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Item 7. Management’s Discussion and Analysis

2025-04-15 compared with 2024-04-15 · 238 added, 254 removed, 75 unchanged (87% of the section changed)

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

The following

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

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

This discussion

contains forward-looking statements that involve risks and uncertainties.

You should specifically consider the various risk factors identified

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

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion of our financial condition

and results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December

31, 2024 and 2023 and the notes to those statements included elsewhere in this report.

This discussion contains forward-looking statements

that involve risks and uncertainties.

You should specifically consider the various risk factors identified in this report that could cause

actual results to differ materially from those anticipated in these forward-looking statements.

Business Overview

We believe we are

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

Our rich history

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

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

of part failure leading to a fatal mission.

We believe we are one of the leading manufacturers

of precision components and assemblies for large aerospace and defense contractors.

Our rich history dates to 1941, producing parts for

World War II fighter aircraft.

Since then, we have maintained an impeccable record with no known incidents of part failure leading to

a fatal mission.

We became a public company in 2005.

Our products include

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

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

Our products include landing gear, flight controls,

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

The ultimate end-user for most of

our products is the U.S.

government, international governments, and commercial global airlines.

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

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

Although our net

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

a number of their subsidiaries and/or business units.

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

and programs including:

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

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

In many cases,

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

Whether it is a small individual component

for assembly by others or complete assemblies we manufacture ourselves, our high quality and extremely reliable products are used in mission

critical operations that are essential for safety of military personnel and civilians.

Although our net sales are concentrated amongst

a number of defense and aerospace prime contractors, we have cultivated long-standing relationships with a number of their subsidiaries

and/or business units.

Additionally, our net sales are generated across several high-profile platforms and programs including:

Hornet, the E-2 Hawkeye, the UH-60 Black Hawk Helicopters, Geared Turbo Engines (used on smaller aircraft such as the Airbus A220 and

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

In many cases, we are the sole or single

supplier of certain parts and components and receive LTAs from our customers, both demonstrating their commitment to us.

Winning a new contract award is highly competitive.

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a highly trained and close- knit team of over 184 professionals committed to driving excellence and precision in every aspect of our operations.

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

impacted by timing.

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

efficiencies, price competition and general business operating environments.

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

to deliver replacement parts on short notice.

Our period-to-period net sales and operating results

are significantly impacted by timing.

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

of products, production efficiencies, price competition and general business operating environments.

In some cases, our gross profit is

impacted by our ability to deliver replacement parts on short notice.

Our operations have a large percentage of fixed factory overhead.

As a result, our profit

margins are highly variable with sales volumes.

For the past several

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

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

Additionally, we expanded our sales and marketing efforts, with

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

Fiscal 2023 marked a year of overall progress

and positioning for growth.

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

business growth.

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

With total unfilled

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

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

financial position.

As a result, our profit margins are highly variable with sales volumes.

For the past several years, despite facing significant

financial and operational challenges, we have strategically invested substantial amounts in new capital equipment, tooling, and processes

to bolster our competitive position.

Additionally, we expanded our sales and marketing efforts, with a sharp focus on expanding relationships

with existing customers and cultivating new ones.

Fiscal 2024 marked a year of overall progress and positioning for growth.

Looking forward

to fiscal 2025, our business strategy is geared towards achieving sustainable and profitable business growth.

We are firmly focused on

securing new contract awards, improving operations and successful execution.

With total unfilled contract values amounting

to $271.3 million (including our $117.9 million in backlog and all potential orders against LTA agreements previously awarded to us),

as of December 31, 2024, we are confident in our ability to boost sales in 2025, attain profitability and improve our financial position.

RESULTS OF OPERATIONS

Years ended December 31, 2024 and 2023:

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Percentage of

$ (1,722,000 )

Percent Change

Cost of sales

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Other income, net

Gain on write-off of accounts payable

Provision for income taxes

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$ (2,131,000 )

$ (1,055,000 )

Balance Sheet Data:

Percent Change

Working capital

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Comparison of Fiscal 2024 to 2023

Net sales in 2023 were

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

The year-over-year decrease in net

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

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

The composition of

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

Net sales in 2024 were $55,108,000, an increase of $3,592,000 or 7.0%,

compared with $51,516,000 that we achieved in 2023.

The year-over-year increase in net sales was primarily driven by the impact of the

Company’s enhanced sales and marketing initiatives which contributed to higher shipment volumes against our expanding backlog.

Additionally,

there have been changes in customer mix and production requirements for other key platforms and programs.

