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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>As filed with the Securities and Exchange
Commission on July 26, 2017</B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: right"><B>Registration No. 333-_____</B></P>

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<P STYLE="font: 11pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>United States<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</B></P>

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<P STYLE="font: 14pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>FORM S-1</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>REGISTRATION STATEMENT UNDER</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>THE SECURITIES ACT OF 1933</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 18pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP</B><BR>
<FONT STYLE="font-family: Times New Roman, Times, Serif; font-size: 10pt"><B>(Exact name of registrant as specified in its charter)</B></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font-size: 10pt; width: 100%; border-collapse: collapse">
<TR>
    <TD STYLE="vertical-align: top; width: 48%; font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt"><B>Nevada</B></FONT></TD>
    <TD STYLE="vertical-align: bottom; width: 52%; font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt"><B>80-0948413</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top; font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">(State or other jurisdiction of incorporation or organization)</FONT></TD>
    <TD STYLE="vertical-align: bottom; font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">(I.R.S. Employer Identification Number)</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>3728</B><BR>
(Primary Standard Industrial Classification Code Number)</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>360 Motor Parkway, Suite</B><BR>
<B>100 Hauppauge, New York</B><BR>
<B>11788 (631) 881-4920</B><BR>
(Address, including zip code, and telephone number, including area code, of registrant&rsquo;s principal executive offices)</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Peter D. Rettaliata<BR>
Acting President and Chief Executive Officer<BR>
Air Industries Group</B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>360 Motor Parkway, Suite 100</B><BR>
<B>Hauppauge, New York 11788</B><BR>
<B>(631) 881-4920</B><BR>
(Name, address, including zip code, and telephone number, including area code, of agent for service)</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>Copy to:</I></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Vincent J. McGill, Esq.<BR>
Eaton &amp; Van Winkle LLP<BR>
3 Park Avenue, 16th Floor<BR>
New York, New York 10016<BR>
(212) 561-3604</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>E-mail: vmcgill@evw.com&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Approximate date of commencement of proposed sale to the
public:</B> From time to time after the effective date of this registration statement.</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933. <FONT STYLE="font-family: Times New Roman, Times, Serif">&#9746;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">If this form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. <FONT STYLE="font-family: Wingdings">o</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">If this form is a post-effective amendment
filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. <FONT STYLE="font-family: Wingdings">o</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">If this Form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. <FONT STYLE="font-family: Wingdings">o</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of &ldquo;large accelerated filer,&rdquo; &ldquo;accelerated filer&rdquo; and &ldquo;smaller reporting company&rdquo; in Rule 12b-2
of the Exchange Act (check one):</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Large accelerated filer <FONT STYLE="font-family: Wingdings">o</FONT>
Accelerated filer <FONT STYLE="font-family: Wingdings">o</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Non-accelerated filer <FONT STYLE="font-family: Wingdings">o</FONT>
(Do not check if a smaller reporting company) Smaller reporting company &#9746;<FONT STYLE="font-family: Wingdings"></FONT> Emerging
growth company <FONT STYLE="font-family: Times New Roman, Times, Serif">&#9746;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. <FONT STYLE="font-family: Wingdings">o</FONT></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CALCULATION OF REGISTRATION FEE </B></P>

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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="border-bottom: black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">&nbsp;<B>Title of Each Class Of</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Securities To Be Registered</B></FONT></TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="border-bottom: black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt"><B>Amount To</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Be</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Registered</B></FONT></TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="border-bottom: black 1pt solid; text-align: center"><P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>Proposed</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Maximum</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Offering Price</B></FONT></P>
                                                                          <P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>Per Security<BR></P></TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="width: 13%; border-bottom: black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt"><B>Proposed</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Maximum</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Aggregate</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Offering Price</B></FONT></TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="width: 0%">&nbsp;</TD>
    <TD NOWRAP STYLE="width: 12%; border-bottom: black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt"><B>Amount of</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Registration</B></FONT><BR>
<FONT STYLE="font-size: 10pt"><B>Fee</B></FONT></TD>
    <TD NOWRAP>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="text-align: left">Common stock, $0.001 par value</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="text-align: center">1,293,938(1)</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="text-align: center">$1.42(2)</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="text-align: center">$1,837,392</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP>&nbsp;</TD>
    <TD NOWRAP STYLE="text-align: center">$212.95</TD>
    <TD NOWRAP>&nbsp;</TD></TR>
</TABLE>


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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">(1)</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">Represents shares issued and issuable upon conversion of Subordinated Convertible Notes due May 12, 2018.</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>(2)</TD>
    <TD>Based upon the average of the high and low prices of a share of Common Stock on the NYSE MKT on July 20, 2017, pursuant to
Rule 457(c).</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>The Registrant hereby
amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to Section 8(a) of the Securities Act, may determine.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B></B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: #FC0014"><B>The information in this
preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement related
to these securities filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not
an offer to sell or a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: #FC0014">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; color: red">Subject to completion, dated
July 26, 2017</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; color: red">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">PROSPECTUS</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">1,293,938 Shares</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><IMG SRC="image_001.jpg" ALT="" STYLE="height: 99px; width: 304px">&thinsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Common Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">This prospectus relates to the offering
by the selling stockholders of Air Industries Group named in this prospectus (the &ldquo;Selling Stockholders&rdquo;) of 1,293,938
shares of our common stock, par value $0.001 per share (&ldquo;the &ldquo;Shares&rdquo;), acquired or to be acquired upon conversion
of our Subordinated Convertible Notes due May 12, 2018. We will not receive any proceeds from the sale of the Shares by the Selling
Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our common stock is
listed on the NYSE MKT under the symbol &ldquo;AIRI&rdquo;.&nbsp;On July 25, 2017, the closing price of our common stock on the
NYSE MKT was $1.42 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
have advised us that they will sell the Shares from time to time in the open market, on the NYSE MKT, in privately negotiated transactions
or a combination of these methods, at market prices prevailing at the time of sale or at prices related to the prevailing market
prices or at negotiated prices.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
may sell the Shares to or through underwriters, brokers or dealers or directly to purchasers. Underwriters, brokers or dealers
may receive discounts, commissions or concessions from the Selling Stockholders. Additional information relating to the distribution
of the Shares by the Selling Stockholders can be found in this prospectus under the heading &ldquo;Plan of Distribution.&rdquo;
If underwriters or dealers are involved in the sale of the Shares, their names, and any applicable purchase price, fee, commission
or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in a supplement
to this prospectus. We will pay the expenses of registering the Shares, other than any underwriting discounts or commissions or
agent&rsquo;s commissions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We are an &ldquo;emerging
growth company,&rdquo; as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, may elect to comply
with certain reduced public company reporting requirements in future reports after the completion of this offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B>Investing in our securities involves
a high degree of risk.&nbsp;Before making any investment in our securities, you should read and carefully consider the risks described
in this prospectus under &ldquo;<U>Risk Factors&rdquo;</U> beginning on page&nbsp;3 of this prospectus.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><B>You should rely
only on the information contained in this prospectus or any prospectus supplement or amendment thereto.&nbsp;We have not authorized
anyone to provide you with different information.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><B>Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete.&nbsp;Any representation to the contrary is a criminal offense.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>This prospectus is dated ______ __, 2017</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B></B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B></B>&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>TABLE OF CONTENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 93%">&nbsp;</TD>
    <TD STYLE="width: 7%; text-align: center"><FONT STYLE="font-size: 10pt"><B>Page</B>&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Special Note Regarding Forward-Looking Statements </FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">ii</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">We are an Emerging Growth Company</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">ii</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Prospectus Summary</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">1</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Risk Factors</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">3</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Use of Proceeds</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">10</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Price Range of Our Common Stock</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">11</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Dividend Policy</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">11</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Business</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">12</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Management&rsquo;s Discussion and Analysis of Financial Condition and Results of Operations</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">17</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Directors and Executive Officers</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">35</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Executive Compensation</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">40</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Security Ownership of Certain Beneficial Owners and Management</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">42</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Certain Relationships and Related Party Transaction</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">45</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Selling Stockholders</FONT></TD>
    <TD STYLE="text-align: right">49</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Plan of Distribution</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">51</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Description of Securities</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">53</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Shares Available For Future Sales</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">60</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Legal Matters</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">61</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Experts</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">61</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Where You Can More Information About Us</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">61</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Incorporation By Reference</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">61</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Index to Financial Statements</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">62</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>This prospectus and any Freewriting
prospectus that we file with the Securities and Commission (&ldquo;SEC&rdquo;) contain information you should consider when making
your investment decision. We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information, you should not rely on it.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>The securities are not being offered in any jurisdiction
where the offer is not permitted.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>You should not assume that the information
in this prospectus is accurate as of any date other than the date on the front of this prospectus.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>In this prospectus, we refer to information
regarding potential markets for our products and other industry data. We believe that all such information has been obtained from
reliable sources that are customarily relied upon by companies in our industry&#894; however, we have not independently verified
any such information.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B></B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B></B>&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">This prospectus contains
&ldquo;forward-looking statements&rdquo; within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, which in some cases,
you can identify by terms such as &ldquo;may,&rdquo; &ldquo;will,&rdquo; &ldquo;should,&rdquo; &ldquo;could,&rdquo; &ldquo;would,&rdquo;
&ldquo;expects,&rdquo; &ldquo;plans,&rdquo; &ldquo;anticipates,&rdquo; &ldquo;believes,&rdquo; &ldquo;estimates,&rdquo; &ldquo;projects,&rdquo;
&ldquo;predicts,&rdquo; &ldquo;potential&rdquo; and similar expressions intended to identify forward-looking statements, relate
to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. These statements include statements regarding our operations,
cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and
the effect of economic conditions. These statements reflect our current views with respect to future events and are based on assumptions
and subject to risks and uncertainties.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Although we
believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating
margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, and general economic conditions, these statements and other
projections contained in this prospectus expressing opinions about future outcomes and non-historical information, are
subject a number of risks and uncertainties, many of which are beyond our control, and reflect future business decisions that
are subject to change and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved.
