What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-08-19 compared with 2021-04-15 · 581 added, 230 removed, 96 unchanged (89% of the section changed)

8 unchanged sentences

discussion and analysis.

American Listing Standards Non-Compliance and Delisting Determination

May 19, 2022, the Exchange announced the suspension of trading of our common stock due to non-compliance with the Exchange’s

SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Company Guide and announced that it

was initiating proceedings to delist our common stock.

The Company filed a request for review of the Exchange’s determination

to initiate delisting proceedings to the Committee.

A hearing for this review before a Listing Qualification Panel of the Committee

has been scheduled for September 7, 2022.

The delisting action has been stayed pending the outcome of the review.

We will become current with our SEC reports upon the filing of the 2022 Q1 Form 10-Q and the 2022 Q2 Form 10-Q.

The Company believes that becoming current with our SEC reports will resolve the condition that led to NYSE American suspending trading in the Company’s common stock on the Exchange and its determination to commence proceedings to delist the common stock from the Exchange.

The 2022 Q1 Form 10-Q and 2022 Q2 Form 10-Q will be filed as soon as practicable.

We cannot assure you that if the Company becomes current with our SEC reports before the Hearing or the outcome of the Hearing will result in the Exchange changing its delisting determination or that our common stock will resume trading on the Exchange in the future.

September 17, 2021, we received notice from the Exchange indicating that the Company does not meet the continued listing standards

set forth in Part 10 of the Company Guide.

The Company is not in compliance with Section 1003(a)(i) of the Company Guide since

it has stockholders’ equity of less than $2.0 million and losses from continuing operations and/or net losses in two of

its three most recent fiscal years and Section 1003(a)(ii) of the Company Guide since it has stockholders’ equity of less

than $4.0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years.

is therefore subject to the procedures and requirements of Section 1009 of the Company Guide and was required to, and timely did,

submit a plan to the Exchange addressing how the Company intends to regain compliance with the continued listing standards by

March 17, 2023 (the “Plan”).

On November 19, 2021, we received notice from the Exchange that it accepted the Plan,

subject to periodic review, including quarterly monitoring, for compliance with the Plan.

If the Company’s common stock

is not delisted from the Exchange as a result of the Company’s delayed filings as described above and (i) the Company is

not in compliance with the continued listing standards by March 17, 2023 or (ii) the Company does not make progress consistent

with the Plan during the plan period, the Exchange staff may initiate delisting proceedings as appropriate.

Part I Item 1A Risk Factors - “ The NYSE American exchange has suspended trading of our common stock and may delist our

common stock from trading on the exchange.

If our common stock is delisted from the NYSE American exchange, our business, financial

condition, results of operations, stock price and investors’ ability to make transactions in our common stock could be adversely

affected and the liquidity of our stock and our ability to obtain financing could be impaired”.

of Common Stock on Expert Market

Company is not current in its SEC reporting obligations with respect to its 2022 Q1 Form 10-Q and its 2022 Q2 Form 10-Q.

Companies that are not current

in their SEC reporting obligations in accordance with the provisions of Rule 15c-11 (“Rule 15c2-11”) promulgated under

the Securities Exchange Act of 1934, as amended, do not have current information publicly available and do not meet the requirements

for ongoing quoting of their securities on one of the public markets (the “OTC Markets”) operated by the OTC Markets

Effective July 15, 2022, the Company’s common stock is quoted on the OTC Markets Group’s “Expert

Expert Market is available for unsolicited quotes only, meaning broker-dealers may use the Expert Market to publish unsolicited

quotes representing orders from retail and institutional investors who are not affiliates or insiders of the Company.

in Expert Market securities are made available to broker-dealers, institutions, and other sophisticated investors.

investors are not assured of the opportunity to purchase or sell their shares when they desire to do so or at all.

Part I Item 1A Risk Factors - “There is currently a very limited trading market for our common stock and investors are

not assured of the opportunity to make transactions in our common stock.”

due to Inventory Costing Errors and Insufficient Reserves

previously reported, on June 4, 2021, the audit and finance committee (the “Audit and Finance Committee”) of the board

of directors of the Company determined, based on the recommendation of management and in consultation with CohnReznick LLP (“CohnReznick”),

the Company’s independent registered public accounting firm, that the Company’s financial statements which were included

in its Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters ended

March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC should no longer be relied upon due to errors in such

financial statements relating to the recording and reporting of inventory costing and related internal controls (the “Inventory

Costing Errors”) and that management’s reports on the effectiveness of internal control over financial reporting,

press releases, and investor communications describing the Company’s financial statements for such periods should no longer

be relied upon.

The Company’s management identified the Inventory Costing Errors during its inventory testing procedures

for the preparation of the Company’s financial statements for the quarterly period ended March 31, 2021.

At the time of

the June 2021 disclosure, the Company estimated and disclosed that the Inventory Costing Errors were expected to increase the

2020 net loss reported on the Annual Report on Form 10-K for the year ended December 31, 2020 by $1.9 million to $2.3 million.

The Company has determined that the Inventory Costing Errors increased 2020 net loss by $2,010,084.

correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain

inventory items required additional reserves.

The Company reevaluated the sufficiency of its provisions for loss contracts and

inventory reserves that it had previously recorded and concluded that increases to these reserves were required.

The insufficient

reserves resulting from such reserve increases are referred to as “Additional Inventory Reserves” and “Loss

Contract Reserve” and are together referred to as the “Insufficient Reserves.” It was further determined by

management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.

November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation

with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included

in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon

due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly,

management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications

describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company

expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Quarterly

Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC (the “Original

Forms 10-Q”) by filing the Comprehensive Form 10-K/A.

Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined

that net loss for the years ended December 31, 2020 and 2019 was $324,231 and $2,189,728, respectively, greater than the net loss

reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on

Form 10-K for the fiscal year ended December 31, 2019.

both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended

December 31, 2020 and 2019 was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Annual Report

on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal year

ended December 31, 2019 and net loss for the quarters ended March 31, 2020, June 30, 2020 was $544,836 and $763,730, respectively,

greater than the net loss reported in the respective Quarterly Reports on Form 10-Q for such periods and the net income for the

quarter ended September 30, 2020 was $24,556 more than the net income reported in the Quarterly Report for such period.

Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities

ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods

received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods.

The Inventory Costing Errors affected the income reported with respect to the Company’s Non-POC Contracts.

The Inventory

Costing Errors did not affect income reported with respect to the Company’s POC Contracts.

The Loss Contract Reserve and

the Additional Inventory Reserves also only affected the income reported with respect to the Company’s Non-POC Contracts,

and did not affect the income reported with respect to the Company’s POC Contracts.

The Inventory Costing Errors and the

Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.

has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions

of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each

of the applicable periods.

As a result of the Inventory Costing Errors and the Insufficient Reserves, management has determined

that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly

periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019.

Item 9A – Controls and Procedures within this Annual Report on Form 10-K for a description of these matters.

a result of the restatement caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net loss for

the years ended December 31, 2020 and December 31, 2019 which was $2,334,315 and $2,300,083, respectively, greater than the net

loss reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Original Form

10-K”) and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, net loss for the

quarters ended March 31, 2020 and June 30, 2020 which was $544,836 and $763,730, respectively, greater than the net loss reported

in the respective Original Forms 10-Q, and net income for the quarter ended September 30, 2020 which was $24,556 greater than

the net income reported in the Original Form 10-Q.

The Inventory Costing Errors and the Insufficient Reserves did not affect reported

revenue or cash flows for the years ended December 31, 2020 or December 31, 2019, or for the quarters ended March 31, June 30

and September 30, 2020.

Comprehensive Form 10-K/A contains our audited restated annual financial statements as of and for the years ended December 31,

2020 and 2019, as well as our unaudited restated quarterly financial statements as of and for the quarters ended March 31, 2020,

June 30, 2020 and September 30, 2020.

The restatement is discussed in more detail within Part II, Item 8 Note 16, “Restatement

of Previously Issued Consolidated Financial Statements” in the notes to the consolidated financial statements included in

this Annual Report on Form 10-K.

and Waivers to the BankUnited Facility

May 11, 2021, we entered into the Seventh Amendment (defined below).

Under the Seventh Amendment, the parties amended the Credit

Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to July 31, 2022, and (b) amending the

leverage ratio covenant .

Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.

October 28, 2021, we entered into the Eighth Amendment (defined below).

Under the Eighth Amendment, the parties amended the Credit

Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the availability

under the Revolving Loan from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0

million in a combination of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional

$750,000 of the principal balance of the Term Loan in three installments of $250,000 on November 30, 2021, December

31, 2021 and March 31, 2022 in addition to $200,000 regular monthly principal payments through December 31, 2022, (d) amending

the minimum debt service coverage ratio covenant and (e) amending the maximum leverage ratio covenant.

Additionally, under the

Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial

In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment Fee”) was earned

by the lenders on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize rather than pay in cash.

As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in

agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan.

The Company has recorded this payable

to its financial statements accordingly.

April 12, 2022 the Company entered into the Ninth Amendment (defined below) to the Credit Agreement.

Under the Ninth Amendment,

the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September

30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments

of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly

principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment

Fee as follows:

through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%;

from July 1, 2022 through

August 31, 2022, Prime Rate plus 5%;

from September 1, 2022 through October 31, 2022, Prime Rate plus 6%;

from November 1, 2022 through December 31, 2022, Prime Rate plus 7%;

and from January 1, 2023 through September 30, 2023,

Prime Rate plus 8%.

Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended.

also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial

information and waived permanently late delivery of certain pro-forma budget information.

August 19, 2022, we entered into the Tenth Amendment (defined below).

Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal

quarter ending September 30, 2022 to 5.0 to 1.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance

requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,024.81

of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 of reserves taken

with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s

covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December

31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter

ending March 31, 2022.

Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by

the Credit Agreement.

Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for

in the previous paragraph):

(a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four

quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to

1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter;

(b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to

1.0 for the trailing four quarter period ended June 30, 2022, 5.0 to 1.0 for the trailing four quarter period ended

September 30, 2022 and 4.0 to 1 for the trailing four quarter periods thereafter;

end of each fiscal quarter being no less than $1.00 commencing June 30, 2022;

and (d) a minimum adjusted EBITDA at the end

of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022).

The additional principal

payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for

purposes of calculating compliance with each of the financial covenants.

Protection Program (PPP) Loan

April 10, 2020, we entered into the PPP Loan, with BNB Bank (now part of Dime Community Bank) as the Lender, in an aggregate principal

amount of $4,795,000, pursuant to the Paycheck Protection Program under the CARES Act.

The PPP Loan is evidenced by the Note.

Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six

months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the Small Business Administration

The Note provides for customary events of default including, among other things, cross-defaults on any other loan with

The PPP Loan may be accelerated upon the occurrence of an event of default.

November 2, 2020 the Company applied to the Lender for full forgiveness of the PPP Loan, calculated in accordance with the

terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act.

We were notified by our lender that our application

was accepted and forwarded to the SBA, from whom, we are currently awaiting a response.

To date the lender has not requested payment

of any interest or principal.

impact that the recent COVID-19 pandemic will have on our business is uncertain.

Our staff has been working modified hours and

remotely due to social distancing protocols and concern over their safety and the safety of others since on or about March 19,

late 2020, we began to experience an increased rate of employees testing positive for COVID-19 and we took steps to mitigate

virus transmission within the workplace.

These steps included adding a second manufacturing shift to lessen employee density on

the manufacturing floor and to require most non-manufacturing personnel to work from home.

These measures continued into the current

We believe it is possible that the impact of the COVID-19 pandemic could have an adverse effect on the results of our operations,

financial position and cash flow for the year ending December 31, 2021 ,

particularly in the first fiscal quarter.

We have taken mitigating steps in an attempt to reduce the

adverse effects.

For example, we have curtailed discretionary spending, deferred all business travel, and taken other steps to

preserve cash.

We have also taken action to more closely manage the flow of materials to be more responsive to unanticipated changes

in customer delivery schedules.

previously reported, on April 10, 2020, we obtained a loan from Dime Community Bank (formerly BNB Bank) as the lender (“Dime”),

in the principal amount of $4,795,000 (“PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus

Aid, Relief, and Economic Security (CARES) Act as administered by the U.S.

