Item 1A. Risk Factors
ITEM
1A. RISK FACTORS
The
purchase of our common stock involves a very high degree of risk.
In
evaluating our common stock and our business, you should carefully consider the risks and uncertainties described below and the other
information and our consolidated financial statements and related notes included herein. If any of the events described in the risks
below actually occurs, our financial condition or operating results may be materially and adversely affected, the price of our common
stock may decline, perhaps significantly, and you could lose all or a part of your investment.
The
risks below can be characterized into three groups:
1)
Risks related to our business,
including risks specific to the defense and aerospace industry;
2)
Risks arising from our
indebtedness; and
3)
Risks related to our status
as a public company and our common stock.
Risks
Related to Our Business
We
may need additional financing to fund investments in new or upgraded property or equipment .
We
may require additional financing to fund investments in new or upgraded property or equipment, in order to remain competitive.
If we do, we may also need to obtain the agreement of holders of portions of our debt to extend or otherwise refinance such debt. In
order to gain consent, we may need to offer these holders increases in the rates of interest they receive or otherwise compensate them
through payments of cash or issuances of our equity securities. Such additional financing or refinancing may involve the issuance of
debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities and may not be available to
us on reasonable terms, if at all. If we are unable to consummate such additional financing or re-financing, the trading price of our
common stock could be adversely affected, and the terms of such financing may adversely affect the interests of our existing stockholders.
Any failure to fund working capital when required would have a material adverse effect on our business and financial condition and may
result in a decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that
are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest
of our existing stockholders.
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A
reduction in budgeted or actual U.S. government spending for defense or changes in the mix of defense products could materially adversely
impact our business strategy, revenues, operating results and financial condition.
The
ultimate end-user for most of our products is the U.S. Government, with significant use on military aircraft. In certain instances, our
products may be exported to allied foreign governments by the U.S. Government. Although we expect to generate net sales from all of our
key aerospace and defense platforms and programs for many years, they are subject to significant risk. Congressional appropriation and
presidential approval are required for funding leaving our platforms and programs vulnerable to potential budget reductions at any point.
For instance, a decrease in U.S. government defense spending or a strategy shift to rocket and drone platforms instead of large military
aircraft platforms, could curtail demand for our landing gear parts and other components we provide which would likely have a materially
adverse effect on our business strategy, revenues, operating results and financial condition.
Our
operations have historically been subject to the fluctuations in government procurement cycles and spending patterns by our customers.
There can be no assurance that our financial condition and future results of operations will not be materially adversely impacted by
volatility in defense spending or changes in the mix of product favored by the U.S. Government or other nations, or the perception among
our customers regarding the likelihood of such shifts.
Although
we have cultivated long-standing relationships with many of our customers, the aerospace and defense industry is characterized by a smaller
number of large and well-known prime customers. We depend on revenues from these relationships and any loss, cancellation, reduction,
or interruption in these relationships could harm our business.
Our
products are purchased by a relatively small number of large aerospace and defense customers who incorporate them into larger products
for ultimate end-use by the U.S. Government, international governments, and commercial global airlines. Consequently, we have a high
degree of sales concentration among specific customers making it challenging to diversify our customer base. In fiscal years 2023 and
2022, four and three customers, respectively, accounted for approximately 64.2% and 76.5% of net sales, respectively.
Our
future success relies heavily on nurturing expanding and effectively managing these relationships. Nevertheless, we cannot assure retention
of these customers or their continuing to purchasing at previous levels. The loss of any key customers, a decline or interruption in
sales to them, or our inability to establish relationships with new customers, could significantly impact our business.
We
depend on revenues from components for a few aircraft programs and platforms and the cancellation or reduction of funding of them will
harm our business.
We
derive a significant portion of our net sales from supplying components for select aircraft programs and platforms, such as the F-18
Hornet, the E-2D Hawkeye, the UH-60 Black Hawk Helicopter, Pratt & Whitney Geared Turbo-Fan Engine, the CH-53 Helicopter, the F-35
Lightning II (also known as the Joint Strike Fighter) and the F-15 Eagle Tactical Fighter. A decrease in demand for our products, stemming
from reduced aircraft production or diminished aircraft utilization, would adversely affect our future operating results and financial
condition.
Changes
in outsourcing strategies and intense competition in our markets may lead to a reduction in our revenues and market share.