Some of the assumptions, future results and levels of performance expressed or implied in the forward-looking statements we
have made or may make in the future inevitably will not materialize, and unanticipated events may occur which will affect our
results. Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results
or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given
these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks
and uncertainties in greater detail under the heading &ldquo;Risk Factors&rdquo; on page 3  of this prospectus, as well as in
our consolidated financial statements, related notes, and the other financial information appearing in this prospectus. You
should read this prospectus completely and with the understanding that our actual future results may be materially different
from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements. We
undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future
events or otherwise, except as may be required under the securities laws of the United States. You are advised, however, to
consult any additional disclosures we make in our reports filed with the Securities and Exchange Commission.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>WE ARE AN EMERGING GROWTH COMPANY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We qualify as an &ldquo;emerging
growth company&rdquo; as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company
may take advantage of reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions
include (i) a requirement to have only two years of audited financial statements and only two years of related Management&rsquo;s
Discussion and Analysis of Financial Condition and Results of Operations disclosure and (ii) an exemption from the auditor attestation
requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We may take advantage
of these provisions until the end of the fiscal year ending after the fifth anniversary of our initial public offering, December
31, 2018, or such earlier time that we are no longer an emerging growth company and if we do, the information that we provide stockholders
may be different than you might get from other public companies in which you hold equity. We would cease to be an emerging growth
company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of common
stock held by non-affiliates, or issue more than $1.0 billion of nonconvertible debt over a three year period.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The JOBS Act permits
an &ldquo;emerging growth company&rdquo; like us to take advantage of an extended transition period to comply with new or revised
accounting standards applicable to public companies, and we have elected to comply with certain reduced public company reporting
requirements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left"></P>

<TABLE CELLPADDING="2" CELLSPACING="0" STYLE="border-collapse: collapse; font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top; text-align: left">
    <TD STYLE="width: 100%">&nbsp;<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PROSPECTUS SUMMARY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>The following is a summary of what we
believe to be important aspects of our business and the offering of our securities under this prospectus. We urge you to read this
entire prospectus. Investing in our securities involves risks. Therefore, carefully consider the risk factors set forth under the
section titled &ldquo;Risk Factors&rdquo; in this prospectus and in our most recent annual and quarterly filings with the Securities
and Exchange Commission (the &ldquo;SEC&rdquo;), if any, as well as other information in this prospectus, before purchasing our
securities. Each of the risk factors could adversely affect our business, operating results, and financial condition, as well as
adversely affect the value of an investment in our securities.</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As used in this prospectus,
unless otherwise stated or the context requires otherwise, the &ldquo;Company&rdquo; and terms such as &ldquo;we,&rdquo; &ldquo;us&rdquo;
&ldquo;our,&rdquo; and &ldquo;AIRI&rdquo; refer to Air Industries Group, a Nevada corporation, and prior to August 30, 2013, Air
Industries Group, Inc., a Delaware corporation, and our directly and indirectly wholly-owned subsidiaries: Air Industries Machining,
Corp., a New York corporation (&ldquo;AIM&rdquo;), Welding Metallurgy, Inc., a New York corporation (&ldquo;Welding Metallurgy,&rdquo;
or &ldquo;WMI&rdquo;), Nassau Tool Works, Inc., a New York corporation (&ldquo;NTW&rdquo;), Miller Stuart, Inc., a New York corporation
(&ldquo;Miller Stuart&rdquo; or &ldquo;MS&rdquo;), until it merged into WMI effective May 16, 2017, Decimal Industries Inc., a
New York corporation (&ldquo;Decimal&rdquo;), Woodbine Products, Inc., a New York corporation (&ldquo;Woodbine&rdquo; or &ldquo;WP&rdquo;),
Eur-Pac Corporation, a Connecticut corporation (&ldquo;Eur-Pac&rdquo; or &ldquo;EPC&rdquo;), Electronic Connection Corporation,
a Connecticut corporation (&ldquo;ECC&rdquo;), The Sterling Engineering Corporation, a Connecticut corporation (&ldquo;Sterling&rdquo;),
Compac Development Corporation, a New York corporation (&ldquo;Compac&rdquo;), and Air Realty Group, LLC, a Connecticut limited
liability company (&ldquo;Air Realty&rdquo;).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Company Overview</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We are an aerospace
and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear,
arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal
fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile
military and commercial aircraft, including Sikorsky&rsquo;s UH-60 Black Hawk and CH-47 Chinook helicopters, Lockheed Martin&rsquo;s
F-35 Joint Strike Fighter, Northrop Grumman&rsquo;s E2 Hawkeye, Boeing&rsquo;s 777, Airbus&rsquo; 380 commercial airliners and
the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the
USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We became a public
company in 2005 when our net sales were approximately $30 million. At that time we had been manufacturing components and subassemblies
for the defense and commercial aerospace industry for over 45 years and had established long term relationships with leading defense
and aerospace manufacturers. Since becoming a public company, we have completed a series of acquisitions of defense related businesses.
These acquisitions have enabled us to broaden the range of products and services we offer. At the time we became a public company,
we were primarily a machining shop. As a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding
and tube bending; the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment
and printed circuit boards; the machining of turbine engine components; and the assembly of packages or &ldquo;kits&rdquo; containing
supplies for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical
and electrical assemblies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Recently Completed Public Offering and Related Restructuring
Transactions</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">On July 12, 2017, we
sold 5,175,000 shares of common stock at a price of $1.50 per share (the &ldquo;July 2017 Public Offering Price&rdquo;) for gross
proceeds of $7,762,500 in a firm commitment underwritten public offering (the &ldquo;Public Offering&rdquo;).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In connection with
the Public Offering, approximately $1,860,908 aggregate principal amount of our Subordinated Convertible Notes due May 12, 2018
(the &ldquo;May 2018 Notes&rdquo;) were converted into an aggregate of 1,240,605 shares of our common stock (the &ldquo;Shares&rdquo;)
at the July 2017 Public Offering Price. We agreed to register the Shares for resale in in order to induce the Selling Stockholders
to agree to the convert their May 2018 Notes in connection with the Public Offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In addition, the following
restructuring transactions contemplated by the Public Offering are to be effected at a conversion price of $1.50 per share, the
public offering price of the shares sold in the Public Offering (the &ldquo;Restructuring Transactions&rdquo;), following a stockholder
vote thereon at our 2017 Annual Meeting of Stockholders, which we expect to hold in September 2017:</P>

</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left"></P>

<TABLE CELLPADDING="2" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in">&nbsp;</TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Holders of an additional $1,834,214 aggregate principal amount of May 2018 Notes have agreed to
convert their 2018 Notes into an additional 1,222,809 shares of common stock.</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif"></P>

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<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Holders of our outstanding 1,294,441 shares of Series A Convertible Preferred Stock (the &ldquo;Series
A Preferred Stock&rdquo;), which had a conversion price at the time of initial issuance in May 2016 of $4.92 per share, will be
automatically converted into 8,629,606 shares of common stock.</TD></TR>                                                                        <TR STYLE="vertical-align: top">
<TD>&nbsp;</TD><TD>&nbsp;</TD><TD STYLE="text-align: justify; border-right: Black 1pt solid">&nbsp;</TD></TR>
</TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif"></P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Michael N. Taglich and Robert F. Taglich, directors and principal stockholders of our company,
who hold our 7% promissory notes in the aggregate principal amount of $500,000 (the &ldquo;Taglich Notes&rdquo;) evidencing our
obligation to repay amounts advanced as working capital in March 2017, have agreed to convert the indebtedness related to those
notes into approximately 344,667 shares of common stock.</TD></TR>
</TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif"></P>

<TABLE CELLPADDING="2" CELLSPACING="0" STYLE="border-collapse: collapse; font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top; text-align: left">
    <TD STYLE="width: 100%">&nbsp;<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B><I>Corporate Information</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We were incorporated
in Nevada on July 9, 2013 and are successor by merger on August 30, 2013 to our former corporate parent, Air Industries Group,
Inc., a Delaware corporation incorporated in November 2005 in connection with the acquisition of AIM.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our principal offices
are located at 360 Motor Parkway, Suite 100, Hauppauge New York 11788 and our telephone number is (631) 881-4920. Our principal
website is <U>http://www.airindustriesgroup.com</U>. The information contained on our website does not form any part of this prospectus.