Small Business Administration (“SBA”).

The Company submitted its PPP Loan forgiveness application and the loan necessity questionnaire to the SBA through Dime.

July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon were fully forgiven

by the SBA and that the forgiveness payment date was July 1, 2021.

The forgiveness of the PPP Loan was recognized during the Company’s

third fiscal quarter ending September 30, 2021.

The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria,

regardless of size.

These audits may occur after forgiveness has been granted.

In accordance with the Coronavirus Aid, Relief

and Economic Security (CARES) Act, all borrowers are required to maintain their PPP loan documentation for six years after the

PPP Loan was forgiven and to provide that documentation to the SBA upon request.

of Class Action

previously disclosed, a consolidated class action lawsuit has been filed against the Company, Douglas McCrosson, the Company’s

former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters

of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B.

The Amended Complaint

in the action asserts claims on behalf of two plaintiff classes:

(i) purchasers of the Company’s common stock issued pursuant

to and/or traceable to the Company’s offering conducted on or about October 16, 2018;

and (ii) purchasers of the Company’s

common stock between March 22, 2018 and February 14, 2020.

The Amended Complaint alleges that the defendants violated Sections

11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in the registration

statement and prospectus supplements issued in connection with its October 16, 2018 securities offering.

The Amended Complaint

also alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated by the SEC,

by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14,

Plaintiff seeks unspecified compensatory damages, including interest;

rescission or a rescissory measure of damages;

equitable or injunctive relief;

and costs and expenses, including attorney’s fees and expert fees.

On February 19, 2021,

the Company moved to dismiss the Amended Complaint.

Plaintiff submitted a brief in opposition to the motion to dismiss on April

May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval.

On July 9, 2021, Plaintiff

filed an unopposed motion for preliminary approval of the settlement.

On November 10, 2021, a magistrate judge recommended that

the Court grant the motion for preliminary approval in its entirety.

The Court adopted the recommendation on May 27, 2022, and

entered an order granting preliminary approval of the settlement on June 7, 2022.

The magistrate judge will hold a hearing on

September 9, 2022 to decide whether to grant final approval of the settlement.

After satisfaction of our $750,000 retention,

the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier.

As of March 31,

2021, we have previously paid or accrued to our financial statements covered expenses totaling $750,000, and have therefore met

our directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class

of December 31, 2021, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and

to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,003,259 and an insurance recovery

receivable of $2,850,000;

this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement

Amount to the Plaintiff by our directors’ and officers’ insurance carrier.

impact that the recent COVID-19 pandemic will have on our business remains uncertain.

outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020.

During the latter part of that quarter and subsequent to that quarter end, the COVID-19 pandemic grew, causing non-essential businesses

to shut down and many people to observe the shelter-in-place directive from our state government.

Our business and operations

and the industries in which we operate have been impacted by public and private sector policies and initiatives in the U.S.

address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work.

pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain of our

customers and suppliers, and, if it continues for an extended period of time, it could adversely impact our results of operations

and financial condition.

In response to the COVID-19 impact on our business, we have been and continue to actively mitigate costs.

We have also been taking actions to preserve capital and protect the long-term needs of our businesses, including negotiating

progress payments with our customers and reducing discretionary spending.

For more information on the current and potential impact

of the COVID-19 pandemic on our business, see Risk Factors included in Part I, Item 1A of this Annual Report on Form 10-K.

late 2020, we began to experience an increased rate of employees testing positive for COVID-19 and we took steps to mitigate virus

transmission within the workplace.

These steps included adding a second manufacturing shift to lessen employee density on the

manufacturing floor and to require most non-manufacturing personnel to work from home.

These measures continued into 2021.

these measures, we experienced a relatively high level of absenteeism directly or indirectly related to COVID-19.

We have taken

mitigating steps in an attempt to reduce the adverse effects of COVID-19 on our business.

For example, we have curtailed discretionary

spending and business travel, and taken other steps to preserve cash.

We have also taken action to more closely manage the flow

of materials to be more responsive to unanticipated changes in customer delivery schedules.

Since May 2021 and through the date

of this Annual Report on Form 10-K, we have experienced a decrease in the impact of COVID-19.

However, we believe that the impact

of COVID-19 on illness and absence rates, workflows and productivity at the Company and our business providers has been a contributing

factor to the time required for our financial statement closing processes and the delayed filing of our SEC reports.

Most non-manufacturing

personnel have now returned to their regular in-person work schedules and we have returned to a single day shift manufacturing

operation, although we do continue to experience employees and business partners with new COVID-19 diagnoses on an intermittent

basis and we take needed steps to mitigate these impacts on the Company’s operation as they occur.

following transactions occurred during the periods covered by this Management’s Discussion and Analysis of Financial Condition

6 unchanged sentences

objected to the Company’s calculation of the post-closing working capital adjustment and rejected the determination of BDO,

USA, LLP (“BDO”), the independent accountant appointed by the parties to resolve the dispute.

On September 27, 2019,

the Company filed a notice of motion in the Supreme Court of the State of New York, County of New York, against Air Industries

seeking, among other things, a judgment against Air Industries in the amount of approximately $4.1 million.

In October 2019,

Air Industries and the Company jointly authorized the release to the Company of approximately $619,000 from escrow, which

represented the value of certain undisputed items.

The remaining escrowed amount of approximately $1,381,000 is shown as

restricted cash on the consolidated balance sheet.

The additional disputed amount of approximately $2.1 million is not on

the Company’s consolidated balance sheet due to the uncertainty of collection.

the independent accountant appointed by the parties to resolve the dispute.

On September 27, 2019, the Company filed a notice

of motion in the Supreme Court of the State of New York, County of New York, against Air Industries seeking, among other things,

a judgment against Air Industries in the amount of approximately $4.1 million.

In October 2019, Air Industries and the Company

jointly authorized the release to the Company of approximately $619,000 from escrow, which represented the value of certain

undisputed items.

Company and Air Industries entered into a settlement agreement dated as of December 23, 2020, to resolve the post-closing working

1 unchanged sentence

was released from escrow to the Company on December 28, 2020.