The
defense and aerospace component manufacturing market is highly competitive. Competition has been increasing and is expected to intensify
further. Our large aerospace and defense prime customers, Tier One suppliers and many of our competitors have significantly greater technical,
manufacturing, financial and marketing resources than we do. In the future, our defense and aerospace customers could make changes in
their supply chain strategies that could adversely impact us. For instance, they could decide to in-source manufacturing, stop purchasing
pursuant to existing LTA agreements or seek other sources at any time. If they seek other suppliers, we may not be able to compete successfully
against either current or future competitors (including commercial manufacturers that wish to diversify their revenues and expand into
the defense supply chain). Increased competition could result in reduced revenue, lower margins or loss of market share, any of which
could significantly harm our business, our operating results and financial condition.
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We
may lose sales if we fail to timely meet the specifications and requirements of our customers.
Most
of our customers incorporate our products into larger products such as aircraft assemblies or completed aircraft. They rely upon us to
deliver products pursuant to existing LTA agreements that include detailed specifications and requirements. If a customer were to conclude
that it could not rely upon us for any reason, it could look to dual source a product or rely upon another party altogether. We could
be informed of a change in sourcing decisions with limited notice or not at all. Any decision by a customer to rely upon an alternate
supplier for some or all of its needs could significantly harm our business, our operating results and our financial condition.
We
may lose sales if our suppliers fail to meet our needs or ship raw materials to us on timely.
We must deliver our products timely with high
quality to ensure smooth operation of our customer production lines. In order to do so, we attempt to procure our raw materials, parts
and components as well as subcontracted services from various sources and utilize multiple subcontractors. However, certain materials,
components and services are exclusively available from a sole or limited number of suppliers and we are reliant upon them. Additionally,
material sourced from overseas are susceptible to supply chain disruptions stemming from global events and political decisions. While
we believe that, in many cases, alternative supplies, components, assemblies, or subcontractors could be secured, sourcing substitutes
may necessitate the development of new suppliers or require product re-engineering and qualification, potentially leading to shipment
delays. Any interruptions in raw material shipments or subcontracted service performance could significantly harm our business, our operating
results and our financial condition.
We
may not be able to improve our gross margin and a reduction in future sales levels could have a disproportionate effect on our gross
profit as a percentage of our net sales.
Our
state-of-the-art manufacturing facilities currently has a large percentage of fixed factory overhead relative to our overall expenses.
Consequently, our gross profit as a percentage of new sales is highly linked with sales volume. If we do not increase our sales volume,
it will be difficult to materially improve our gross profit margin. Although we have plans to improve operating efficiencies at our current
sales levels, we may not be able to do so. Further, any reduction in future sales volume would likely causes us to absorb the fixed overhead
costs over a smaller base of sales, causing our gross profit as a percentage of sales to decline from current levels. Any reduction in
our profit margin adversely impacts our reported performance and would have a material adverse impact on results of operation and our
financial position.
There
are risks associated with the bidding processes in which we compete.
We
obtain many LTA and other contracts through a competitive bidding process. We must devote substantial time and resources to prepare bids
and proposals and may not have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have
bid will be sufficient to allow us to generate a profit from any particular contract. There are significant costs involved with producing
a small number of initial units of any new product and it may not be possible to recoup such costs on later production runs.
Due
to fixed contract pricing, increasing contract costs expose us to reduced profitability and the potential loss of business.
The
cost estimation process requires significant judgment and expertise. Reasons for cost growth include unavailability and productivity
of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect
of delays in performance, availability and timing of funding from the customer, natural disasters, supply chain disruptions and the inability
to recover any claims for added services necessary to complete production. A significant change in costs from those on which we based
our estimates on one or more programs could have a material effect on our consolidated financial position or results of operations.
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The
prices of raw materials we use are volatile.
The
prices of raw materials used in our manufacturing processes are volatile. Some LTA agreement with customers allow us to increase our
prices due to increases in the price of raw materials. However, these LTA agreements generally require that we first absorb all or a
portion of the price increases before being able to pass on the increase the customer. For some LTA agreements, we are at full risk for
future price agreements. If the prices of raw materials rise, we may not be able to pass along all of such increases to our customers
and this could have an adverse impact on our financial position and results of operations. It is possible that some of the raw materials
we use might become subject to new or increased tariffs. Significant increases in the prices of raw materials could adversely impact
our customers’ demand for certain products which could lead to a reduction in our revenues and have a material adverse impact on
our revenues and on our financial position and results of operations.