We have included our website address as a factual reference and do not intend it to be an active link to our website.</P>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

</TD></TR>
</TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif"></P>

<TABLE CELLPADDING="2" CELLSPACING="0" STYLE="border-collapse: collapse; font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top; text-align: left">
    <TD STYLE="width: 50%"><B><I>The Offering</I></B></TD>
    <TD STYLE="width: 50%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD><B>Securities Offered by Selling Stockholders</B></TD>
    <TD><B></B> 1,293,938
shares of common stock.</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD><B>Common Stock Outstanding</B></TD>
    <TD>14,065,770 shares. <SUP>(1)</SUP></TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD><B>Use of Proceeds</B></TD>
    <TD STYLE="text-align: justify">We will not receive any proceeds from
the sale of the Shares by the Selling Stockholders<B STYLE="text-decoration: none; font-style: normal; font-weight: normal">.</B></TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD><B>Risk Factors</B></TD>
    <TD STYLE="text-align: justify">Investing in our securities involves a significant
degree of risk. You should read the &ldquo;Risk Factors&rdquo;
section beginning on page 3  and other information included in this prospectus for
a discussion of factors you should carefully consider before investing
in our securities.</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD><B>Plan of Distribution</B></TD>
    <TD STYLE="text-align: justify">This offering is not being underwritten.&nbsp;The
Selling Stockholders will sell their shares of common stock at prevailing
market prices or privately negotiated prices. The Selling
Stockholders themselves directly, or through their agents,
or through their brokers or dealers, may sell their shares from time to time, in (i)&nbsp;privately negotiated
transactions, (ii)&nbsp; in one or more transactions, including block transactions in accordance with the applicable rules of the
NYSE MKT or (iii)&nbsp;otherwise in accordance with the section of this prospectus entitled &ldquo;Plan of Distribution.&rdquo;&nbsp;To
the extent required, the specific shares to be sold, the names of the Selling Stockholders, the respective purchase prices and
public offering prices, the names of any agent, broker or dealer and any applicable commission or discounts with respect to a particular
offer will be described in a supplement to this prospectus.&nbsp;In addition, any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. For additional information on
the methods of sale, you should refer to the section of this prospectus entitled &ldquo;Plan of Distribution,&rdquo; beginning
on page 51.</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD><B>NYSE MKT Symbol</B></TD>
    <TD STYLE="text-align: justify"></B> Our common stock is listed under the
symbol &ldquo;AIRI.&rdquo;</TD></TR>
<TR STYLE="vertical-align: top; text-align: left">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
</TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif"><B><I>__</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">(1)</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Excludes as of July 15, 2017 (i) a total of approximately
    10,187,082 shares issuable upon consummation of the Restructuring Transactions, (ii) 1,950,148 shares issuable upon
    conversion of our 8% subordinated convertible notes (the &ldquo;8% Notes&rdquo;), (iii) 1,469,530 shares of common stock
    issuable upon exercise of outstanding warrants, (iv) 516,342 shares of common stock issuable upon exercise of stock options
    granted pursuant to our existing equity incentive plans and (v) shares of common stock, or&nbsp;&nbsp;securities convertible,
    exercisable     or     exchangeable for shares of common stock, issued subsequent to July 15, 2017.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>RISK FACTORS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Investing in our securities involves
a high degree of risk. Before making an investment decision, you should carefully review and consider the risks and uncertainties
described below, in addition to the other information presented in this prospectus, in light of your particular investment objectives
and financial circumstances. The risks so described are not the only risks we face. Additional risks not presently known to us
or that we currently deem immaterial may also impair our business operations. Our business, financial condition, results of operations,
or prospects could be materially adversely affected by any of these risks. The trading price of our securities could decline due
to any of these risks, and you may lose all or part of your investment.</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>The risks below can be characterized into three groups:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt"><B><I>1)</I></B></FONT></TD>
    <TD STYLE="width: 97%"><FONT STYLE="font-size: 10pt"><B><I>Risks related to our business, including risks specific to the defense and aerospace industry:</I></B></FONT></TD></TR>
</TABLE>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt"><B><I>2)</I></B></FONT></TD>
    <TD STYLE="width: 97%"><FONT STYLE="font-size: 10pt"><B><I>Risks arising from our indebtedness; and</I></B></FONT></TD></TR>
</TABLE>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt"><B><I>3)</I></B></FONT></TD>
    <TD STYLE="width: 97%"><FONT STYLE="font-size: 10pt"><B><I>Risks related to our common stock and this offering.</I></B></FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to Our Business</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We incurred a substantial net loss in 2016 and may not be
able to continue to operate as a going concern.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We suffered net losses
from operations of $10,789,000 and $519,000 and net losses of $15,623,000 and $1,154,000 for the year ended December 31, 2016 and
the three months ended March 31, 2017, respectively. We also had negative cash flows from operations for the year ended December
31, 2016. In 2015 we ceased paying dividends on our common stock and in 2016 we disposed of the real estate on which one of our
operating subsidiaries is located through a sale leaseback transaction. In January 2017, we sold one of our operating subsidiaries.
During the year ended December 31, 2016 and subsequent thereto, we sold in excess of $20,000,000 in debt and equity securities
to secure funds to operate our business. Since September 2016 we have been issuing additional shares of our Series A Convertible
Preferred Stock in lieu of cash payment of accrued dividends on our outstanding shares of Series A Convertible Preferred Stock
and since February 2017 we have issued additional convertible notes in lieu of cash payment of accrued interest on our outstanding
convertible notes. Furthermore, as of December 31, 2016 and March 31, 2017, we were not in compliance with two financial covenants
under our Amended and Restated Revolving Credit, Term Loan and Security Agreement with PNC Bank (the &ldquo;Loan Facility&rdquo;).
The report of our independent registered public accountants on our financial statements for the year ended December 31, 2016 states
that these factors raise uncertainty about our ability to continue as a going concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Although we received
net proceeds of approximately $6,819,125 from the sale of 5,175,000 shares of our common stock in a firm commitment underwritten
public offering on July 12, 2017, of which approximately $2,355,624 was added to our working capital, unless we are able to generate
positive cash flows from operations, we will continue to depend upon further issuances of debt, equity or other financings to fund
ongoing operations. We may continue to incur additional operating losses and we cannot assure you that we will continue as a going
concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We have identified deficiencies and material weaknesses in
our internal controls and we may not be successful in remediating these deficiencies and weakness in the near future.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with
our review of our disclosure controls and internal controls over financial reporting for the fiscal year ended December 31, 2016
and the quarter ended March 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and internal controls over financial reporting were not effective as of such dates. In particular, certain portions of our inventory
control system have not been integrated into the system used by the balance of our company which could result in a failure to
properly account for the costs associated with work in process, slow moving inventory and the value of inventory on hand, and
the enterprise reporting system used to track employee hours. Accordingly, costs to be included in work in process, may not be
sufficiently automated to ensure compliance at all times. In addition, our Chief Executive Officer and Chief Financial Officer
concluded that our quarterly closing process was deficient at our subsidiaries and that our consolidating process and period end
reporting and disclosure procedures were materially weak. They also concluded that our system for administering and disclosing
stock compensation was deficient and that we lacked the accounting personnel necessary to account for complex accounting matters
and unusual and nonstandard transactions. We intend to remediate these conditions. In the event we do not remediate these deficiencies
and material weaknesses in our internal controls, our operations may be adversely affected and the market price of our common
stock could decline. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not
be able to maintain our listing on the NYSE MKT.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>A reduction in government spending on defense could materially
adversely impact our revenues, results of operations and financial condition.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">A large percentage of
our revenue is derived from products for US military aviation. There are risks associated with programs that are subject to appropriation
by Congress, which could be potential targets for reductions in funding. Reductions in United States Government spending on defense
or future changes in the mix of defense products required by United States Government agencies could limit demand for our products,
and may have a materially adverse effect on our operating results and financial condition. Our operations for the year ended December
31, 2016 were negatively impacted by reductions in government procurement orders and such reductions may continue. Since March
1, 2013, as a result of the continuing budget impasse, automatic government spending cuts termed the Sequester were implemented,
and consequently, our revenues, particularly those of our Complex Machining segment, were and continue to be impacted by a slowing
of orders in anticipation of a reduction or shift in the mix of defense spending. There can be no assurance that our financial
condition and results of operations will not be materially adversely impacted by future reductions in defense spending or a change
in the mix of products purchased by defense departments in the United States or other countries, or the perception on the part
of our customers that such changes are about to occur.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We depend on revenues from a few significant relationships.