As part of the settlement agreement CPI agreed to give up the right

to pursue the additional disputed working capital amount of approximately $2.1 million.

As part of the settlement agreement CPI Aero agreed to give up the

right to pursue the additional disputed working capital amount of approximately $2.1 million.

Aircraft Company, Inc.

10 unchanged sentences

orders placed with the Company thereunder.

April 29, 2020, the Company received a letter from Triumph Group stating that due to the COVID-19 pandemic, it had received a

significant schedule change from its customer, Gulfstream Aerospace, and requested that we immediately stop work on the contract

we have to produce certain fixed leading edge assemblies on the wing of the G650 business jet.

In May 2020, Triumph Group cancelled

nearly all open orders with the Company, decreasing our G650 leading edge backlog by $3.6 million.

On May 27, 2020, Triumph Group

announced it had reached an agreement in principle to sell the G650 wing program to Gulfstream Aerospace.

On June 12, 2020, the

Company received a joint communication from Gulfstream Aerospace and Triumph Group that stated Gulfstream Aerospace’s intention

at the conclusion of the transaction is to continue to purchase G650 wing components from the Company.

In December 2020, the Company

received purchase orders from Gulfstream Aerospace for G650 wing components.

are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the commercial

10 unchanged sentences

Accounting Policies

January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”

(“ASC 606”), using the modified retrospective method.

In accordance with ASC 606, the Company recognizes revenue when

it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to be

entitled to in exchange for the good or service.

The majority of the Company’s performance obligations are satisfied over

time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs

incurred plus a reasonable profit margin for work completed to date.

Under the over time revenue recognition model, revenue and

gross profit are recognized over the contract period as work is performed based on actual costs incurred and an estimate of

costs to complete and resulting total estimated costs at completion.

Note 3 “Revenue”, for additional information regarding the Company's revenue recognition policy.

February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting

Standards Update (“ASU”) No.

2016-02, “Leases (“ASC 842”)”,

which sets out the principles for the recognition, measurement, presentation and disclosure

of leases for both lessees and lessors.

On January 1, 2019, the Company adopted the new

lease standard using the optional transition method under which comparative financial

information will not be restated and continue to apply the provisions of the previous

lease standard in its annual disclosures for the comparative periods.

In addition, the

new lease standard provides a number of optional practical expedients in transition.

The Company elected the package of practical expedients.

As such, the Company did not

have to reassess whether expired or existing contracts are or contain a lease;

have to reassess the lease classifications or reassess the initial direct costs associated

with expired or existing leases.

842 also provides practical expedients for an entity's ongoing accounting.

The Company elected the short-term lease recognition

exemption under which the Company will not recognize right-of-use (“ROU”) assets or lease liabilities, and this includes

not recognizing ROU assets or lease liabilities for existing short-term leases.

The Company elected the practical expedient to

not separate lease and non-lease components for certain classes of assets (office building).

January 1, 2019, the Company recognized ROU assets and lease liabilities of approximately $5.3 million and $5.9 million, respectively,

on its consolidated balance sheet using an estimated incremental borrowing rate of 6%.

As of December 31, 2020 the Company has

ROU assets and lease liabilities of approximately $4.1 million and $4.4 million, respectively, on its consolidated balance sheet.

In January 2017, the FASB issued Accounting

Standards Update No.

accordance with ASC 606, the Company recognizes revenue when it transfers control of a promised good or service to a customer

in an amount that reflects the consideration it expects to be entitled to in exchange for the good or service.

The majority of

the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative use

to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed

Under the overtime revenue recognition model, revenue and gross profit are recognized over the contract period as work

is performed based on actual costs incurred and an estimate of costs to complete and resulting total estimated costs at completion.

See Part II, Item 8, Note 2 “Revenue Recognition” in the notes to the consolidated financial statements included in

this Form 10-K for additional information regarding the Company’s revenue recognition policy.

is stated at the lower of cost or estimated net realizable value.

Cost is determined using the weighted average method.

capitalizes labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed

to the customer.

The Company regularly reviews inventory quantities on hand, future purchase commitments with its suppliers, and

the estimated usability for its inventory.

If the Company’s review indicates a reduction in usability below carrying value,

it reduces its net inventory to a new cost basis.

Company does not recognize right-of-use (“ROU”) assets or lease liabilities, and this includes not recognizing ROU

assets or lease liabilities for existing short-term leases.

In addition, the Company does not separate lease and non-lease components

for certain classes of assets (office building).

Company’s ROU assets and lease liabilities at December 31, 2021 were approximately $7.8 million and $8.0 million, respectively,

using an estimated incremental borrowing rate of 5%, as compared to ROU assets and lease liabilities as of December 31, 2020 of

$4.1 million and $4.4 million, respectively.

January 2017, the FASB issued Accounting Standards Update No.

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

Simplifying the Test for Goodwill Impairment

(“ASU-2017-04).

ASU 2017-04 is intended to simplify how all entities assess goodwill for impairment.

This is accomplished

by removing the requirement to determine the fair value of individual assets and liabilities in order to calculate a reporting

unit’s “implied” goodwill.

The goodwill impairment test consists of one step comparing the fair value of a reporting

unit with its carrying amount.

An entity should recognize a goodwill impairment charge for the amount by which the carrying amount

exceeds the reporting unit’s fair value.

An entity may still perform the optional

qualitative assessment for a reporting unit to determine if it is more likely than not that goodwill is impaired.

ASU 2017-04 eliminates the requirement to perform a qualitative assessment for any reporting unit with zero or negative carrying

the Test for Goodwill Impairment (“ASU-2017-04).

ASU 2017-04 is intended to simplify how all entities assess goodwill for

This is accomplished by removing the requirement to determine the fair value of individual assets and liabilities

in order to calculate a reporting unit’s “implied” goodwill.

The goodwill impairment test consists of one step

comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize a goodwill impairment charge

for the amount by which the carrying amount exceeds the reporting unit’s fair value.

entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely than not that

goodwill is impaired.

However, the ASU 2017-04 eliminates the requirement to perform a qualitative assessment for any reporting

unit with zero or negative carrying amount.

The Company adopted ASU-2017-4 for the year ended December 31, 2020.