Some
of the products we produce have long lead times.
Some
of the products we produce require months to produce and we sometimes produce products in excess of the number ordered intending to sell
the excess as spares when orders arise. As a result, our inventory turns slowly and ties up our working capital. Our inventory represented
approximately 59% of our assets as of December 31, 2023. Any requirement to write down the value of our inventory due to obsolescence,
excess and slow moving, or a drop in the price of materials could have a material adverse effect on our consolidated financial position
and results of operations.
We
do not own the intellectual property rights to products we produce.
Although
we develop our internal processes, nearly all the parts and subassemblies we produce are built to customer specifications and the customer
owns the intellectual property, if any, related to the product. Consequently, if a customer desires to use another manufacturer to fabricate
its part or subassembly, it would be free to do so, which could have a material adverse effect on our business, our operating results
and financial condition.
There
are risks associated with new programs.
New
programs typically carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or
changing specifications, timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program
may experience delays for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs
to the customers’ satisfaction or if a new program in which we had made a significant investment was terminated or experienced
weak demand, delays or other problems, then our business, financial condition and results of operations could be materially adversely
affected. This could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings
in excess of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.
To
perform on new programs, we may be required to incur material up-front costs which may not have been separately negotiated and may not
be recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.
The
need to control our expenses will place a significant strain on our management and operational resources. If we are unable to control
our expenses effectively, our business, results of operations and financial condition may be adversely affected.
There
are risks associated with offering new services to our customers.
From time-to-time in order to reduce our dependence
on subcontractors or increase our gross margins we offer new services to our customers, such as painting and finishing products we already
manufacture for them. There are risks associated with offering these services and even if performed timely and correctly, it is likely
that our margins for these new services will be relatively low, or even negative, in the initial phases when volume is low. We may not
be successful in achieving positive gross margins for these new services or be able to ultimately meet our customer requirements. If we
are unsuccessful, it could hurt our relationship with our customers.
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Attracting
and retaining executive talent and other key personnel is an essential element of our future success.
Our
future success depends to a significant extent upon our ability to attract executive talent, as well as the continued service of our
existing executive officers and other key management and technical personnel. We are a relatively small company and experienced management
and technical, marketing and support personnel in the defense and aerospace industries are in demand and competition for their talents
is intense. Our failure to attract or retain executive, key management and technical personnel, could have a material adverse effect
on our business, financial condition and results of operations.
We
are subject to intense competition for the skilled machinists necessary to manufacture our products.
We
are subject to intense competition for the services of skilled machinists necessary to manufacture our products and those of other companies
in the aerospace and defense industry. In recent years, the competition for skilled employees has intensified and we have experienced
wage inflation. We have strategically located our operations in the U.S. and many companies are expanding their domestic production.
As such, there is currently a shortage of skilled workers in the U.S. In order to maintain and increase production levels, we must hire
new employees and machinists for our two state-of-the art manufacturing facilities and we may not be able to do so or the costs to hire
and/or train them may significantly exceed our budget. If the U.S. economy continues to experience inflation, our labor costs may further
increase which could have a material adverse effect on our business, financial condition and results of operations.
We
are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense in the
event of non-compliance.
We
are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among
other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure
to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain
hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us.
In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on
or in our facilities without regard to whether we knew of, or caused, the release of such substances.
We
are also required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious
physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use
of such substances. Our operations require the use of chemicals and other materials for painting and cleaning that are classified under
applicable laws as hazardous chemicals and substances. If we are found to be in violation of any of these rules, regulations or permits,
we may be subject to fines, remediation expenses and the obligation to change our business practice, any of which could result in substantial
costs that would adversely impact our business operations and financial condition.
We
may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.
We
are subject to regulation by the FAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards
and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines
and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse
effect on our operations. We have never been subject to such fines or disqualification.
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Cyber
security attacks, internal system or service failures, and any unauthorized access to our customer data will have an adverse effect on
our business and reputation.
