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Item 7. Management’s Discussion and Analysis

2024-04-08 compared with 2023-04-14 · 119 added, 249 removed, 115 unchanged (76% of the section changed)

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

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

following discussion and analysis of our financial condition and results of operations should be read together with our consolidated

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discussion and analysis.

March 17, 2023, we received notice from NYSE American (the “Exchange”) that the Company is in compliance with all

of the NYSE American LLC continued listing standards set forth in Part 10 of the NYSE American Company Guide (“Company Guide”),

and that, specifically, the Company has resolved the continued listing deficiency with respect to Sections 1003(a)(i) and (ii)

of the Company Guide referenced in the Exchange’s letter to the Company dated September 17, 2021, which was previously disclosed

by the Company.

March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”).

the Twelfth Amendment, the parties amended the Credit Agreement by :

(i) extending the maturity date of the Company’s existing

revolving line of credit and its existing term loan to November 30, 2024 (under the terms of the Credit Agreement, the outstanding

principal balance of the term loan will be repaid by June 30, 2023);

(ii) providing for reduction of the aggregate maximum principal

amount of all revolving line of credit loans to $20,520,000 from October 1, 2023 through December 31, 2023, $19,800,000 from January

1, 2024 through March 31, 2024, $19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000 from July 1, 2024 through September

30, 2024, and $17,640,000 from October 1, 2024 and thereafter, and for payments to be made by the Company to comply therewith

(if any such payments are necessary), on the first day of each such period;

and (iii) payment of a $250,000 capitalized fee incurred

in connection with the Eighth Amendment to the Credit Agreement in two installments, the first installment to be paid on June

1, 2023 in the amount of $116,667 and the second installment to be paid July 1, 2023 in the amount of $133,333, together with

all unpaid interest accrued at the term loan interest rate on the capitalized fee through each such date.

February 20, 2024, the Company entered into a Thirteenth Amendment to the Credit Agreement (the “Thirteenth Amendment”).

Under the Thirteenth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Company’s

existing revolving line of credit to August 31, 2025;

and (b) setting the aggregate maximum principal amount of all revolving

line of credit loans to $19,800,000 from January 1, 2024 through March 31, 2024, $19,080,000 from April 1, 2024 through June 30,

2024, $18,360,000 from July 1, 2024 through September 30, 2024, $17,640,000 from October 1, 2024 through December 31, 2024, $16,920,000

from January 1, 2025 through March 31, 2025, $16,200,000 from April 1, 2025 through June 30, 2025 and $15,480,000 thereafter,

and for payments to be made by the Company to comply therewith (if any such payments are necessary), on the first day of each

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

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supply chain management and kitting, and MRO services.

Accounting Policies

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.

Accounting Estimates

preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect

the reported amounts of certain assets and liabilities, revenues and expenses, and disclosure of contingencies during the reporting

Significant estimates and assumptions include revenue recognition, the valuation of deferred income taxes, and the valuation

of inventory.

Actual results could differ from those estimates.

believe that the following discussion addresses our critical accounting policies which require management’s most difficult,

subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently

For more discussion of these and other significant accounting policies, refer to Part

II, Item 8, Note 1 “ Principal Business Activity and Summary of Significant Accounting

Policies” in our notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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.

See Part II, Item 8, Note 1 “Principal

Business Activity and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included

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

Income Taxes – Valuation Allowance

a quarterly basis, we assess the likelihood that we will be able to recover our deferred tax assets against future sources of

taxable income and reduce the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available

evidence, it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of such assets will not

Assessing the realizability of deferred tax assets

requires the determination of whether it is more likely than not that some portion or all the deferred tax assets will not be realized.

In assessing the need for a valuation allowance, the Company considers all available positive and negative evidence, including future

reversals of existing taxable temporary differences, projected future taxable income, loss carryback and tax-planning strategies.

more weight is given to objectively verifiable evidence, such as a cumulative loss in recent years, as a significant piece of negative

evidence to overcome.

