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.
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 emphasis 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.
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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 2024 and 2023, four customers, accounted for approximately 73.4%
and 64.2% 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.
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.
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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 have a large percentage of fixed factory overhead relative to our overall expenses. Consequently, our gross profit as a percentage
of 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 sales volume would likely cause 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 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.
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 to 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 56% of our assets as
of December 31, 2024. 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.
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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 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 places 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, increase our customers’ reliance upon us 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 new 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 new services or be able to ultimately
meet our customer requirements. If we are unsuccessful, it could hurt our relationship with our customers.
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.
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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.
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 and 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.
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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.
Complying with the requirements imposed by the
U.S. Government and our customers with respect to privacy, data governance, data protection and cybersecurity is costly and requires a
significant amount of attention form management.
Any disruptive national or international
events, such as potential future public health crises, ongoing or new conflicts, domestic or foreign terrorist activities, banking crises,
the imposition of tariffs, shifts in government alliances, 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, the imposition of tariffs, shifts in government alliances, 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 ongoing war with 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, tariffs and other issues, 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. Conversely, many nations chose to rely upon U.S. manufacturers as their primary source for defense products, such
as helicopters and fighter aircraft. 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.
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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, 2024, we have total indebtedness
of approximately $26,283,000, 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, 2024, we had approximately
$18,130,000 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 2024 was 7.66%. This indebtedness is secured by
a lien on substantially all our assets.
Additionally, as of December 31, 2024, we had
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 interest rate
ranging between 7% and 12% per year. Subsequent to December 31, 2024, we repaid approximately $1,291,000 of this debt.
In addition to $1,007,000 of finance lease obligations
and a $14,000 vehicle loan, we also had $970,000 of borrowings for the solar energy systems installed at our Barkhamsted facility pursuant
to a financing agreement (“Solar Facility”) with CT Green Bank. On October 1, 2024, the Solar Facility converted to a 20-year
level payment term loan.
If we are unable to pay or refinance 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. Since it is unlikely that we will be able to pay this debt, we have initiated steps to satisfy
portions and refinance the balance. 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 2024 on borrowings outstanding on the Current Credit Facility was 7.66% and this interest rate may increase in the future.
The weighted average interest rate paid during
the year-ended December 31, 2024 on borrowings outstanding on the Current Credit Facility was 7.66% as compared to 7.55% for the year-ended
December 31, 2023, the increase reflects 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.
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We have a history of net losses, need to refinance our bank debt
and the opinion of our auditor contains an explanatory paragraph as to our ability to continue as a going concern.
We incurred net losses for the years ended December
31, 2024, 2023 and 2022 of $1,366,000, $2,131,000 and $1,076,000, respectively. As of December 31, 2024, we had approximately $18,130,000
of indebtedness outstanding pursuant to our Current Credit Facility that matures on December 30, 2025 with Webster Bank (“Current
Credit Facility”) and 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. We must pay or refinance
large portions of this indebtedness prior to its respective due dates. Further, as a condition to refinancing our Current Credit Facility
prior to December 31, 2025, Webster 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 the sale of shares of our common stock pursuant to our Registration
Statement on Form S-3 that was declared effective on December 19, 2024. 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. Because of the
uncertainty regarding our ability to refinance our indebtedness, our auditors have included an explanatory paragraph in their opinion
as to our ability to continue as a going concern. Refinancing 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. 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.
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. As of December 31, 2024, we were in compliance with the minimum
EBITDA (as defined in the Current Credit Facility) which represents net income (or loss) before interest, taxes, depreciation and amortization
of $2,800,000 on a rolling twelve-month basis. Beginning in with the fiscal quarter ending March 31, 2025 on a rolling twelve-month basis
and continuing for the fiscal quarter ending June 30, 2025 on a rolling twelve-month basis we are required to achieve a Fixed Charge Coverage
Ratio (as defined) of 1.05x which is a financial metric that is used to measure our ability to cover fixed charges such as interest and
lease expenses as divided by EBITDA. This metric increase for future fiscal quarter on a rolling twelve-month basis to 1.25x. If we were
not in compliance with the required covenant we would have to seek a waiver with our lender, but we may not be able to do so.
Even if we obtain a waiver for the failure to
meet a financial covenant, if we do not achieve our fiscal 2025 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.
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.
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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 $4,871,000 of Related
Party Notes as of March 31, 2025, some of which are convertible into our common stock. Although the Related Party Notes are subordinate
to the $18,130,000 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.
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 imposition of tariffs, shifts in international alliances, 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.
15
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. 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.
16
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, 2024, 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 and 2024, we will need
to enhance and further formalize these controls during fiscal 2025. We expect to conclude our testing of effectiveness in fiscal 2025
but we may find that fiscal 2023 and 2024 remediations were not effective and have to incur additional costs to adopt new controls. A
significant increase in costs in 2025 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.
17
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.