Most of our products are used by large aerospace
and prime contractors who ultimately provide them to the U.S. Government, foreign governments and commercial airlines. As such, in most
cases, we are required to maintain confidential and proprietary information on our information systems. Hackers, whether they be individuals,
entities or hostile enemies, may attempt to penetrate our network or those of our third-party hosting and storage providers, to gain access
to confidential and proprietary data. If any of this data is hacked or leaked, obtained by others or destroyed without authorization,
it could harm our reputation, we could be exposed to civil and criminal liability, which will materially impact our financial results
and financial condition. Any system or service disruptions caused by hackers or even those caused by projects to improve our information
technology capabilities, if not mitigated, could significantly disrupt our production assembly could have an immediate material adverse
effect on our business. We could also be subject to systems failures, including network, software or hardware failures, whether caused
by us or third-party service providers, computer viruses, natural disasters or power shortages.
If
hackers gain access to sensitive, confidential or otherwise protected information, they may attempt to force us to pay a ransom before
stopping their attack. Any hacker penetration could cause loss of data and interruptions or delays in our business, cause us to incur
remediation costs or subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or
utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Although we utilize various
procedures and controls to monitor and mitigate the risk of these threats and have increased recent investment to improve our cyber-security
posture, there can be no assurance that these procedures and controls or new investments will be sufficient. Our property and business
interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure
or disruption which would adversely affect our business, results of operations and financial condition. Moreover, expenditures incurred
in implementing cyber security and other procedures and controls could adversely affect our results of operations and financial condition.
We
are subject to an extensive and highly-evolving regulatory landscape, and requirements imposed by our customers to secure our communications,
and any adverse changes to, or our failure to comply with, any laws and regulations or requirements of our clients could adversely affect
our brand, reputation, business, operating results, and financial condition.
We
subject to extensive laws, rules and regulations directed to those who conduct business over the internet, in addition to security requirements
imposed by our clients, including those governing privacy, data governance, data protection and cybersecurity. Many LTAs that we sign
with our customers also require us to comply with strict vendor clauses including replications of specific sections of the FAR. These
legal and regulatory regimes, including the laws, rules, and regulations thereunder, may be modified, interpreted, and applied in an
inconsistent manner. To the extent we have not complied with such laws, rules, and regulations, or requirements imposed by our LTAs,
we could be subject to significant fines, limitations the products and services we provide, reputational harm, and other regulatory consequences,
each of which may be significant and could adversely affect our business, operating results, and financial condition.
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Any
disruptive national or international events, such as potential future public health crises, ongoing or new conflicts, domestic or foreign
terrorist activities, banking crises, and responses from the U.S. Government, other nations, and the public to such occurrences, could
significantly disrupt the operations of us or our suppliers and impede our ability to procure, receive, or replenish inventory (including
raw materials). These disruptions may also present challenges in communication and lead to sudden and unexpected shifts in product demand
by our customers. Furthermore, global financial markets could experience disruptions, affecting our business and our ability to secure
future financing, including accessing debt or equity. The occurrence of any of these events could result in lost sales and otherwise
adversely affect our business, operating results, and financial condition.
Conflicts
between nations (such as the ongoing Russia-Ukraine conflict), or between nations and terrorist organizations (such as the ongoing conflict
between terrorist groups and Israel), as well as terrorist attacks, natural disasters (such as hurricanes, fires, floods and earthquakes),
unusually adverse weather conditions, pandemic outbreaks or a banking crisis could adversely affect our operations and financial performance.
If any of these events affect us or our suppliers, it could result in an inability on our part to manufacture products and/or result
in lost sales, materially affecting our operations and financial performance.
Additionally,
such events could disrupt travel, making it a challenge to communicate with our customers, as evidenced during the coronavirus pandemic.
Moreover, they could lead to increases in fuel or other energy prices, fuel shortages, temporary labor shortages, temporary or long-term
disruptions in delivery of products from our suppliers and disruption to our information systems, any of which could have an adverse
impact on our business, operating results and financial condition. Disruptive events could make it difficult for us to access debt and
equity capital on attractive terms, or at all, and impact our ability to service or refinance our debt, fund business activities, and
repay debt on a timely basis.
Russia’s
invasion of Ukraine, the conflict in the Middle East, continued tensions between the US and the European Union with China and Russia,
and tension between the US and the European Union with respect to funding Ukraine’s war effort, may alter countries’ willingness
to rely on others as the source of certain products and material.