As of December 31, 2023, the Company achieved three years of consecutive book and taxable income, along with projections

of profitability, for which management determined that there is sufficient positive evidence to conclude that it is more likely than not

that a portion of the deferred tax assets will be realized.

As such, $14,170,891 of the valuation allowance was released during the fourth

quarter of 2023, leaving a balance in the valuation allowance of $569,143 as of December 31, 2023.

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

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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 for existing short-term leases.

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, 2022 were approximately $6.5 million and $6.9 million, respectively,

using an estimated incremental borrowing rate of 10.5%, as compared to ROU assets and lease liabilities as of December 31, 2021

of $7.8 million and $8.0 million, respectively.

testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step

0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less

than its carrying value.

This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic

conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as

changes in the Company’s management, strategy and primary customer base.

If the Company determines that it is more likely

than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative goodwill

impairment analysis by comparing the carrying amount to the fair value of the reporting unit.

If the carrying amount exceeds the

fair value, goodwill will be written down to the fair value and recorded as impairment expense in the consolidated statements

of operations.

The Company performs its impairment testing annually and when circumstances change that would more likely than

not reduce the fair value of a reporting unit below its carrying value.

The Company performed its annual impairment assessment

of goodwill as of December 31, 2022 and concluded that goodwill was not impaired.

it reduces its net inventory to its net realizable value.

of Operations

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for the year ended December 31, 2023 was $86,466,321 compared to $83,335,764 for the year ended December 31, 2022, representing

a decrease of $20,033,780 or 19.4%.

The decrease was primarily related to decreases in the

Raytheon - SDTA program, NGC E-2D MYP II and NGC E-2D WOWP programs, partly offset by increases in the Sikorsky HIRRS program .

generated from prime government contracts for the year ended December 31, 2022 was $8,663,308 compared to $7,551,743 for the year

ended December 31, 2021, an increase of $1,111,565, or 14.7%.

an increase of $3,130,557, or 3.8%.

The increase was primarily related to increases in the

Raytheon - SDTA program and the T-38 Pacer Classic program, partly offset by decreases

in the Sikorsky HIRRS program .

generated from prime government contracts for the year ended December 31, 2023 was $11,842,145 compared to $8,663,308 for the

year ended December 31, 2022, an increase of $3,178,837, or 36.7%.

This increase is primarily a result of increased revenue recognized

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generated from government subcontracts for the year ended December 31, 2023 was $69,672,602 compared to $69,023,729 for the year

ended December 31, 2021, a decrease of $20,746,293, or 23.1%.

The decrease in revenue related to decreases in the NGC E-2D OWP

and WOWP programs and the Raytheon - SDTA program, partly offset by increases in the Sikorsky HIRRS program.

ended December 31, 2022, an increase of $648,873, or 0.9%.

The increase in revenue was primarily related to increases in the Raytheon

- SDTA program and the Lockheed Martin F-16 Rudder Island program, partly offset by decreases in the Sikorsky HIRRS program

and the NGC E-2D WOWP program.

generated from commercial contracts for the year ended December 31, 2023 was $4,951,574 compared to $5,648,727 for the year ended

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The decrease in revenue resulted from decreased revenue recognized on the

Gulfstream G650 and HondaJet programs, largely offset by increases in the Embraer Phenom 300 program.

of sales for the year ended December 31, 2022 was $67,031,502 compared to $88,364,452 for the year ended December 31, 2021, a

decrease of $21,332,950 or 24.1%.

Gulfstream G650 program, which concluded in 2022.

of sales for the year ended December 31, 2023 was $69,400,693 compared to $67,031,502 for the year ended December 31, 2022, an

increase of $2,369,191 or 3.5%.

components of cost of sales were as follows:

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of $73,460 or 0.2%.