Any loss, cancellation, reduction, or interruption in these relationships could harm our business.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We expect that our customer
concentration will not change significantly in the near future. We derive most of our revenues from a small number of customers.
Four customers represented approximately 56.4% and 59.3% of total sales for the years ended December 31, 2016 and 2015, respectively.
These four customers represented approximately 60.5% and 58.4% of total sales for the three months ended March 31, 2017 and 2016,
respectively. The markets in which we sell our products are dominated by a relatively small number of customers which have contracts
with United States governmental agencies, thereby limiting the number of potential customers. Our success depends on our ability
to develop and manage relationships with significant customers. We cannot be sure that we will be able to retain our largest customers
or that we will be able to attract additional customers, or that our customers will continue to buy our products in the same amounts
as in prior years. The loss of one or more of our largest customers, any reduction or interruption in sales to these customers,
our inability to successfully develop relationships with additional customers or future price concessions that we may have to make,
could significantly harm our business.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We depend on revenues from components for a few aircraft
platforms and the cancellation or reduction of either production or use of these aircraft platforms could harm our business.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our Complex Machining
segment derives most of its revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter,
the Northrop Grumman E-2 Hawkeye naval aircraft, the McDonnell Douglas (Boeing) C-17 Globemaster, the F-16 Falcon and the F-18
Hornet. Boeing closed its C-17 production line in 2015. A reduction in demand for our products as a result of either a reduction
in the production of new aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market demand) would
have a material adverse effect on our operating results and financial condition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Intense competition in our markets may lead to a reduction
in our revenues and market share.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The defense and aerospace
component manufacturing market is highly competitive and we expect that competition will increase and perhaps intensify as the
overall market remains static or declines. Many competitors have significantly greater technical, manufacturing, financial and
marketing resources than we do. We expect that more companies will enter the defense and aerospace component manufacturing market.
We may not be able to compete successfully against either current or future competitors. Increased competition could result in
reduced revenue, lower margins or loss of market share, any of which could significantly harm our business, our operating results
and financial condition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We may lose sales if our suppliers fail to meet our needs
or shipments of raw materials are not timely made.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Although we
procure most of our parts and components from multiple sources or believe that these components are readily available from
numerous sources, certain components are available only from a sole or limited number or sources. While we believe that
substitute components or assemblies could be obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of our products and could have a materially
adverse effect on our operating results and financial condition. Recently, we have had difficulties in securing timely
shipments of raw materials from certain vendors due to our liquidity problems. Our results of operations for 2016 were
negatively impacted by disruptions in receipt of materials and such disruptions may continue. Any delays in the shipment of
raw materials could significantly harm our business, our operating results and our financial condition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>There are risks associated with the bidding processes in
which we compete.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We obtain many contracts
through a competitive bidding process. We must devote substantial time and resources to prepare bids and proposals and may not
have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have bid will be sufficient
to allow us to generate a profit from any particular contract. There are significant costs involved with producing a small number
of initial units of any new product and it may not be possible to recoup such costs on later production runs.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Due to fixed contract pricing, increasing contract costs
expose us to reduced profitability and the potential loss of future business.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The cost estimation
process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor,
the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of
any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover
any claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material
effect on our consolidated financial position or results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>The prices of raw materials we use are volatile.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The prices of raw materials
used in our manufacturing processes are volatile. If the prices of raw materials rise we may not be able to pass along such increases
to our customers and this could have an adverse impact on our consolidated financial position and results of operations. Significant
increases in the prices of raw materials could adversely impact our customers&rsquo; demand for certain products which could lead
to a reduction in our revenues and have a material adverse impact on our revenues and on our consolidated financial position and
results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Some of the products we produce have long lead times.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Some of the products
we produce, particularly those of our Complex Machining segment, require months to produce and we sometimes produce products in
excess of the number ordered intending to sell the excess as spares when orders arise. As a result, portions of our inventory turn
slowly and tie up our working capital. Our inventory represented approximately 52% of our assets as of March 31, 2017. Any requirement
to write down the value of our inventory due to obsolescence or a drop in the price of materials could have a material adverse
effect on our consolidated financial position or results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We do not own the intellectual property rights to products
we produce.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Nearly all the parts
and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any, related
to the product. Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would
be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>There are risks associated with new programs</B>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">New programs typically
carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or changing specifications,
timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program may experience delays
for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs to the customers&rsquo;
satisfaction or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays
or other problems, then our business, financial condition and results of operations could be materially adversely affected. This
could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings in excess
of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">To perform on new programs
we may be required to incur up-front costs which may not have been separately negotiated. Additionally, we may have made assumptions
related to the costs of any program which may be material and which may be incorrect, resulting in costs that are not recoverable.
Such charges and the loss of up-front costs could have a material impact on our liquidity.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Our future success also depends on our ability to address
potential market opportunities and to manage expenses to match our ability to finance operations.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The need to control
our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be adversely affected.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Attracting and retaining a new executive officer and other
key personnel is an essential element of our future success.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our future success depends
to a significant extent upon our ability to attract a new chief executive officer and other executive talent, as well as the continued
service of our existing executive officers and other key management and technical personnel. Experienced management and technical,
marketing and support personnel in the defense and aerospace industries are in demand and competition for their talents is intense.
Our failure to attract a new chief executive officer and other executive talent, or retain our existing executive officers and
key personnel, could have a material adverse effect on our business, financial condition and results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We are subject to strict governmental regulations relating
to the environment, which could result in fines and remediation expense in the event of non-compliance.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are required to comply
with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals,
including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous
substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In
addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released
on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required
to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical
harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use
of such substances. Our operations require the use of chemicals and other materials for painting and cleaning that are classified
under applicable laws as hazardous chemicals and substances. If we are found not to be in compliance with any of these rules, regulations
or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any of which could
result in substantial costs that would adversely impact our business operations and financial condition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We may be subject to fines and disqualification for non-compliance
with Federal Aviation Administration regulations.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are subject to regulation
by the Federal Aviation Administration under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes
standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be
subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure
to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which
could have a material adverse effect on our operations. We have never been subject to such fines or disqualification.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Terrorist acts and acts of war may seriously harm our business,
results of operations and financial condition.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">United States and global
responses to the Middle East conflict, terrorism, perceived nuclear, biological and chemical threats and other global crises increase
uncertainties with respect to U.S. and other business and financial markets. Several factors associated, directly or indirectly,
with the Middle East conflict, terrorism, perceived nuclear, biological and chemical threats, and other global crises and responses
thereto, may adversely affect the mix of products purchased by defense departments in the United States or other countries to
platforms not serviced by us. A shift in defense budgets to product lines we do not produce could have a material adverse effect
on our business, financial condition and results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to Our Indebtedness</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Our indebtedness may have a material adverse effect on
our operations.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have substantial
indebtedness under our Loan Facility. As of June 30, 2017, we had approximately $23,203,866 of indebtedness outstanding under the
Loan Facility, including $2,194,071 of excess advances. All of our indebtedness under the Loan Facility is secured by substantially
all of our assets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We also have outstanding
$5,359,420 principal amount of 8% Notes. To the extent we are not able to pay accrued interest on the 8% Notes in cash due to restrictions
set forth in the Loan Facility or otherwise, we may issue additional 8% Notes in payment of such accrued interest in lieu of cash
(&ldquo;PIK Notes&rdquo;). We issued PIK Notes in lieu of cash payment of accrued interest on the 8% Notes on February 28, 2017
and May 31, 2017. Although we intend to pay the accrued interest on the 8% Notes for the period ended August 15, 2017 in cash,
there can be no assurance that we will be able to do so. If we are unable to pay the outstanding principal and accrued interest
on the 8% Notes when due, our operations may be materially and adversely affected.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In addition, we
have outstanding approximately $1,834,214 aggregate principal amount of May 2018 Notes, which will be converted at a
conversion price of $1.50 per share, the public offering price of our shares of common stock in the Public Offering (as
compared to $2.49 per shares at the time the May 2018 Notes were sold in May 2017), into approximately 1,222,809 shares of
common stock following the stockholder vote on the Restructuring Transactions at our 2017 Annual Meeting of Stockholders,
which we expect to hold in September 2017. The principal amount of the May 2018 Notes is subject to increase by 2% per month
for each 30 days they remain outstanding commencing on August 1, 2017. We also have outstanding subordinated notes in the
aggregate principal amount of $500,000 payable to Michael N. Taglich and Robert F. Taglich bearing interest at the rate of 7%
per annum with an amended maturity date of March 17, 2018, which will be converted at a conversion price of $1.50 per share
