

Deferred Rent

Amortization - NTW Transaction

Inventory reserve

Deferred gain on sale of real estate

Accrued expenses

Disallowed interest

Operating lease liability

Total non-current deferred tax asset before valuation allowance

( 1,197,000 )

Valuation allowance

( 9,394,000 )

( 8,132,000 )

Total non-current deferred tax asset after valuation allowance

Deferred tax liabilities:

Property and equipment

( 2,150,000 )

( 1,707,000 )

Operating lease ROU assets

Total deferred tax liabilities

( 2,550,000 )

( 2,615,000 )

Net deferred tax asset

Subsequent Events

On April 18, 2023, we received a notice from NYSE

American (the “Exchange”) stating that the Company is not in compliance with the continued listing standards of the Exchange

under the timely filing criteria included in Section 1007 of the NYSE American Company Guide because the Company failed to file by the

extended due date of April 17, 2023, its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”).

In accordance with Section 1007 of the Company

Guide, the Company will have six months from the date of the filing delinquency, or until October 17, 2023 (the “Initial Cure Period”),

to file the Form 10-K with the Securities and Exchange Commission.

If the Company fails to file the Form 10-K during the Initial Cure

Period, the Exchange may, in its sole discretion, provide an additional six-month cure period depending on the Company’s specific

circumstances.

Upon filing of the Form 10-K the Company will cure this delinquency.

The aggregate intrinsic

value at both December 31, 2023 and 2022 was $ 0 based on the Company’s closing stock price of $ 3.25 and $ 4.25 , respectively.

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

What changed 10-K

Item 9A. Controls and Procedures