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consolidated financial statements and notes thereto.

Ended December 31, 2020 as Compared to the Year Ended December 31, 2019

for the year ended December 31, 2020 was $87,584,690 compared to $87,518,688 for the year ended December 31, 2019, representing an increase of $66,002.

We experienced revenue increases on our E2-D wing panel kits, our Pacer

Classic III Phase 2 program with USAF as this effort transitions to Phase 3, and our Lockheed Martin F-16 Rudder Island

The revenue increases were partially offset by decreases on our Raytheon NGJ Pod program as we transitioned to our

follow on order, and on the G650 fixed leading edge program.

revenue generated from prime government contracts for the year ended December 31, 2020 was $9,115,983 compared to $6,429,860 for

the year ended December 31, 2019, an increase of $2,686,123.

This increase is primarily a result of increased revenue recognized

on the T-38C Pacer Classic phase 2 aircraft structural modification program which is transitioning from Phase 2 to Phase 3.

Aero was awarded the Phase 3 contract in 2019.

Revenue for the year ended December 31, 2021 was $103,369,544 compared to $87,584,690 for the year ended December 31, 2020,

representing an increase of $15,784,854 or 18%.

We experienced revenue increases on our Raytheon Next Generation Jammer (“NGJ”)

Pod program, Raytheon NRC Wing program and USAF T-38 Pacer Classic program.

generated from prime government contracts for the year ended December 31, 2021 was $3,658,383 compared to $9,115,983 for the year

ended December 31, 2020, a decrease of $5,457,600.

This decrease is primarily a result of decreased revenue recognized on the

T-38 Pacer Classic program and the F-16 program.

generated from government subcontracts for the year ended December 31, 2021 was $93,663,383 compared to $70,106,741 for the year

ended December 31, 2020, an increase of $23,556,642.

The increase in revenue related to the start of a new multi-year award for

the Northrop Grumman E2D program as well as increases related to the NGC WOWP, and the F16 Rudder Island program, offset by a

decrease in the Raytheon NGJ Pod program as described above.

generated from commercial contracts was $8,361,966 for the year ended December 31, 2020 compared to $18,769,302 for the year ended

The increase in revenue related to increases in the following programs;

Next Generation Jammer (“NGJ”) Pod program, the Raytheon NRC Wing program, the Pacer Classic III Phase 3 program,

the Boeing A-10 program, the Northrop Grumman WOWP program and the Lockheed Martin F-35 lock program.

generated from commercial contracts for the year ended December 31, 2021 was $6,047,779 compared to $8,361,966 for the year ended

December 31, 2020, a decrease of $2,314,187.

Most of this decrease resulted from decreased production of the Gulfstream G650

fixed leading edge assembly.

We also had year-over-year revenue declines in our program with Honda as we negotiated an exit to

this unprofitable program.

Revenue from Embraer also declined largely due to decreased business jet demand.

Cost of sales for the years ended December 31, 2020 and 2019 were $75,490,503 and $78,386,997, respectively,

a decrease of $2,896,494 or 4%.

The decrease in revenue resulted from the decrease in the HondaJet program and the

Sikorsky S-92 Kit program.

Cost of sales for the years ended December 31, 2021 and 2020 was $88,364,452 and $77,824,732, respectively,

an increase of $10,539,720, or 14%.

components of cost of sales were as follows:

Factory overhead

Other cost of

Other cost of sales

Cost of sales

for the year ended December 31, 2020 was $56,093,073 compared to $49,920,962 for the

year ended December 31, 2019, an increase of $6,172,111 or 12%.

This increase is primarily

the result of an increase in procurement for the E2D and WOWP programs.

costs for the year ended December 31, 2020 were $6,063,509 compared to $7,778,571 for the year ended December 31, 2019, a decrease

for the year ended December 31, 2021 was $64,628,025 compared to $56,337,476 for the year ended December 31, 2020, an increase

of $8,290,549 or 14.7%.

The decrease is primarily the result of the absence in 2020 of labor associated with the NGJ pod program,

which was very labor intensive, as well as lower labor on the HondaJet and G650 programs.

This increase is primarily the result of an increase in procurement for the Sikorsky HIRSS program, Raytheon

NGJ Mid-Band Pod Program , Raytheon Multi-Purpose Booster Development Wing Assembly program

and the Boeing A-10 Re-wing programs.

costs for the year ended December 31, 2021 were $7,843,520 compared to $6,414,658 for the year ended December 31, 2020, an increase

of $1,428,862 or 22.3%.

The increase is primarily the result o f labor associated with the

Raytheon NGJ Mid-Band Pod program, the Northrop Grumman Tubes program, the Boeing A-10 Re-wing program, and the Lockheed Martin

F-16 Rudder Island program, which were very labor i ntensive .

overhead costs for the year ended December 31, 2021 were $19,462,924 compared to $20,803,029 for the year ended December 31, 2020,

a decrease of $1,340,105 or 6.4%.

This decrease is primarily due to a decrease in factory supplies.

The decrease is primarily the result of more productivity on programs such as the Raytheon NGJ

Mid-Band Pod program, the Northrop Grumman E-2D program, the Northrop Grumman Outer Wing Panel program, the Northrop Grumman Wet

Outer Wing Panel Program, and the Boeing A-10 Re-wing program, which led to higher labor absorption rates and lower overhead costs.

cost of sales relates to items that can increase or decrease cost of sales such as changes in inventory levels, changes in inventory

valuation, changes to inventory reserves, changes in loss contract provisions, absorption variances and direct charges to cost

For the year ended December 31, 2020 there was a reduction of costs in the amount of ($6,669,609) primarily the result of changes

in inventory levels and reductions in loss contract reserves.

valuation, changes to inventory reserves, changes in loss contract provisions and direct charges to cost of sales.

ended December 31, 2021, there was a reduction of costs in the amount of ($3,570,017), primarily the result of changes in inventory

levels and reductions in loss contract reserves.

For the year ended December 31, 2020, there was a reduction in costs of ($5,730,431),

primarily the result of changes in inventory levels and reductions in loss contract reserves.

Gross profit for the year ended December 31, 2021 was $15,005,092 compared to $9,759,958 for the year ended December

31, 2019, an increase of $2,962,496.