This decrease is primarily the result of a decrease in procurement for the NGC E-2D MYP II OWP program,

the Northrop Grumman E2D WOWP program, the Bell AH-1Z program, the Gulfstream G650

program and the Raytheon - SDTA program.

costs for the year ended December 31, 2022 were $6,829,405 compared to $7,843,520 for the year ended December 31, 2021, a decrease

This decrease is primarily the result of a decrease in procurement for the Lockheed Martin F-16 Rudder Island

program, the Raytheon - SDTA program, the NGC E-2D MYP II OWP program and the NGC

E2D WOWP program, the Bell AH-1Z program, the Gulfstream G650 program and the Raytheon B-52 Radar Rack program, partly

offset by increases in the Sikorsky HIRRS program and the Raytheon Next Generation Jammer – Mid-Band pod program.

costs for the year ended December 31, 2023 were $7,054,308 compared to $6,829,405 for the year ended December 31, 2022, an increase

of $224,903 or 3.3%.

The decrease is primarily the result of lower labor cost incurred on the Raytheon – SDTA program.

The increase is primarily the result of higher labor cost incurred on the Boeing A-10 Warthog program.

overhead costs for the year ended December 31, 2023 were $16,028,140 compared to $15,730,682 for the year ended December 31, 2022,

a decrease of $3,732,242 or 19.2%.

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

- SDTA program, the NGC welded tubes program, the NGC E-2D MYP II OWP program, the Sikorsky - Gunner Windows program and the Bell

AH-1Z program, which led to higher labor absorption rates and lower overhead costs.

an increase of $297,458 or 1.9%.

The increase is primarily the result of higher overhead rates incurred on the Raytheon Next Generation

Jammer – Mid-Band pod program, the Sikorsky – Gunner Windows program and the Lockheed Martin F-16 Rudder Island program.

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 and direct charges to cost of sales.

ended December 31, 2022, there was a reduction of costs in the amount of $1,622,673 compared to a reduction of costs in the amount

of $3,570,017 for the year ended December 31, 2021, a decrease of $1,947,344 or 54.5%.

The decrease is primarily the result of

a lower level of cost decrease in 2022 related to changes in inventory levels and loss contract reserve reductions.

ended December 31, 2023, there were costs in the amount of $297,617 compared to a reduction of costs in the amount of $1,622,673

for the year ended December 31, 2022, an increase of $1,920,290 or 118.3%.

The increase is primarily the result of a higher level

of cost decrease in 2022 related to changes in inventory levels and loss contract reserve reductions.

profit for the year ended December 31, 2023 was $17,065,628 compared to $16,304,262 for the year ended December 31, 2022, an increase

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to 19.6% for year ended December 31, 2022.

The increase was driven by year-over-year improvements in operating efficiencies and

decreased factory overhead costs.

Favorable/(Unfavorable)

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Net adjustments

$ (1,450,502 )

general and administrative expenses

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$11,410,067 for the year ended December 31, 2022, a decrease of $651,443 or 5.7%.

This decrease was primarily due to decreased

accounting and legal fees, partially offset by increases in insurance expense.

income for the year ended December 31, 2022 was nil, compared to $4,795,000 for the year ended December 31, 2021.

The other income

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

The decrease was primarily due to decreased

insurance expense and legal fees.

expense for the year ended December 31, 2023 was $2,455,214, compared to $2,271,101 for the year ended December 31, 2022, an increase

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before provision for income taxes

had income before provision for income taxes for the year ended December 31, 2022 of $2,623,094 compared to $6,834,982 for the

year ended December 31, 2021, a decrease of $4,211,888 or 61.6%.

Excluding the $4,795,000 PPP loan forgiveness by the SBA on July

31, 2021, our income before provision for income taxes for the year ended December 31, 2021 was $2,039,982.

Excluding the PPP

loan forgiveness, income before provision for income taxes for 2022 increased by $583,112, or 28.6%, over 2021.

The increase was

driven by the aforementioned increase in gross profit and decrease in SG&A, partially offset by the increase in interest expense

described above.

before provision for income taxes for the year ended December 31, 2023 was $3,851,790 compared to $2,623,094 for the year ended

December 31, 2022, an increase of $1,228,696 or 46.8%.

The increase was driven by the aforementioned increase in gross profit

and decrease in SG&A, partially offset by the increase in interest expense described above.

(benefit) for income taxes

income tax (benefit) for the year ended December 31, 2022 was ($6,553,131), an effective tax (benefit) rate of (249.8%), as compared

to the income tax provision of $14,609, an effective tax rate of 0.2%, for the year ended December 31, 2021.