Historically,
prime contractors and the entire U.S. aerospace and defense supply chain have relied upon parts, components, and raw materials from foreign
suppliers including those located in Russia and China. Geo-political tensions have increased during the past several years and we expect
them to continue. Supply chain disruptions resulting from escalating political tensions and the economic disruption resulting from retaliatory
measures between any countries could result in production delays and cancellations of programs.
Additionally,
any material changes to the current aerospace and defense supplier structure resulting from geo-political tensions or otherwise could
disrupt the markets for raw materials and supplies and our ability and the ability of our suppliers to obtain raw materials, may be significantly
impacted. We cannot forecast with any certainty whether such disruptions, restrictions imposed by various governments in response thereto
and resulting changes in business practices, may materially impact our ability and the ability of our suppliers to obtain necessary raw
material, our business and our consolidated financial position, results of operations, and cash flows.
Risks
Related to Our Indebtedness
As of December 31, 2023, we have total indebtedness
of approximately $23,311,000, large portions of which must be redeemed or refinanced prior to December 30, 2025 and July 1, 2026. We may
not be able to achieve favorable financing terms in the future or consummate any refinancing of our existing loans prior to their respective
maturity dates. Failure to do so would materially impact our business and our stock price.
As
of December 31, 2023, we had approximately $15,849,000 of indebtedness outstanding pursuant to a loan facility that matures on December
30, 2025 with Webster Bank (“Current Credit Facility”). The average interest rate on this indebtedness during fiscal 2023
was 7.55%. This indebtedness is secured by a lien on substantially all our assets.
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Additionally, we have approximately $6,162,000 of subordinated notes
payables (“Related Party Notes”) that mature on July 1, 2026 and which are held by two directors Michael N. Taglich and Robert
F. Taglich, and their affiliates. The Related Party Notes payable carry an interest rate ranging between 7% and 12% per year.
In addition to $884,000 of finance lease obligations
and a $22,000 vehicle loan, we also had $393,000 of borrowings for solar energy systems pursuant to a financing agreement (“Solar
Facility”) with CT Green Bank. The Solar Facility requires borrowings for completed projects to be repaid over a 20-year level payment
term.
If we are unable to pay our indebtedness when
due, our operations may be materially and adversely affected. We must pay or refinance large portions of this indebtedness prior to December
30, 2025, and July 1, 2026. During fiscal 2024, we initiated steps to refinance this debt. Refinancing may require us to pay higher interest
rates than we currently pay, agree to more restrictive business or financial covenants or involve the issuance of debt, equity and/or
new securities convertible into or exercisable or exchangeable for our common stock which may adversely affect the trading price of our
common stock and the interests of our existing stockholders. Any failure to refinance our existing debt or obtain additional working capital
when required would have a material adverse effect on our business and financial condition and may result in a decline in our stock price.
Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or
exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.
Our
current or future leverage may adversely affect our ability to finance future operations and capital needs, may limit our ability to
pursue business opportunities and may make our results of operations more susceptible to adverse economic conditions. Ultimately, we
may not be able to successfully refinance our indebtedness and if we cannot, we would become insolvent.
The
weighted average interest rate we paid in 2023 on borrowings outstanding on the Current Credit Facility was 7.55% and this interest rate
may increase in the future.
The
weighted average interest rate paid during the year-ended December 31, 2023 on borrowings outstanding on the Current Credit Facility
was 7.55% as compared to 4.50% for the year-ended December 31, 2022, the increase primarily the result of the increase in the target
rates set by the Federal Reserve. Under the terms of our Current Credit Facility, amounts due bear interest at a per annum 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. Consequently, we may be susceptible to future increased rates if the Federal Reserve chooses to increase its target
rate of interest.
We may not be able to comply with the covenants
of the Current Credit Facility and our debt could be called.
Under the terms of the Current Credit Facility,
we are required to maintain certain business and financial covenants including a Fixed Charge Coverage Ratio (as defined) that is determined
at the end of each fiscal quarter. This ratio is a financial metric that we use to measure our ability to cover fixed charges such as
interest and leases expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (or loss) before
interest, taxes, depreciation, and amortization. For the year ended December 31, 2023, we achieved a Fixed Charge Coverage Ratio of 1.31x
as compared to the required ratio of 0.95x and were in full compliance with all other covenants. As of March 31, 2024, we were not in
compliance with the required ratio of 1.10x. We are currently in discussions with our lender to obtain waivers, but may not be able to
do so.