31, 2020, an increase of $5,245,134 or 54%.

Gross profit percentage (“gross margin”) for the year ended December 31,

was 13.8% compared to 10.4% for the same period last year.

The increase was primarily on our E2-D kitting programs which experienced

a growth in revenue as well as our exit from unprofitable programs, partially offset by a decrease in gross profit on our Raytheon

Pod program due to lower volumes.

2021 was 14.5% compared to 11.1% for year ended December 31, 2020.

The increase was primarily on the Raytheon NGJ Mid-Band Pod

program, the Northrop Grumman E-2D program, the Northrop Grumman Outer Wing Panel program, the Northrop Grumman Wet Outer Wing

Panel program, and the Boeing A-10 Re-wing program, which experienced growth in revenue, and a decrease in factory overhead costs.

Favorable/Unfavorable

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in changes in total gross profit as follows:

December 31, 2020

December 31, 2019

Favorable adjustments

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$ (1,734,388 )

$ (3,035,624 )

general and administrative expenses

general and administrative expenses (“SG&A”) for the year ended December 31, 2021 were $11,823,921 compared to

$11,562,781 for the year ended December 31, 2019, an increase of $483,389 or 4.2%.

This increase was primarily due to increased

legal and accounting expenses compared to the prior period associated with the prior restatement of our consolidated financial

statements for several prior periods.

$12,046,171 for the year ended December 31, 2020, a decrease of $222,250 or 1.8%.

This decrease was primarily due to decreased

legal and accounting expenses compared to the prior period, which included the costs associated with the 2018 and 2019 restatement

of our consolidated financial statements, partially offset by increases in our business insurance premiums during 2021.

income for the year ended December 31, 2021 was $4,795,000, compared to nil for the year ended December 31, 2020.

The other income

in 2021 was due to the forgiveness of the PPP loan by the SBA on July 31, 2021.

expense for the year ended December 31, 2021 was $1,141,189, compared to $1,421,955 for the year ended December 31, 2020, a decrease

of $280,766 or 19.7%.

The decrease in interest expense is the result of continued principal repayment on our term loan with BankUnited,

lower overall interest rates and a favorable 1% interest rate on our PPP loan with the SBA which we are accruing but not paying.

If the PPP Loan is forgiven, the accrual will be reversed.

(Loss) from operations

We had a profit from operations for the year ended December 31,

2020 of $48,017 compared to a loss from operations of (2,431,090) for the year ended December 31, 2019.

This improvement was primarily

the result of higher revenue and gross profit on the E2D program and the exit from unprofitable programs.

The decrease in interest expense is the result of continued principal repayment on our term loan with Bank

(loss) before provision for income taxes

had an income before provision for income taxes for the year ended December 31, 2021 of $6,834,982 compared to a loss before provision

from income taxes of ($3,708,167) for the year ended December 31, 2020, an increase of $10,543,149.

Excluding the PPP loan forgiveness

by the SBA on July 1, 2021, our income before provision for income taxes for the year ended December 31, 2021 was $2,039,982,

an increase over the prior year of $5,748,149, which was driven by the increase in gross profit, decrease in SG&A and decrease

in interest expense described above.

(benefit) for income taxes .

The income tax (benefit) for the year

ended December 31, 2020 was ($53,500), an effective tax rate of 3.09%.

The tax benefit consists of a refund received from

the 2014 NOL carryback claim and state minimum taxes.

In February 2019, the Company received information that the net

operating loss carryback that was utilized in 2014 was under examination and could possibly be partially disallowed by the

Internal Revenue Service (“IRS”).

This adjustment was an issue of timing of the loss and had no income tax

provision effect.

In June 2020, the Company received a letter from the IRS stating that the returns will be accepted as

The income tax provision (benefit) for the year ended December 31, 2021 of $14,609,

an effective tax rate of 0.21%, compared to a benefit of ($53,414) for the year ended December 31, 2020, an effective tax rate

The income tax provision in 2021 is mostly the result of state franchise and minimum taxes.

The tax benefit in 2020

consists of a refund received from the 2014 NOL carryback claim and state minimum taxes.

In February 2019, the Company received

information that the net operating loss carryback that was utilized in 2014 was under examination and could possibly be partially

disallowed by the Internal Revenue Service (“IRS”).

This adjustment was an issue of timing of the loss and had no

income tax provision effect.

In June 2020, the Company received a letter from the IRS stating that the returns will be accepted

In September 2020, the Company received additional refunds related to the tax years under examination.

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is now closed and there is no uncertain tax position recorded for this item.

income (loss)

income (loss) for the year ended December 31, 2021 was $6,820,373 compared to a net loss of $(3,654,753) for the year ended December

The increase in net income was driven by the increase in gross profit, the PPP loan forgiveness by the SBA on July 1,

2021, the decrease in SG&A and the decrease in interest expense, partly offset by an increase in provision for income taxes.

Basic and diluted earnings per share was $0.56 for the year ended December 31, 2021 calculated utilizing 12,193,826 weighted average

shares outstanding.

Basic and diluted loss per share was $(0.31) for the year ended December 31, 2020 calculated utilizing 11,884,307

weighted average shares outstanding.

the $4,795,000 PPP loan forgiveness by the SBA on July 1, 2021, our net income for the year ended December 31, 2021 was $2,025,373,

an increase over the prior year of $5,680,126, which was driven by the increase in gross profit, the decrease in SG&A and

the decrease in interest expense, partly offset by an increase in provision for income taxes.

Excluding the aforementioned PPP

loan forgiveness by the SBA on July 1, 2021, our basic and diluted earnings per share was $0.17 as compared to the $(0.31) loss

per basic and diluted share for the year ended December 31, 2020.

statements in the “Business Outlook” section and other forward-looking statements of this Annual Report on Form 10-K

2 unchanged sentences

At December 31, 2021, we had working capital of $12,175,776 compared to working capital of $7,674,974 at December 31, 2020,

a decrease of $1,542,345, or 11.1%.

This decrease is primarily the result of an increase in accounts payable and accrued expenses.

A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process

and which do not provide for progress payments.

Costs for which we are not able to bill on a progress basis are components of

contract assets on our consolidated balance sheet and represent the aggregate costs and related earnings for uncompleted contracts

an increase of $4,500,802, or 58.6%.