into approximately 334,667 shares of common stock following the stockholder vote on, and as part of, the Restructuring
Transactions at our 2017 Annual Meeting of Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our leverage may adversely
affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may
make our results of operations more susceptible to adverse economic conditions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Our indebtedness may limit our ability to pay dividends.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The terms of our Loan
Facility require that we maintain certain financial covenants. Unless we are in compliance with our Loan Facility in the future,
we would need to seek covenant changes under our Loan Facility to pay dividends. There can be no assurance our lenders would agree
to covenant changes acceptable to us or at all. In addition, we may in the future incur indebtedness or otherwise become subject
to agreements whose terms restrict our ability to pay dividends.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to our common stock and this offering</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>The ownership of our common stock is highly concentrated,
and your interests may conflict with the interests of our existing stockholders.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Two of our directors,
Michael N. Taglich and Robert F. Taglich, and their affiliates beneficially own approximately 22.78% of our outstanding common
stock, and following the consummation of the Restructuring Transactions, they will beneficially own approximately 25.50% of our
outstanding shares of common stock. Accordingly, these directors have significant influence over the outcome of corporate actions
requiring stockholder approval. Accordingly, these directors have significant influence over the outcome of corporate actions
requiring stockholder approval. The interests of these directors may be different from the interests of other stockholders on
these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our
common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>A large number of shares may be sold in the market as a result
of the Public Offering and the resale of the Shares offered by this prospectus, which may depress the market price of our common
stock.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">All of the shares of
our common stock sold in the Public Offering and the Shares offered by this prospectus will be freely tradable without restriction
or further registration under the Securities Act. In addition, we will issue a total of approximately 10,187,082 shares of common
stock upon consummation of the Restructuring Transactions, all of which will be eligible for sale in accordance with Rule 144 and
a significant number of the approximately 8,629,606 shares issuable upon the automatic conversion of the Series A Preferred Stock
held by non-affiliates having been held for over the one-year holding period required by Rule 144, will eligible for sale without
restriction. As a result, a substantial number of shares of our common stock may be sold in the public market, which may cause
the market price of our common stock to decline.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We can provide no assurance that our common stock will continue
to meet NYSE MKT listing requirements. If we fail to comply with the continuing listing standards of the NYSE MKT, our common stock
could be delisted.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As a result of the delayed
filing of our Annual Report on Form 10-K for the year ended December 31, 2016 (&ldquo;2016 Form 10-K&rdquo;) and our Quarterly
Report on Form 10-Q for the period ended March 31, 2017 (&ldquo;Q1 2017 Form 10-Q&rdquo;), we received official notices of noncompliance
with NYSE MKT continued listing standards. We resolved the continued listing deficiencies and regained compliance with NYSE MKT
continued listing standards upon filing our 2016 Form 10-K and Q1 2017 Form 10-Q. However, we may fail to timely file a periodic
report or other required SEC filing in the future and as a result may fail to be in compliance in the future. If we fail to satisfy
the continued listing requirements of the NYSE MKT, the NYSE MKT may take steps to delist our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In addition, the
NYSE MKT has advised that the consummation of the Restructuring Transactions is subject to stockholder approval in accordance
with the applicable rules of the NYSE MKT. Our Board of Directors has decided that if stockholders fail to approve the
Restructuring Transactions at the 2017 Annual Meeting of Stockholders, we nevertheless will consummate the Restructuring
Transactions, in which event the NYSE MKT is likely to delist our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The delisting of our
common stock would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase
common stock when you wish to do so.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>There is only a limited public market for our common stock.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our common stock is
listed on the NYSE MKT. However, trading volume has been limited and a more active public market for our common stock may not develop
or be sustained over time. The lack of a robust market may impair a stockholder&rsquo;s ability to sell shares of our common stock.
In the absence of a more active trading market, any attempt to sell a substantial number of our shares could result in a decrease
in the price of our stock. Specifically, you may not be able to resell your shares of common stock at or above the price you paid
for such shares or at all.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Moreover, sales of our
common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our common
stock. As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly at all, and
the price per share of our common stock may fluctuate significantly.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Our future revenues are inherently unpredictable; our operating
results are likely to fluctuate from period to period and if we fail to meet the expectations of securities analysts or investors,
our stock price could decline significantly.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our quarterly and
annual operating results are likely to fluctuate significantly due to a variety of factors, some of which are outside our
control. Accordingly, we believe that period-to-period comparisons of our results of operations are not meaningful and should
not be relied upon as indications of performance. Some of the factors that could cause quarterly or annual operating results
to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense
recognition for contracts, the United States Government contracting and budget cycles, introduction of new government
regulations and standards, contract closeouts, variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic conditions and economic conditions specific to the
defense market. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses
are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our
business.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Fluctuations in quarterly
results, competition or announcements of extraordinary events such as acquisitions or litigation may cause earnings to fall below
the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly
decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of
our common stock, as well as our overall operating results. Consequently, our share price may experience significant volatility
and may not necessarily reflect the value of our expected performance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We are currently unable to pay cash dividends on our common
stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our ability to pay cash
dividends on our common stock is limited by the terms of our Loan Facility (and the terms of any future indebtedness or other agreements),
under applicable law, and our status as a holding company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We may need to raise additional capital in the future. Additional
capital may not be available to us on reasonable terms, if at all, when or as we require. If we issue additional shares of our
common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing
stockholders would experience further dilution and could trigger anti-dilution provisions in outstanding warrants.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Assuming we meet our
current operating budget, we do not expect to need capital in the foreseeable future. However, we may need to raise additional
capital in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable
or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as
we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected
and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional
working capital when required would have a material adverse effect on our business and financial condition and may result in a
decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are
convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest
of our existing stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Future financings or acquisitions may adversely affect the
market price of our common stock.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Future sales or issuances
of our common stock, including the issuance of shares of our common stock upon the consummation of the Restructuring Transactions,
upon conversion of the 8% Notes, upon exercise of our outstanding warrants or as part of future financings or acquisitions, would
be substantially dilutive to the outstanding shares of common stock. Any dilution or potential dilution may cause our stockholders
to sell their shares, which would contribute to a downward movement in the price of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Future issuances of additional 8% Notes in lieu of cash interest
payments on our 8% Notes will dilute existing holders of our common stock and may adversely affect the market price of our common
stock.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are obligated to
pay accrued interest quarterly to holders of our 8% Notes. To date, we have issued additional 8% Notes in lieu of cash payments
of accrued interest (&ldquo;PIK Notes&rdquo;). Although we intend to pay the accrued interest on the 8% Notes for the period ended
August 15, 2017 in cash, there can be no assurance that we will be able to do so. If for any future interest periods we are unable
to pay accrued interest on the 8% Notes in cash due to restrictions in our Loan Facility or liquidity constraints, we may issue
additional PIK Notes to holders of our 8% Notes. The conversion of PIK Notes into common stock will dilute the interests of our
common stockholders and may adversely affect the market price of our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We are an &ldquo;emerging growth company&rdquo; and we cannot
be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive
to investors.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The JOBS Act permits
&ldquo;emerging growth companies&rdquo; like us to rely on some of the reduced disclosure requirements that are already available
to companies having a public float of less than $75 million, for as long as we qualify as an emerging growth company. During that
period, we are permitted to omit the auditor&rsquo;s attestation on internal control over financial reporting that would otherwise
be required by the Sarbanes-Oxley Act. Companies with a public float of $75 million or more must otherwise procure such an attestation
beginning with their second annual report after their initial public offering. For as long as we qualify as an emerging growth
company, we also are excluded from the requirement to submit &ldquo;say-on-pay&rdquo;, &ldquo;say-on-pay frequency&rdquo; and &ldquo;say-on-parachute&rdquo;
votes to our stockholders and may avail ourselves of reduced executive compensation disclosure compared to larger companies. In
addition, as described in the following risk factor, as an emerging growth company we can take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public companies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Until such time as we
cease to qualify as an emerging growth company, investors may find our common stock less attractive because we may rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and our stock price may be more volatile.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>As an &ldquo;emerging growth company&rdquo; we may take advantage
of an extended transition period to comply with new or revised accounting standards applicable to public companies.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 107 of
the JOBS Act also provides that, as an emerging growth company, we can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We can therefore
delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have
elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be
comparable to those of companies that comply with such new or revised accounting standards. Please refer to
&ldquo;Management&rsquo;s Discussion and Analysis of Financial Condition and Results of Operations &mdash; Critical
Accounting Policies and Estimates&rdquo; for further discussion of the extended transition period for complying with new or
revised accounting standards.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>At such time as we cease to qualify as an &ldquo;emerging
growth company&rdquo; under the JOBS Act, the costs and demands placed upon management will increase.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We will continue to
be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual
gross revenues of $1,000,000,000 (as indexed for inflation), (ii) December 31, 2018 (the last day of the fiscal year following
the fifth anniversary of the date of the first sale of common stock under a registration statement under the Securities Act,) (iii)
the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv)
the date on which we are deemed to be a &lsquo;large accelerated filer&rsquo; as defined by the SEC, which would generally occur
upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and
demands placed upon management to increase, as we would have to comply with additional disclosure and accounting requirements,
particularly if our public float should exceed $75 million.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>We incur significant costs as a result of operating as a