The income tax (benefit)

in 2022 was primarily due to a $6,473,532 reduction in the valuation allowance recorded by the Company during the fourth quarter

of 2022 on its deferred tax asset balance related to its net operating loss carryforwards (the “Fourth Quarter 2022 Valuation

Allowance Decrease”).

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

income for the year ended December 31, 2022 was $9,176,225 compared to $6,820,373 for the year ended December 31, 2021, an increase

of $2,355,852 or 32.4%.

The increase in net income was driven by the aforementioned increase in gross profit, decrease in SG&A

and the 2022 income tax (benefit), partially offset by the aforementioned increase in interest expense.

the $6,473,532 Fourth Quarter 2022 Valuation Allowance Decrease, a $771,834 first quarter 2022 severance charge and the 2021 $4,795,000

PPP loan forgiveness, our net income for the years ended December 31, 2022 and December 31, 2021 was $3,474,527 and $2,025,373,

respectively, representing a year-over-year increase in 2022 net income of $1,449,154, or 71.5%.

per share was $0.74 ($0.73 per unrestricted share and $0.01 per restricted share) for the year ended December 31, 2022 calculated

utilizing 12,389,890 weighted average shares outstanding (“WASO”) (12,286,781 WASO unrestricted and 103,109 WASO restricted)

as compared to $0.56 ($0.55 per unrestricted share and $0.01 per restricted share) for the year ended December 31, 2021 calculated

utilizing 12,193,826 WASO (11,960,134 WASO unrestricted and 233,692 WASO restricted), an increase of $0.18 per share, or 32.1%.

the aforementioned Fourth Quarter 2022 Valuation Allowance Decrease, the aforementioned first quarter 2022 severance charge and

the aforementioned 2021 PPP loan forgiveness, our earnings per share was $0.28 per share for the year ended December 31, 2022

as compared to $0.17 per share for the year ended December 31, 2021, an increase of $0.11 per share, or 64.7%.

The income tax (benefit) for the year ended December 31, 2023 was ($13,349,414),

which was an effective tax (benefit) rate of (346.6%), as compared to the income tax (benefit) of ($6,553,131) for the year ended December

31, 2022, which was an effective tax (benefit) rate of (249.8%).

The income tax (benefit) in 2023 and 2022 was primarily due to reductions

of the Company’s deferred tax asset valuation allowance recorded by the Company in the fourth quarter of 2023 and the fourth quarter

of 2022 of $14,170,891 and $6,473,532, respectively.

Net income for the year ended December 31, 2023 was $17,201,204 compared

to $9,176,225 for the year ended December 31, 2022, an increase of $8,024,979 or 87.5%.

The increase in net income was driven by the aforementioned

increase in gross profit, decrease in SG&A and the 2023 income tax (benefit), partially offset by the aforementioned increase in interest

Basic earnings per share was $1.40 for the

year ended December 31, 2023 calculating utilizing 12,311,219 weighted average shares outstanding as compared to $0.74 for the year

ended December 31, 2022 calculated utilizing 12,389,890 weighted average shares outstanding, an increase of $0.66 per share, or

Diluted earnings per share was $1.38 for the year ended December 31, 2023 calculated utilizing 12,471,961 weighted average

shares outstanding as compared to $0.74 for the year ended December 31, 2022 calculated utilizing 12,389,890 weighted average shares

outstanding, an increase of $0.64 per share, or 86.4%.

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

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and Capital Resources

At December 31, 2022, we had working capital of $12,896,602 compared to working capital of $12,175,776 at December 31, 2021,

an increase of $720,826, or 5.9%.

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

At December 31,

2023, we had working capital of $15,402,381 compared to working capital of $12,896,602 at December 31, 2022, an increase of $2,505,779,

This increase is primarily the result of an increase in contract assets and cash, partially offset by an increase in accrued

expenses and accounts payable and a decrease in current portion of long-term debt.

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

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as exploring alternative funding sources.