This increase is primarily the result of a decrease in accounts payable and an increase in

contract assets, net.

A large portion of our cash is used to pay for materials and processing costs associated with contracts that are

in process and which do not provide for progress payments.

Costs for which we are not able to bill on a progress basis are components

of contract assets on our consolidated balance sheet and represent the aggregate costs and related earnings for uncompleted contracts

for which the customer has not yet been billed.

1 unchanged sentence

of billings in accordance with contract terms.

ASC 606 requires us to use estimates in determining revenues, costs and profits and in assigning the amounts to accounting

periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash

that we receive during any reporting period.

Accordingly, it is possible that we may have a shortfall in our cash flow and may

need to borrow money or take steps to defer cash outflows until the reported earnings materialize into actual cash receipts.

ASC 606 requires us to use estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods,

there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that

we receive during any reporting period.

Accordingly, it is possible that we may have a shortfall in our cash flow and may need

to borrow money or take steps to defer cash outflows until the reported earnings materialize into actual cash receipts.

of our programs require us to expend up-front costs that may have to be amortized over a portion of production units.

the case of significant program delays and/or program cancellations, we could experience margin degradation, which may be material for costs that are not recoverable.

Such charges and the loss of up-front

costs could have a material impact on our liquidity and results of operations.

the case of significant program delays and/or program cancellations, we could experience margin degradation, which may be material

for costs that are not recoverable.

Such charges and the loss of up-front costs could have a material impact on our liquidity

and results of operations.

continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well

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December 31, 2021, our cash balance was $6,308,866 compared to $6,033,537 at December 31, 2020, an increase of $275,329.

accounts receivable balance at December 31, 2020 decreased to $4,962,906 from $7,029,602 at December 31, 2019.

Credit Facilities

On March 24, 2016, the Company entered into the BankUnited Facility.

The Credit Agreement entered into in connection with

the BankUnited Facility provided for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and

a $10 million term loan (“Term Loan”).

The Revolving Loan bears interest at a rate as defined in the Credit Agreement.

August 24, 2020, the Company entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement.

the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Company’s Revolving

Loan and Term Loan to May 2, 2022 and making conforming changes to the repayment schedule of the Term Loan, by increasing the

Term Loan $6.0 million and reducing the Revolving Loan by $6.0 million.

The maturities of the Term Loan are included in the maturities

of long-term debt.

BankUnited Facility, as amended by the Sixth Amendment, requires us to maintain the following financial covenants:

a Fixed Cost (Debt Service) coverage ratio of no less than 1.5 to 1.0 at December 31, 2020 and no less than 1.25 to 1.0 for the

trailing four quarter period at the end of each quarter thereafter;

(2) maintain a minimum net income, after taxes, of no less

(3) effective March 31, 2021, maintain a maximum leverage ratio at the end of each quarter for the trailing four quarter

period of no more than 4.0 to 1.0;

(4) maintain a minimum adjusted EBITDA at the end of each quarter of no less than $1 million;

and (5) maintain a minimum liquidity of $3 million at all times.

As of December 31, 2020, the Company was in compliance with all

of the covenants contained in the BankUnited Facility.

of December 31, 2020 and December 31, 2019, the Company had $20.7 million and $26.7 million respectively outstanding under

the BankUnited Facility.

Bank (BNB) On April 10, 2020, we entered into the PPP Loan, with BNB Bank (now part of Dime Community Bank) as the Lender,

receivable balance at December 31, 2021 of $4,967,714 was nearly the same as the balance at December 31, 2020 of $4,962,906.

March 24, 2016, the Company entered into the Credit Agreement.

The BankUnited Facility originally provided for a revolving credit

loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”).

The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement.

August 24, 2020, the Company entered into a Sixth Amendment and Waiver to the Credit Agreement (the “Sixth Amendment”).

Under the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Revolving Loan and Term

Loan to May 2, 2022 and making conforming changes to the repayment schedule of the Term Loan.

The availability under

the Revolving Loan was reduced by $6 million, to $24 million, and the outstanding principal amount on the Term Note

was increased to approximately $7,933,000.

May 11, 2021, the Company entered into a Waiver and Seventh Amendment (“Seventh Amendment”) to the Credit Agreement.

Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan

and the Term Loan to July 31, 2022, and (b) amending the leverage ratio covenant.

Additionally, under the Seventh Amendment,

BankUnited waived late delivery of certain financial information.

October 28, 2021, the Company entered into a Waiver and Eighth Amendment (the “Eighth Amendment”) to the Credit Agreement.

Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan

and the Term Loan to December 31, 2022, (b) reducing the availability under the Revolving Loan from $24 million to $21 million

while eliminating the requirement to maintain a minimum $3.0 million in a combination of Revolving Loan availability and

unrestricted cash, (c) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in

three installments of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $200,000 regular

monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant, and (e) amending

the maximum leverage coverage ratio.

Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance

and waived temporarily, late delivery of certain financial information.

In connection with the Eighth Amendment, a $250,000 amendment

fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind

and accrue and capitalize rather than pay in cash.

As at December 31, 2021, the Amendment Fee payable was posted by BankUnited

to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited

to the Term Loan.

The Company has recorded this payable to its financial statements accordingly.

April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit

Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving

Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal

balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31,

2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest

on the Revolving Loan, Term Loan, and the Amendment Fee as follows:

through June 30, 2022, Prime Rate (as defined in the Credit

Agreement) plus 2.5%;

from July 1, 2022 through August 31, 2022, Prime Rate plus 5%;

from September 1, 2022 through

October 31, 2022, Prime Rate plus 6%;

from November 1, 2022 through December 31, 2022, Prime Rate plus 7%;

and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%.

Additionally, under the Ninth Amendment, the Credit

Agreement financial covenants were amended.

BankUnited also waived or consented to certain covenant non-compliance, waived temporarily

or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget

August 19, 2022, we entered into a Consent, Waiver and Tenth Amendment (“the “Tenth Amendment”) to the Credit Agreement

the Tenth Amendment.

Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio

applicable for the fiscal quarter ending September 30, 2022 to 5.0 to 1.0, (b) waiving and/or consenting to the exclusion from the Company’s

covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022

up to (i) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51

of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from

the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022

and December 31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal

quarter ending March 31, 2022.

Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial

information required by the Credit Agreement.

Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for

in the previous paragraph):

(a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four

quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to

1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter;

(b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to

1.0 for the trailing four quarter period ended June 30, 2022, 5.0 to 1.0 for the trailing four quarter period ended

September 30, 2022 and 4.0 to 1 for the trailing four quarter periods thereafter;

end of each fiscal quarter being no less than $1.00 commencing June 30, 2022;

and (d) a minimum adjusted EBITDA at the end

of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022).

The additional principal

payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for

purposes of calculating compliance with each of the financial covenants.

April 10, 2020, we entered into the PPP Loan, with BNB Bank (now part of Dime Community Bank (“Dime”)) as the lender,

in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection Program under the CARES Act.

is evidenced by the Note.

Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent (1%) per

annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the

Small Business Administration (SBA).

The Note provides for customary events of default including, among other things, cross-defaults

on any other loan with the Lender.

The PPP Loan may be accelerated upon the occurrence of an event of default.

November 2, 2020 the Company applied to the Lender for full forgiveness of the PPP Loan as calculated in accordance with the terms

of the CARES Act, as modified by the Paycheck Protection Flexibility Act.

We were notified by our lender that our application

was accepted and forwarded to the SBA, from whom, we are currently awaiting a response.

To date the lender has not requested payment

of any interest or principal.

All amounts are classified as current or long term in accordance with the Note terms.

believe that our existing resources, together with the availability under the BankUnited Facility, will be sufficient to meet

our current working capital needs for at least the next 12 months from the date of issuance of our consolidated financial statements.

However, our working capital requirements can vary significantly, depending in part on the timing of

On November 2,

2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the

CARES Act, as modified by the Paycheck Protection Flexibility Act.

On July 13, 2021, the Company received notification through

Dime that the PPP Loan and accrued interest thereon were fully forgiven by the Small Business Association and that the forgiveness

payment date was July 1, 2021.

The forgiveness of the PPP Loan was recognized during the Company’s third fiscal quarter

ending September 30, 2021.

The PPP Loan was evidenced by a promissory note (the “Note”) and, subject to the terms

of the Note, the PPP Loan had a fixed interest rate interest of one percent (1%) per annum, with the first six months of interest

deferred and had an initial term of two years.

The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria,

regardless of size.

These audits may occur after forgiveness has been granted.

In accordance with the Coronavirus Aid, Relief

and Economic Security Act (“CARES Act”), all borrowers are required to maintain their PPP loan documentation for six

years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.

All amounts are classified as

current or long term in accordance with the Note terms.

working capital requirements can vary significantly, depending in part on the timing of the conclusion of mature programs and

new program awards and the payment terms with our customers and suppliers.

If our working capital needs exceed our cash flows

from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangement to satisfy

those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate

amounts, if at all.

There is currently no availability for borrowings under

the BankUnited Facility and the Company finances its operations from internally generated cash flow.

Note 8 to our consolidated

financial statements included in Part II - Item 8 includes a discussion regarding the BankUnited Facility and recent amendments

thereto which provide, among other things, for increases in principal payments and the interest rate on the loans provided for

Also, the Company currently has a shareholders’ deficit and has experienced losses from operations and negative cash

flows from operations in prior periods.

These factors collectively represent significant risk to the Company’s ability to

continue to operate as a going concern.

Management has assessed these risks and to address them, the Company has (i) negotiated

and executed a further amendment to the Credit Agreement which extended the maturity date of the Credit Agreement to September

30, 2023, (ii) obtained and is seeking additional progress payment and advance payment customer contract funding provisions, (iii)

maintained procedures to reduce investments in inventory and contract assets, (iv) remained focused on its military segment which

has proven to be less susceptible to COVID-19 related impacts and (v) maintained its approximately $135 million backlog of funded

orders, 98% of which are for military programs.

Based upon this assessment and the execution of the plans described above it is

management’s estimation that there will likely not be any individual conditions or combination of events that will occur

in the coming year which would cause the Company to be unable to meet its obligations or otherwise continue as a going concern.

However, there can be no assurance that such plans will accomplish their intended goals.

Reduction Initiative

the first quarter of 2022, the Company began a cost reduction initiative designed to improve operational efficiency and reduce

costs during fiscal year 2022.

Management is reallocating resources and reducing operating and general administrative expenses

to more properly align the Company’s costs to anticipated near-term revenue given the timing differences between the conclusion

of certain mature programs and the commencement of new programs in 2022.

The Company executed a headcount reduction and furlough

action in March 2022 and is implementing cost controls and cuts during the balance of fiscal year 2022.

The Company anticipates

recording severance costs related to the headcount reduction in its first fiscal quarter of 2022 and the cost reductions of these

actions are anticipated to positively impact the financial results of the Company beginning in the second fiscal quarter of 2022.

Obligations .

The table below summarizes information about our contractual obligations as of December 31, 2020 and

the effects these obligations are expected to have on our liquidity and cash flow in the future years:

Payments Due By Period

Contractual Obligations

table below summarizes information about our contractual obligations as of December 31, 2021 and the effects these obligations

are expected to have on our liquidity and cash flow in the future years.

The Company is required to make $4,733,333 in principal

payments on its outstanding term loan payable within three years from December 31, 2021, $422,595 in payments on its outstanding

equipment capital lease obligations within five years from December 31, 2021 and $8,026,181 in payments on its outstanding building

and equipment operating lease obligations within, primarily, five years from December 31, 2021.

Due By Period

Finance Lease Obligations

Operating Leases

Total Contractual Cash Obligations

Inflation historically has not had a material effect on our operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

STATEMENTS AND SUPPLEMENTARY DATA

Total Contractual

Cash Obligations

historically has not had a material effect on our operations.

The Company’s long term contracts with both its customers

and suppliers reflect fixed pricing.

When bidding for work, the Company takes inflation risk and supply side pricing risk into

account in its proposals.

AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

information appears following Item 15 of this Annual Report on Form 10-K and is incorporated herein by reference.

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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