public company, and our management is required to devote substantial time to compliance requirements, including establishing and
maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable to comply with
these requirements.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As a public company,
we will incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented
by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies,
including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial
amount of time to these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Sarbanes-Oxley Act
requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and
procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting
to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404
of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant
management efforts. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be
material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we
cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose confidence in the
reliability of our financial statements and we could be subject to sanctions or investigations by the SEC or other applicable regulatory
authorities.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>USE OF PROCEEDS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We will not receive
any proceeds from the sale of the Shares offered by the Selling Stockholders under this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have agreed to bear
the expenses (other than any underwriting discounts or commissions or agent&rsquo;s commissions) in connection with the registration
of the Shares being offered hereby by the Selling Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PRICE RANGE OF OUR COMMON STOCK</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our common stock is
listed on the NYSE MKT under the symbol &ldquo;AIRI.&rdquo; The prices set forth below reflect the quarterly high and low closing
prices of a share of our common stock for the periods indicated as reported by Yahoo Finance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD><FONT STYLE="font-size: 10pt">2015:</FONT></TD>
    <TD COLSPAN="3" STYLE="text-align: center"><FONT STYLE="font-size: 10pt"><B>High</B></FONT></TD>
    <TD COLSPAN="3" STYLE="text-align: center"><FONT STYLE="font-size: 10pt"><B>Low</B></FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 75%"><FONT STYLE="font-size: 10pt">Quarter Ended March 31, 2015</FONT></TD>
    <TD STYLE="width: 1%; text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="width: 11%; text-align: right"><FONT STYLE="font-size: 10pt">10.52</FONT></TD>
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="width: 10%; text-align: right"><FONT STYLE="font-size: 10pt">9.70</FONT></TD>
    <TD STYLE="width: 1%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended June 30, 2015</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">10.74</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">9.91</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended September 30, 2015</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">10.13</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">8.06</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended December 31, 2015</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">9.17</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">6.98</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">2016:</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended March 31, 2016</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">8.23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">5.90</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended June 30, 2016</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">6.08</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">4.20</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended September 30, 2016</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">4.89</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">3.95</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended December 31, 2016</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">4.39</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">2.25</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">2017:</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended March 31, 2017</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">4.60</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">2.75</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended June 30, 2017 </FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">3.60</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">1.79</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Quarter Ended September 30, 2017 (through July 25)</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">1.75</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">$</FONT></TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">1.35</FONT></TD>
    <TD>&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On July 25, 2017, the closing price of our
common stock was $1.42.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Holders </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On July 24, 2017, there were
approximately 197 stockholders of record of our common stock. The number of record holders does not include persons who held
our Common Stock in nominee or &ldquo;street name&rdquo; accounts through brokers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>DIVIDEND POLICY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The declaration and
payment of dividends on our common stock is subject to the discretion of our Board of Directors and depends on a number of factors,
including future earnings, capital requirements, restrictions under our Loan Facility, financial conditions and future prospects
and other factors the Board of Directors may deem relevant.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>BUSINESS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are an aerospace
and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear,
arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal
fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile
military and commercial aircraft including Sikorsky&rsquo;s UH-60 Black Hawk and CH-47 Chinook helicopters, Lockheed Martin&rsquo;s
F-35 Joint Strike Fighter, Northrop Grumman&rsquo;s E2 Hawkeye, Boeing&rsquo;s 777, Airbus&rsquo; 380 commercial airliners and
the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the
USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We became a public company
in 2005 when our net sales were approximately $30 million. At that time we had been manufacturing components and subassemblies
for the defense and commercial aerospace industry for over 45 years and had established long term relationships with leading defense
and aerospace manufacturers. Since becoming public we have completed a series of acquisitions of defense related businesses. These
acquisitions have enabled us to broaden the range of products and services we offer. At the time we became a public company, we
were primarily a machining shop. As a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding
and tube bending; the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment
and printed circuit boards; the machining of turbine engine components; and the assembly of packages or &ldquo;kits&rdquo; containing
supplies for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical
and electrical assemblies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We currently divide
our operations into three operating segments: Complex Machining; Aerostructures &amp; Electronics; and Turbine Engine Components.
As our businesses continue to develop and evolve, we may deem it appropriate to reallocate our companies into different operating
segments and, once we achieve sufficient integration among our businesses, report as a unified company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Complex Machining is
comprised of Air Industries Machining (&ldquo;AIM&rdquo;) and Nassau Tool Works (&ldquo;NTW&rdquo;). Since the lease for the premises
occupied by NTW expires in October 2018, we are relocating and consolidating the operations of NTW into the facilities of AIM in
Bay Shore, New York, approximately six miles from the premises presently occupied by NTW on Long Island.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Aerostructures &amp;
Electronics is comprised of Welding Metallurgy (&ldquo;WMI&rdquo;), Woodbine Products (&ldquo;WPI&rdquo;), Eur-Pac, Electronic
Connections (&ldquo;ECC&rdquo;) and Compac Development (&ldquo;Compac&rdquo;). We previously relocated the operations of Miller
Stuart, and Compac Development from their locations on Long Island to Welding Metallurgy&rsquo;s facility in Hauppauge, Long Island
NY, and merged Miller Stuart into WMI. We are continuing to fully integrate these operations, and the operations of Woodbine Products,
and Decimal Industries into the operations of Welding Metallurgy. Turbine Engine Components is comprised of The Sterling Engineering
Corporation and, until its sale in January 2017, included AMK Welding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Our Market</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We operate primarily
in the military and, to a lesser degree, commercial aviation industries. Defense revenues represent a preponderance of our sales.
Our principal customers include Sikorsky Aircraft, Goodrich Landing Gear Systems, Northrop Grumman, the United States Department
of Defense, GKN Aerospace, Lockheed, Boeing, Raytheon, Piper Aircraft, M7 Aerospace, Vought Aerospace, Ametek/Hughes-Treitler and
Airbus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our products are incorporated
into many aircraft platforms, the majority of which remain in production, and of which there are a substantial number of operating
aircraft in the fleets maintained by the military and commercial airlines. We believe that we are the largest supplier of flight
critical parts to Sikorsky&rsquo;s Black Hawk helicopter. We have made, or currently make, or have been awarded, products for the
CH-47 Chinook helicopter, Lockheed Martin&rsquo;s F-35 Joint Strike Fighter, Northrop Grumman&rsquo;s E2 Hawkeye, Boeing&rsquo;s
777, Airbus&rsquo; 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine Components
segment makes components for jet engines that are used on the USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition
to a number of non-military ground turbine applications.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Many of our products
are &ldquo;flight critical,&rdquo; essential to aircraft performance and safety on takeoff, during flight and when landing. These
products require advanced certifications as a condition to being a supplier. For many of our products we are the sole or one of
a limited number of sources of supply. Many of the parts we supply are subject to wear and tear or fatigue and are routinely replaced
on aircraft on a time of service or flight cycle basis.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Replacement demand for these products will
continue, albeit at perhaps a lower rate, so long as an aircraft remains in service, which is usually many years after production
has stopped.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The National Defense
Authorization Act, which was approved in December 2016, provides for an increase in defense spending. President Donald Trump&rsquo;s
preliminary budget proposal provides for a further increase in military spending of approximately 10%. Despite these positive developments,
there can be no assurance that any such increase in military spending will increase demand for the products we supply or otherwise
benefit us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Sales and Marketing</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our approach to sales
and marketing can be best understood through the concept of customer alignment. The aerospace industry is dominated by a small
number of large prime contractors and equipment manufacturers. These customers rely heavily upon subcontractors to supply quality
parts meeting specifications on a timely and cost effective basis. These customers and other customers we supply routinely rate
their suppliers based on a variety of performance factors. One of our principal goals is to be highly rated and thus relied upon
by all of our customers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The large prime contractors
are increasingly seeking subcontractors who can supply and are qualified to integrate the fabrication of larger, more complex and
more complete subassemblies. We seek to position ourselves within the supply chain of these contractors and manufacturers to be
selected for subcontracted projects. Successful positioning requires that we qualify to be a preferred supplier by achieving and
maintaining independent third party quality approval certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts. We believe that the various capabilities we have acquired through our
acquisition program increase the likelihood we will qualify for and be awarded larger, more complex projects. As an example of
our successful efforts to move up the supplier chain, our Aerostructures &amp; Electronics segment has grown from being a supplier
of welding services to being a supplier of welding subassemblies and is now a product integrator, providing customers with complete
structural assemblies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As part of our effort
to become a product integrator and increase our value to our customers, we have recruited personnel to design products and to fabricate
complete, fully-assembled products. In our marketing efforts we let customers know that we now have employees with the talent and
experience to manage the manufacture of sections of aircraft structures to be delivered to the final assembly phase of the aircraft
manufacturing cycle, and customers have now engaged us for these services.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As we acquired new businesses,
we often gained new or enhanced technical capabilities. When we sought to exploit these new capabilities by introducing to our
existing customers newly acquired products and capabilities we previously lacked. Businesses we acquired often introduced us to
customers we had not previously supplied and we marketed to these customers the products and services they need which we historically
provided. This marketing effort has enabled us to grow some of the businesses we acquired and increased our value to our customers.