During our first and third quarters of fiscal
2023, primarily because of the unexpected and dramatic increase in interest rates and the failure to receive certain raw materials from
a supplier, we were unable to comply with the Fixed Charge Coverage Ratio. In 2023, our lender provided waivers for these quarters and
provided for more relaxed Fixed Charge Coverage ratios for future periods, including the 0.95x as of December 31, 2023.
Even if we obtain a waiver for the failure to
meet the fixed charge coverage ratio as of March 31, 2024, if we do not achieve our fiscal 2024 plan and successfully execute our business
strategy, we may not be able to comply with future quarterly covenant requirements. If we fail to do so and/or are unable to obtain future
waivers, we may have to pay increased interest rates or may be required to immediately pay any outstanding debt. An increase in the interest
rate would likely have a material adverse impact on our consolidated financial position and results of operations. If we were required
to make immediate repayment, we may not be able to obtain financing to do so and would become insolvent.
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We
currently do not pay dividends and the terms of our Current Credit Facility limit our ability to pay dividends.
We
currently do not pay dividends and have no foreseeable plans to do so. Additionally, the terms and covenants of our Current Credit Facility
do not currently allow us to. In the future should we decide to pay dividends, we would need to seek covenant changes or a waiver under
our Current Credit Facility. There can be no assurance our lenders would agree to covenant changes or grant a waiver. In addition, we
may in the future incur additional indebtedness or otherwise become subject to agreements whose terms restrict our ability to pay dividends
in the future.
Risks
Related to our status as a public company and our common stock
There
is only a limited public market for our common stock.
Although
our common stock is listed on the NYSE American, there is only a limited number of our shares available in the public float and the related
market capitalization of such float is relatively small. The trading volume for our common stock has been limited and a more active public
market for our common stock may not develop or be sustained over time. The lack of a robust market may impair a stockholder’s ability
to sell shares of our common stock. In the absence of a more active trading market, any attempt to sell our shares could result in a
decrease in the price of our stock. Specifically, our shareholders may not be able to resell their shares of common stock at or above
the price paid for such shares or at all.
Moreover,
sales of our common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our
common stock. As a result, our shareholders may not be able to sell your shares of our common stock in short time periods, or possibly
at all, and the price per share of our common stock may fluctuate significantly.
The
ownership of our common stock is highly concentrated amongst related parties, and their interests may conflict with the interests of
other stockholders.
Two of our directors, Michael N. Taglich and Robert
F. Taglich, and their affiliates own a significant portion of our outstanding shares of common stock. They also hold $6,162,000 of Related
Party Notes, some of which are convertible into our common stock. Although the Related Party Notes are subordinate to the $15,849,000
of debt outstanding pursuant to the Current Credit Facility, we may require additional concessions from the holders of the Related Party
Notes when we seek to refinance the Current Credit Facility. These related parties have significant influence over the outcome of corporate
actions, including those requiring stockholder approval. The interests of these related parties may be different from the interests of
other stockholders on these and other matters. Additionally, this concentration of ownership could also have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn
could reduce the price of our common stock.
The
market price of our common stock is likely to be highly volatile, which could result in substantial losses to investors.
The market price of our common stock has historically been volatile
and is likely to continue to be volatile. The market price of our common stock could fluctuate widely due to factors relating to our operations
as well as those beyond our control. Because our common stock is thinly traded, the trading price may be volatile due to factors concerning
our operations, such as variations in our operating results, failure to meet the covenants under the Current Credit Facility, news regarding
the loss of a major customer or termination or a reduction in funding for a program we are on, the loss of management personnel, the outcome
or perception of the potential outcome of any litigation, general industry conditions and significant industry developments. In addition,
the market price of our common stock may be affected by factors unrelated to our operations, such as general economic factors, government
budgeting decisions affecting our industry and developments in the financial markets and availability of credit.
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Disruptive
national and international events and the response of the United States, other countries and the public to such events, and the resulting
macroeconomic disruption to the financial markets could lead to increased volume and price volatility for publicly traded securities
which could adversely impact the price of our common stock.