The composition of customers that exceeded 10%

of our net sales in either 2024 or 2023 are shown below:

Percentage of Net Sales

Lockheed Martin

United States Government

(A) RTX includes Collins Landing Systems and Collins Aerostructures

The composition of our net sales by platform or

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

RTX includes Collins Landing Systems and Collins Aerostructures

The composition of our net sales by platform or program profiles for

the years ended December 31, 2024 and 2023 are shown below:

Percentage of Net Sales

Platform or Program

UH-60 Blank Hawk Helicopter

CH-53 Helicopter

UH-60 Black Hawk Helicopter

F-35 Lightning II

F-15 Eagle Tactical Fighter

CH-53 Helicopter

All other platforms

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

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

compared to the level we achieved in 2023.

Period-to-period changes in customer mix and related

platforms and programs are largely attributable to customer requirements, availability of parts, production capacity and timing.

Gross Profit:

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

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

This improvement can be attributable to

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

Gross profit for the

year ended December 31, 2024, amounted to $8,932,000, an increase from the $7,428,000 achieved in 2023.

Our gross profit percentage in

fiscal 2024 increased to 16.2% from the 14.4% we achieved in 2023.

This improvement can be attributed to our increase in sales, changes

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

Operating Expenses :

In fiscal 2024,

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

As a percentage of consolidated net sales,

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

The increase in both dollars and percentage was primarily

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

operating expenses totaled $8,473,000, higher than the $7,723,000 recorded in 2023.

As a percentage of consolidated net sales, operating

expenses rose to 15.4%, compared to the 15.0% achieved in fiscal 2023.

The increase in both dollars and percentage was primarily driven

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

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

Interest Expense:

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

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

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

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

Net loss for the year ended

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

LIQUIDITY AND

CAPITAL RESOURCES

As of December 31,

2023, we have debt service requirements related to:

Interest expense

(which includes amortization of deferred financing costs) was $1,893,000 in fiscal 2024, a decrease of $27,000 or 1.4% from $1,920,000

The decrease is primarily attributable to a decrease in the average amount outstanding under our Current Credit Facility.

average interest rate on our Current Credit Facility increased to 7.66% in 2024 as compared to 7.55% in 2023.

Net loss for the year

ended December 31, 2024 was $1,366,000, compared to a net loss of $2,131,000 for the year ended December 31, 2023, for the reasons discussed

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2024, we have debt service

requirements related to:

Outstanding indebtedness under our Current Credit Facility of $18,130,000 (consisting of a Revolving Loan of $12,905,000 and a Term Loan in the amount of $5,225,000).

This debt matures on December 30, 2025, and requires us to make monthly payments of approximately $68,000 in 2025.

Related Party Notes of

approximately $6,162,000.

This debt matures on July 1, 2026.

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

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

Various equipment leases

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

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

Related Party Notes of approximately $6,162,000.

This debt matures

on July 1, 2026.

Pursuant to the Current Credit Facility we are permitted to make principal payments against this debt with money raised

pursuant to the sale of our securities under our Registration Statement on Form S-3 declared effective December 19, 2024.

to December 31, 2024 we repaid approximately $1,291,000 of this debt out of proceeds of such sales.

Various equipment leases and contractual obligations related to our

normal business, including advances under our Solar Facility for the installation of solar energy systems including the replacement of

the existing roof at our Sterling Facility.

Under the terms of the Current Credit Facility,

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

This ratio is

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

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

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

compliance with all other covenants.

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

Although we have started discussions with our

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

such waiver will not be granted.

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

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

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

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

Matters”, related to the classification of callable debt.

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

which substantially all of our cash receipts are remitted.

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

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

to the collection account.

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

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

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

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

of our auditors contained in this report.

as amended, we are required to achieve prescribed levels of EBITDA (as defined in the Current Credit Facility) at the end of each Fiscal

Quarter on a rolling basis, for the Fiscal Quarters ending September 30, 2024 and December 31, 2024.

Beginning with the Fiscal Quarter

ending March 31, 2025 we are required to meet a prescribed 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 lease

expenses as divided by EBITDA (as defined in the Current Credit Facility) which represents net income (loss) before interest, taxes, depreciation

and amortization.

For the twelve months cumulative period ending December 31, 2024, we achieved an EBITDA of $3,640,000 as compared to

the required $2,800,000.

As of December 31, 2024, we met all the financial

and business covenants required under the terms of the Current Credit Facility which included a minimum EBITDA on a twelve-month basis

of $2.8 million.

In the past, we have not met our financial and business covenants, most recently as of March 31, 2024, and therefore

historically classified the term loan at December 31, 2023 in accordance with the guidance in Accounting Standards Codification (“ASC”)

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

The Current Credit Facility expires on December

In addition, we are required to maintain a collection account with our lender into which substantially all cash receipts are

If we were to default under the Current Credit Facility, our lender could choose to increase the rate of interest or refuse

to make loans under the revolving portion of the Current Credit Facility and keep the funds remitted to the collection account.