December 31, 2022, our cash balance was $3,847,225 compared to $6,308,866 at December 31, 2021, a decrease of $2,461,641, or 39.0%.

The decrease was driven by our pay down of outstanding debt during 2022 of $3,365,181, partly offset by $944,329 in cash provided

by operations.

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.

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 of 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.

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) $566,025 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii)

$367,045 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 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.

November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”).

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

and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is

paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on

the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation

to make two principal payments on the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing

the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5% effective as of November

described above, on March 23.

2023, the Company entered into the Twelfth Amendment, under which the parties amended the Credit

Agreement by :

(a) extending the maturity date of the Company’s existing revolving line of credit and its existing term

loan to November 30, 2024 (under the terms of the Credit Agreement, the outstanding principal balance of the term loan will be

repaid by June 30, 2023);

(b) providing for reduction of the aggregate maximum principal amount of all revolving line of credit

loans to $20,520,000 from October 1, 2023 through December 31, 2023, $19,800,000 from January 1, 2024 through March 31, 2024,

$19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000 from July 1, 2024 through September 30, 2024, and $17,640,000

from October 1, 2024 and thereafter, and for payments to be made by the Company to comply therewith (if any such payments are

necessary), on the first day of each such period;

and (c) payment of a $250,000 capitalized fee incurred in connection with the

Eighth Amendment in two installments, the first installment to be paid on June 1, 2023 in the amount of $116,667 and the second

installment to be paid July 1, 2023 in the amount of $133,333, together with all unpaid interest accrued at the term loan interest

rate on the capitalized fee through each such date.

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 1.0 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 Coronavirus Aid, Relief

and Economic Security Act (“CARES Act”).

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

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 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.

December 31, 2023, our cash balance was $5,094,794 compared to $3,847,225 at December 31, 2022, an increase of $1,247,569, or

The increase was driven by $3,928,341 in cash provided by operations, partly offset by our pay down of outstanding debt

during 2023 of $2,679,766.

information is set forth in Note 8 to our Consolidated Financial Statements, appearing following Item 15 of this Annual Report

on Form 10-K which is hereby incorporated by reference.

information is set forth in Note 10 to our Consolidated Financial Statements, appearing following Item 15 of this Annual Report

on Form 10-K which is hereby incorporated by reference.

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

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Management has (i) negotiated and executed a further amendment to the Credit Agreement which extended the maturity date

of the Credit Agreement to November 30, 2024, (ii) obtained and regularly seeks 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 customer base which has proven to be less susceptible to COVID-19 related impacts and (v) maintained

its approximately $122 million backlog of funded orders, 98% of which are for military programs.

Based upon the aforementioned

factors, 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 implemented a cost reduction initiative designed to improve operational efficiency and

reduce costs during fiscal year 2022.

Management has reallocated resources and reduced operating and general administrative expenses

to more properly align the Company’s costs to revenue given the timing differences between the conclusion of certain mature

programs and the commencement of new programs in 2022.

In connection with the cost reduction initiative, the Company executed

a headcount reduction and furlough action in March 2022 and implemented cost controls and cuts during the balance of fiscal year

The Company recorded severance costs related to the headcount reduction in its first fiscal quarter of 2022 and the cost

reductions of these actions positively impacted the financial results of the Company beginning in the second fiscal quarter of

of the Credit Agreement to August 31, 2025, (ii) obtained and regularly seeks additional progress payment and advance payment

customer contract funding provisions, (iii) maintained procedures to minimize investments in inventory and contract assets, (iv)

remained focused on its military customer base and (v) maintained its approximately $118.2 million backlog of funded orders, 98%

of which are for military programs.

Based upon the aforementioned factors, 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.

table below summarizes information about our contractual obligations as of December 31, 2023 and the effects these obligations

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Operating Leases

Insurance Financing Agreement

Total Contractual Cash Obligations

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AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

are exposed to interest rate risk on variable-rate credit facilities for which there was $20,040,000 outstanding at December 31,

Additionally, if we were to refinance our long-term debt, it may be refinanced at higher interest rates.

STATEMENTS AND SUPPLEMENTARY DATA

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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