Disruptive
national and international events, such as the outbreak of a public health crisis, conflicts between nations or between nations and terrorist
organizations, terrorists acts, natural disasters, a banking crisis, the possibility of default by the U.S. Government on its obligations
due to its debt ceiling or the actuality of such an event, and the response of the U.S. Government, other countries and the public to
such events, and the resulting macroeconomic disruption to the financial markets could lead to increased volume and price volatility
for publicly traded securities which could adversely impact the price of our common stock.
We can provide no assurance that our common
stock will continue to be listed on the NYSE American. If we fail to meet the continued listing standards of the NYSE American, our
common stock could be delisted. The delisting of our common stock could impair your ability to purchase shares of our common stock or
sell your common stock when you wish to do so which could have a negative effect on the price of our common stock.
If we fail to satisfy the continued listing requirements of the NYSE
American, it may take steps to delist our common stock. There are measures that can be taken to remain in compliance with certain of the
listing requirements of NYSE American which often require the undertaking of a reverse stock split, selling common stock at prices below
what the Board of Directors may believe is its true value or completing a merger to acquire a new business. There are other exchanges
and trading platforms on which we could choose to list our common stock. Our Board periodically examines the costs and benefits of listing
our common stock on the NYSE American with the costs and benefits that would result from an alternative trading platform. If our
Board were to choose to seek another platform for the trading of our common stock, this could entail suspending our obligation to file
periodic reports with the SEC and using other means to make information publicly available to shareholders and potential buyers of our
common stock. There can be no assurance that any cost savings and other benefits we might achieve from trading on another platform
would outweigh any negative impact to the trading market and price of our common stock that would result from delisting from the NYSE
American.
If
we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.
Our quarterly and annual operating results fluctuate
significantly due to a variety of factors, some of which are outside our control. Accordingly, we believe period-to-period comparisons
should not be relied upon as indications of future performance. Some of the factors that could cause quarterly or annual operating results
to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense recognition
for contracts, the U.S. Government contracting and budget cycles, introduction of new government regulations and standards, contract closeouts,
variations in manufacturing efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers,
general economic conditions and economic conditions specific to the defense market and disruptions caused by global events such as COVID-19
and Russia’s invasion of Ukraine. Because we base our operating expenses on anticipated revenue trends and a high percentage of
our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business.
Fluctuations in quarterly results may cause earnings
to fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly
decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of our common
stock, as well as our overall operating results. Consequently, our share price may experience significant volatility and may not necessarily
reflect the value of our expected performance.
Future
financings or acquisitions may adversely affect the market price of our common stock.
Future
sales or issuances of our common stock, including upon conversion of our outstanding convertible notes, upon exercise of our outstanding
warrants and options, or as part of future financings or acquisitions, would be substantially dilutive to the outstanding shares of common
stock. Any dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward movement
in the price of common stock.
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We incur significant costs as a result of
operating as a public company, and our management is required to devote substantial effort to compliance requirements, including establishing
and maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable to comply with these
requirements. Costs to comply may increase in the future.
As a public company,
we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented by the
Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies, including
requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time
to these requirements. Moreover, if new rules or regulations are adopted in future periods, they will likely increase our compliance
costs and will make some activities more time-consuming and costlier.
The Sarbanes-Oxley
Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure controls and procedures.
In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow
management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts.
Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. In the
event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner,
the market price of our stock could decline if investors and others lose confidence in the reliability of our financial statements and
we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.
If we are unable
to effectively maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our
financial results and our stock price could be adversely affected.
Our management determined that as of December
31, 2023, our disclosure controls and procedures and internal control over financial reporting were not effective due to a material weakness
regarding appropriate segregation of duties with respect to and validation of data produced by certain modules of our financial IT systems.
We first determined this weakness in fiscal 2022. Although new controls have been implemented during fiscal 2023, they were put in place
late in the year which did not allow sufficient time for testing of the effectiveness of such controls. We expect to conclude our testing
of effectiveness in fiscal 2024 but we may find that fiscal 2023 remediations were not effective and have to incur additional costs to
adopt new controls. A significant increase in costs in 2024 or any failure to maintain our controls or operation of these controls, could
harm our operations, decrease the reliability of our financial reporting, and cause us to fail to meet our financial reporting obligations,
which could adversely affect our business and reduce our stock price.
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