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

If the lender were to cease making new loans

under the revolving facility, we would lack the funds to continue operations.

The Current Credit Facility expiration date and the rights

granted to the lender, combined with the reasonable possibility that the we might fail to meet covenants in the future, raise substantial

doubt about our ability to continue as a going concern for the one year commencing as of the date of filing this report.

The following is a brief discussion of recent

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

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

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

It also provided for the establishment of a Capital

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

In 2022, we borrowed $878,000,

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

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

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

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

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

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

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

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

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

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

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

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

expenditures (as defined) in excess of permitted amounts.

This amendment further revised the Fixed Charge Coverage Ratio by requiring

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

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

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

On November 20, 2023, we entered into a Sixth Amendment that waived defaults caused by the failure by us to achieve the Fixed Charge Coverage Ratio of the Fifth Amendment and because we purchased capital expenditures (as defined) in excess of permitted amounts.

This amendment further revised the Fixed Charge Coverage Ratio by requiring it to be calculated on a rolling period basis and not be less than, (a) 1.10x (as calculated on a six-months basis) for the fiscal quarter ending March 31, 2024, (b) 1.20x (as calculated on a nine-months basis) for the fiscal quarter ending June 30, 2024, and (c) 1.25 (as calculated on a twelve-months basis) for all fiscal quarters beginning with September 30, 2024, until the Current Credit Facility expires.

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

In connection

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

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

On May 31, 2024, we entered into a Seventh Amendment that waived the default caused by our failure to achieve the required Fixed Charge Coverage Ratio of the Sixth Amendment.

This amendment further revised our Financial Covenants.

For the six months ending June 30, 2024 our EBITDA shall not be less than $740,000;

for the nine months ending September 30, 2024 our EBITDA shall not be less than $1,500,000;

for the twelve months ending December 31, 2024 our EBITDA shall not be less than $2,800,000.

For the rolling twelve-month period ending March 31, 2025, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x.

Beginning with the rolling twelve-month period ending June 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage Ratio of 1.25x.

All other covenants remain unchanged.

Additionally, this amendment increased the Term Loan by approximately $1,000,000 to $5,700,000, with monthly principal installments in the amount of $68,000.

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

On January 30, 2025, we entered into an Eighth Amendment to provide for an additional Term Loan in the amount of $1,640,000 for the acquisition of additional equipment.

The monthly principal installments on this additional Term Loan are $19,524 This amendment further revised our Financial Covenants.

For the rolling twelve-month period ending March 31, 2025 and June 30, 2035, we are required to achieve a Fixed Charge Coverage Ratio of 1.05x.

Beginning with the rolling twelve-month period ending September 30, 2025 and going forward the Company is required to achieve a Fixed Charge Coverage Ratio of 1.25x.

All other covenants remain unchanged.

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

Although navigating the current business landscape

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As of December 31, 2024, we have borrowing capacity of approximately $7,095,000 under

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

In addition to required

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

For so long as the Term Loan under

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

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

of the Term Loan.

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

following such fiscal year.

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

In addition to the

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

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

the Revolving Loan.

In addition to required Term Loan payments of

approximately $1,011,000 in fiscal 2025, we may have to make additional payments.

For so long as the Term Loan under the Current Credit

Facility remains outstanding, if Excess Cash Flow (as defined) is a positive amount for any fiscal year, we are obligated to pay an amount

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

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

such fiscal year.

For the fiscal year ended December 31, 2024, based on the calculation there is a $43,500 Excess Cash Flow payment required.

In addition to the outstanding indebtedness under

the Current Credit Facility and Related Party Notes, we have various equipment leases and contractual obligations of an ongoing nature

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

Our material cash requirements are for debt service,

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Based on our current revenue

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

However, if we are

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

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

The following table

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

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

we must pay or refinance large portions of our

indebtedness prior to December 30, 2025, and July 1, 2026.

Further, as a condition to refinancing our Current Credit Facility prior to

December 31, 2025, our lender may require that the holders of our Related Party Notes extend or otherwise modify the subordination agreements

they have given in favor of the lender.

Since it is not likely that we will be able to pay this debt, we have initiated steps to satisfy

portions and refinance the balance.

These steps included entering an At The Market Offering Agreement dated December 13, 2024, with

Craig-Hallum Capital Group LLC pursuant to which, as of March 31, 2025, we have sold 326,791 shares of our common stock for gross proceeds

of $1,412,000 of which $1,291,000 has been used to satisfy portions of the Related Party Notes.

We expect to engage in discussions during 2025 with our lender under

the Current Credit Facility and related party note holders to explore potential extensions or refinancing of our obligations.

our indebtedness 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.

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.

The following table summarizes our net cash flow

from operating, investing and financing activities for the periods indicated (in thousands):

Cash provided by (used in)

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Cash Provided By Operating Activities

For the year ended

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

The substantial increase

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

receivable and inventory levels.

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

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

Investing Activities

We continue to make significant investments to enhance our competitiveness

and market position.

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

and equipment.

We continue to make

strategic investments in capital equipment to enhance our competitiveness.

The investments in 2023 and 2022 increased production efficiency

and speed, while maintaining closer tolerances.

For the year ended December 31, 2024, we generated

cash flows from operations of $324,000 as compared to $4,862,000 for fiscal 2023.

The decrease in cash flows was primarily due to

the use of a portion, $2,442,000, of customer deposits which had been advanced prior to 2024 for the procurement of long lead time raw

materials expected to be utilized in 2024.

Cash Used In Investing Activities

We continue to make significant investments to

enhance our competitiveness and market position.

Cash used in investing activities of $2,285,000 and $2,112,000, in 2024 and 2023, respectively,

was for new property and equipment.

We continue to make strategic investments in capital

equipment to enhance our competitiveness.

The investments in 2024 and 2023 increased production efficiency and speed, while maintaining

closer tolerances.

They also expanded the size of products we can manufacture.

We expect to invest approximately

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

Cash Provided

by Financing Activities

For the year ended

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

During fiscal 2023, we reduced borrowings under our Current Credit

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

the Term Loan).

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

During fiscal

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

For the year ended

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

During fiscal 2022, we increased borrowings under our Current

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

against the Term loan).

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

$250,000 of Related Loan principal

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

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

We expect to invest approximately $1,600,000 in 2025 for

new or upgraded equipment.

Cash Provided by (Used In) Financing

For the year ended December 31, 2024, cash provided

by financing activities was $2,368,000.

During fiscal 2024, we increased borrowings under our Current Credit Facility by $2,238,000 (consisting

of a net increase in Revolving Loan borrowings of $2,101,000 and a net increase of $137,000 against the Term Loan) and received advances

of $533,000 against the Solar Facility.

We also made payments of $196,000 pursuant to financing lease obligations and $9,000 on a loan

For the year ended December 31, 2023, cash used

in financing activities was $2,685,000.

During fiscal 2023, we reduced borrowings under our Current Credit Facility by $2,921,000 (consisting

of net reduction in Revolving Loan borrowings of $2,548,000 and a net decrease of $373,000 against the Term Loan).

We also made payments

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

During fiscal 2023, we also took advances of $393,000

against the Solar Facility including origination fees of $25,000.

Critical Accounting Estimates

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Use of Estimates.

The preparation of financial statements in accordance

with generally accepted accounting principles in the U.S.

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

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

amounts of revenues and expenses during the reporting period.

The financial statements include estimates based on currently available

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

Significant estimates in these financial statements

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

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

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

The preparation of financial

statements in accordance with generally accepted accounting principles in the U.S.

requires us to make estimates and assumptions that

affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenues and expenses during the reporting period.

The financial statements include estimates based

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

Significant estimates in

these financial statements include, inventory valuation and income tax provision.

Changes in the status of certain facts or circumstances

could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ

from the estimates and assumptions.

Below is a description of our critical accounting estimates:

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

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

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

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

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

Impairment of Long-Lived Assets.

We review long-lived assets for impairment

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

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

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

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

and costs related to the asset groups subject to review.

Forecasts require assumptions about demand for our products and future market

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

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

The effect of any

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

In addition, we estimate the useful lives

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

Inventory Valuation, which includes the estimates

and methodology used in accounting for the transition of production costs to inventory costs.

In our consolidated financial statements,

inventory is reflected at the lower of cost or 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 (defined as goods which

do not have an open order and have not had movement for two years), obsolescence and for other impairments of value.

Income Taxes.

We account for income taxes under the asset and

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

This approach requires the recognition of deferred tax assets and

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

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

Developing the provision

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

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

deferred tax assets.

We account for income taxes under the asset and liability method, based on the income tax laws in the United States.

This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse.

Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets.

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

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

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

We will continue

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

Our judgments and tax strategies are subject to audit by various

taxing authorities.

Allowance for Credit Loss on Accounts Receivable.

We account for Credit

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

Measurement of Credit

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

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

If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made.

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

Our judgments and tax strategies are subject to audit by various taxing authorities.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

disclosure is required in response to this Item.

STATEMENTS AND SUPPLEMENTARY DATA

No disclosure is required in response to this Item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 7. Management’s Discussion and Analysis