For example, the acquisition of the business of Nassau Tool Works in 2012 expanded our capabilities in the &ldquo;turning&rdquo;
of metal components. This enhanced capability was important in our Complex Machining segment winning a large multi-year commercial
aerospace contract to supply Thrust Struts to a unit of UTAS for use in the Pratt &amp; Whitney Geared Turbo Fan jet engine.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Initial contracts are
usually obtained through competitive bidding against other qualified subcontractors, while follow-on contracts are usually retained
by successfully performing initial contracts. The long term business of each of our current operating segments generally benefits
from barriers to entry resulting from investments, certifications, familiarization with the needs and systems of customers, and
manufacturing techniques developed during the initial manufacturing phase. We endeavor to develop each of our relationships to
one of a &ldquo;partnership&rdquo; where we participate in the resolution of pre-production design and build issues, and initial
contracts are obtained as single source awards and follow-on pricing is determined through negotiations. Despite these efforts
a minority of our sales are based on negotiated prices.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Our Backlog</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Our backlog is best understood by looking at our operating segments
independently.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Within our Complex
Machining and Turbine Engine Components segments, the production cycle of products can extend from several months to a year or
longer. This gives rise to significant backlogs as customers must order product with sufficient lead time to ensure timely delivery.
In contrast, the production cycle for a significant majority of the products produced in our Aerostructures &amp; Electronics
segment is much shorter, a matter of several weeks or a few months. This shorter cycle allows customers to delay orders resulting
in a much smaller backlog.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have a number of
long-term multi-year General Purchase Agreements or GPA&rsquo;s with several of our customers. These agreements specify part numbers,
specifications and prices of the covered products for a specified period, but do not authorize immediate production and shipment.
Shipments are authorized periodically by the customer to fit their production schedule. We recently received a renewal of our multi-year
contract with Sikorsky, MY9, for the years 2018 to 2023. This contract is for $47 million worth of product during this period.
This is the third multi-year contract award we have received from Sikorsky.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our &ldquo;firm
backlog&rdquo; includes only fully authorized orders received for products to be delivered within the forward 18-month
period. As of June 30, 2017, our 18-month &ldquo;firm funded backlog&rdquo; was approximately $120 million.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Competition</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Winning a new contract
is highly competitive. For the most part we manufacture to customer designs and specifications, and compete against companies that
have similar manufacturing capabilities in a global marketplace. Consequently, the ability to obtain contracts requires providing
quality products at competitive prices. To accomplish this requires that we strive for continuous improvement in our capabilities
to assure our competitiveness and provide value to our customers. Our marketing strategy involves developing long-term ongoing
working relationships with customers. These relationships enable us to develop entry barriers to would-be competitors by establishing
and maintaining advanced quality approvals, certifications and tooling investments that are difficult and expensive to duplicate.
Despite these barriers to entry, many of our competitors are well-established subcontractors engaged in the supply of aircraft
parts and components to prime military contractors and commercial aviation manufacturers. Among our competitors are: Monitor Aerospace,
a division of Stellex Aerospace; Hydromil, a division of Triumph Aerospace Group; Heroux Aerospace and Ellanef Manufacturing, a
division of Magellan Corporation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Many of our competitors
are larger enterprises or divisions of significantly larger companies having greater financial, physical and technical resources,
and the capabilities to timelier respond under much larger contracts.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Raw Materials and Replacement Parts</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The manufacturing process
for certain products, particularly those for which we serve as product integrator, requires significant purchases of raw materials,
hardware and subcontracted details. As a result, much of our success in profitably meeting customer demand for these products requires
efficient and effective subcontract management. Price and availability of many raw materials utilized in the aerospace industry
are subject to volatile global markets. Most suppliers of raw materials are unwilling to commit to long-term contracts at fixed
prices. This is a substantial risk as our strategy often involves long term fixed price commitments to our customers. Recently,
we have had difficulties in securing timely shipments of raw materials from certain vendors due to our liquidity problems.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Employees</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of May 31, 2017,
we employed approximately 366 people. Of these, approximately 42 were in administration, 29 were in sales and procurement, and
295 were in manufacturing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Air Industries Machining,
one of the components of our Complex Machining segment, is a party to a collective bargaining agreement (the &ldquo;Agreement&rdquo;)
with the United Service Workers, IUJAT, Local 355 (the &ldquo;Union&rdquo;) with which we believe we maintain good relations. The
Agreement, dated January 1, 2016, expires December 31, 2018 and covers all of AIM&rsquo;s production personnel, of which there
are approximately 104 people. AIM is required to make a monthly contribution to each of the Union&rsquo;s United Welfare Fund and
the United Services Worker&rsquo;s Security Fund. This is the only pension benefit required by the Agreement and the Company is
not obligated for any future defined benefit to retirees. The Agreement contains a &ldquo;no-strike&rdquo; clause, whereby, during
the term of the Agreement, the Union will not strike and AIM will not lockout its employees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">All of our employees are covered under a
co-employment agreement with ADP.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Regulations&#9;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Environmental Regulation; Employee Safety</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are subject to
regulations administered by the United States Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting in cooperation with federal and state
authorities. Among other things, these regulatory bodies impose restrictions that require us to control air, soil and water
pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require
notification or reporting of the storage, use and release of certain hazardous chemicals and substances. The extensive
regulatory framework imposes compliance burdens and financial and operating risks on us. Governmental authorities have the
power to enforce compliance with these regulations and to obtain injunctions or impose civil and criminal fines in the case
of violations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (&ldquo;CERCLA&rdquo;) imposes strict, joint and several liability on the present
and former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation
and Recovery Act of 1976 (&ldquo;RCRA&rdquo;) regulates the generation, transportation, treatment, storage and disposal of hazardous
waste. New York and Connecticut, the states where all of our production facilities are located, also have stringent laws and regulations
governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards
that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence
of hazardous chemicals and to train employees in the use of such substances.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Federal Aviation Administration</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are subject to regulation
by the Federal Aviation Administration (&ldquo;FAA&rdquo;) under the provisions of the Federal Aviation Act of 1958, as amended.
The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by
the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations.
Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts,
which could have a material adverse effect on our operations. We have never been subject to such fines or disqualifications.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Government Contract Compliance</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our government contracts
and those of many of our customers are subject to the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations. Many of the contract terms are dictated by these rules and regulations. During and after the
fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed to the
project. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquiries
and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or
limitations on our ability to continue to bid for government contracts and fulfill existing contracts.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We believe that we are
in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses
and permits required for the operation of our business.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Properties</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our executive offices
are located at 360 Motor Parkway, Suite 100, Hauppauge, New York 11788. We occupy our executive offices under a lease with approximately
five years remaining in the term which ends January 2022. The annual rent was $103,000 for the lease year which began in January
2016, and increases by approximately 3% per annum each year thereafter until the seventh year of the lease.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The operations of a
portion of our Complex Machining segment are conducted on a 5.4-acre corporate campus in Bay Shore, New York. We occupy three buildings
on the campus, consisting of 76,000 square feet. On October 24, 2006, we entered into a &ldquo;sale/leaseback&rdquo; transaction
whereby we sold the buildings and real property located at the corporate campus and entered into a 20-year triple-net lease for
the property. Base annual rent for 2016 was approximately $723,000 and increases by 3% each subsequent year. The lease grants us
an option to renew the lease for an additional five years. Under the terms of the lease, we are required to pay all of the costs
associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The remaining portion
of the operations of our Complex Machining segment are conducted in a 60,000 square foot facility in West Babylon, New York. The
space is occupied under a lease which provides for an annual base rent of approximately $360,000 through October 30, 2018. We
are in the process of relocating the operations of NTW conducted at this location to AIM&rsquo;s facilities in Bay Shore, New
York.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The operations of our
Aerostructures &amp; Electronics segment are principally conducted in an 81,035 square foot facility located in Hauppauge, New
York. This space is occupied under a sublease which had an annual base rent of approximately $527,000 for 2016 and increases by
an agreed upon amount each anniversary of the commencement of the lease through December 31, 2026.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The balance of our Aerostructures
&amp; Electronics segment are located in a 16,000 square foot facility in Waterbury, Connecticut. The space is occupied under a
lease which has an annual base rent of approximately $115,000 and expires May 31, 2019; and a 9,200 square foot space in Bay Shore,
New York, which is occupied under a lease which has an annual base rent of approximately $75,000 and expires April 30, 2018.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The operations of our
Turbine Engine Components segment are conducted in a 74,923 square foot facility on a 24 acre parcel in Barkhamsted, Connecticut.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Legal Proceedings</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">From time to time we
may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of
any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material
adverse effect on our business, financial condition or operating results. We, however, have had claims brought against us by a
small number of vendors due to our liquidity constraints. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material interest adverse
to our interest.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>MANAGEMENT&rsquo;S DISCUSSION AND ANALYSIS
OF<BR>
FINANCIAL CONDITION AND RESULTS OF OPERATION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>The following discussion
of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements
for the years ended December 31, 2016 and 2015 and our unaudited condensed consolidated financial statements for the quarters ended
March 31, 2017 and 2016 and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this prospectus
that could cause actual results to differ materially from those anticipated in these forward-looking statements.</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Business Overview</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are an aerospace
company operating primarily in the defense industry, though the proportion of our business represented by the commercial and industrial
sector is increasing. We manufacture and design structural parts and assemblies that focus on flight safety, including landing
gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. We also provide sheet metal fabrication
of aerostructures, tube bending, welding and kitting services. Our Turbine Engine Components segment makes components and provides
services for jet engines and ground-power turbines. Our products are currently deployed on a wide range of high profile military
and commercial aircraft.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We became a public company
in 2005 when our net sales were approximately $30 million. We have manufactured components and subassemblies for the defense and
commercial aerospace industry for over 50 years and have established long-term relationships with leading defense and aerospace
manufacturers. Since becoming public, we have completed a series of acquisitions of defense related businesses. These acquisitions
have enabled us to broaden the range of products and services we offer. At the time we became a public company, we were primarily
a machining shop. As a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding and tube bending;
the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment and printed
circuit boards; the machining of turbine engine components; and the assembly of packages or &ldquo;kits&rdquo; containing supplies
for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical and
electrical assemblies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">Since January 1, 2015, we have made the following
acquisitions and dispositions:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top"><TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify">In March 2015, we acquired Sterling Engineering Corporation
(&ldquo;Sterling&rdquo;) for approximately $10.1 million. Founded in 1941, Sterling provides complex machining services and its
business is concentrated with aircraft jet engine and ground turbine manufacturers;</FONT></TD></FONT></TD></TR></TABLE>


<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">In September 2015, we acquired Compac Development Corporation (&ldquo;Compac&rdquo;) for
                                                                                                                   approximately $1.5 million. Founded in 1976, Compac specializes in the manufacture of RFI/EMI (Radio Frequency Interference
                                                                                                                   &ndash; Electromagnetic Interference) shielded enclosures for electronic components;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">In January 2017 we sold AMK Welding, Inc., for $4.5 million, net of a working capital
                                                                                                                   adjustment of ($240,000) plus additional payments based on net revenue not to exceed $1.5 million. We acquired AMK Welding
                                                                                                                   in
                                                                                                                   October, 2014.</FONT></TD>
</TR></TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The aerospace market
is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business.
Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through
a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors
seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive
not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete
assemblies for our customers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our ability to operate
profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts
on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally
requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period
of time. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors,
the prices we can obtain from our subcontractors.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">While our revenues are
largely determined by the number of contracts we are awarded, the volume of product delivered and the price of product under each
contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials
and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace
industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive.
The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product,
the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice.
Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the
result of shifts in the mix of products sold.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">A very large percentage
of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements parts for aircraft
already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and
decreased usage of aircraft have reduced the demand for both new production and replacement spares. This reduced our sales, particularly
in our Complex Machining segment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Defense budget proposed
for Fiscal Year 2017, beginning on October 1, 2016, approved in December 2016, increases military spending and presumably procurement.
Recently President Trump has proposed an additional increase of approximately $50 billion for fiscal year 2018, beginning on October
1, 2017. There is no assurance that defense spending will, in fact, increase in the near future or that the increase will increase
demand for the product lines we produce.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Public Offering</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On July 12, 2017,
we sold 5,175,000 shares of common stock at a price of $1.50 per for gross proceeds of $7,762,500 in a firm commitment underwritten
public offering (the &ldquo;Public Offering&rdquo;). We received net proceeds of approximately $6,819,125 from the sale of our
shares in the Public Offering. For additional information concerning the Public Offering and the related Restructuring Transactions,
see the discussion under the caption &ldquo;Liquidity,&rdquo; below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Segment Data</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We follow Financial
Accounting Standards Board (&ldquo;FASB&rdquo;) ASC 280, &ldquo;Segment Reporting&rdquo; (&ldquo;ASC 280&rdquo;), which establishes
standards for reporting information about operating segments in annual and interim financial statements, and requires that companies
report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes
standards for related disclosures about products and services, geographic areas and major customers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We currently divide
our operations into three operating segments: Complex Machining; Aerostructures &amp; Electronics; and Turbine Engine Components.
Effective January 1, 2015, all operating costs are allocated to our three operating segments. As our businesses continue to develop
and evolve we may deem it appropriate to reallocate our companies into different operating segments. Along with our operating subsidiaries,
we report the results of our corporate division as an independent segment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The accounting policies
of each of the segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance
of each segment based on revenue, gross profit contribution and assets employed.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>RESULTS OF OPERATIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Three Months ended March 31, 2017 and 2016</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Selected Financial Information:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months Ended March 31, 2017 and
    2016:</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">16,153,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">15,184,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Cost of sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">13,451,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12,363,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,702,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,821,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Operating expenses and interest costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,114,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,917,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Other income, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(193,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Gain on Sale of Subsidiary</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">451,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Benefit from income taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">656,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(1,430,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Balance Sheet Data:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Cash and cash equivalents</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,043,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,304,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Working capital</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,096,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,903,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">73,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total stockholders&rsquo; equity</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">24,911,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">24,890,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following sets forth the results of
operations for each of our segments individually and on a consolidated basis for the periods indicated:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months Ended March 31,</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">COMPLEX MACHINING</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">9,891,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,467,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,901,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,858,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,085,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(400,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">41,940,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">51,076,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">AEROSTRUCTURES &amp; ELECTRONICS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,320,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">26,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">948,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,279,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(772,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,669,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,263,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">TURBINE ENGINE COMPONENTS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,942,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,557,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(225,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(827,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(914,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,233,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,247,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">CORPORATE</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(133,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">785,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">534,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">CONSOLIDATED</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">16,153,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,184,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,702,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,821,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,086,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Benefit from Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">656,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,430,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">73,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">88,120,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Net Sales:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Consolidated net sales
for the three months ended March 31, 2017 were approximately $16,153,000, an increase of $969,000, or 6.4%, compared with $15,184,000
for the three months ended March 31, 2016. The increase in sales resulted from an increase in our Complex Machining segment of
approximately $2,424,000 or 32.5%. This increase in sales was partially offset by decreases in our Turbine Engine Components and
Aerostructures &amp; Electronics segments of approximately $615,000 and $840,000, respectively. The decrease in our Turbine Engine
Segment in 2017 largely resulted from the inclusion of AMK for three months in 2016 and only one month in 2017. AMK was sold on
January 27, 2017. Without AMK revenues of this segment were essentially flat, declining just $38,000 for the quarter.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As indicated in the
table below, four customers represented 60.5% and 58.4% of total sales for the three months ended March 31, 2017 and 2016, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Sales</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(unaudited)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Sikorsky Aircraft</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">16.6</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">23.2</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">United States Department of Defense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17.1</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12.7</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Goodrich Landing Gear Systems</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14.1</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11.9</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Northrop Grumman Corporation</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12.7</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10.6</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Gross Profit:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Consolidated gross profit
from operations for the three months ended March 31, 2017 was $2,702,000, a decrease of approximately $119,000, or 4.2%, as compared
to gross profit of $2,821,000 for the three months ended March 31, 2016. Consolidated gross profit as a percentage of sales was
16.7% and 18.6% for the three months ended March 31, 2017 and 2016, respectively. Gross profit from operations increased by approximately
$1,043,000 in our Complex Machining segment. This increase was offset by declines in gross profit in our Turbine &amp; Engine and
Aerostructures &amp; Engineering segments of approximately $239,000 and $922,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Operating Expenses:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Consolidated operating
expenses for the three months ended March 31, 2017 were $3,221,000 and decreased by $1,191,000, or 27.0%, compared to $4,412,000
for the three months ended March 31, 2016. The decrease resulted primarily from a reduction in corporate expense and to a lesser
degree the elimination of operating costs for AMK for two months of 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest and financing
costs for the three months ended March 31, 2017 were approximately $893,000, an increase of approximately $388,000, or 76.8%, compared
to $505,000 for the three months ended March 31, 2016. The increase resulted from increases in debt in the form of subordinated
notes bearing interest at higher rates than debt under the PNC Loan Facility and to a lesser degree higher interest rates on the
PNC loan facility, offset in part by less principal outstanding on the PNC loans.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Loss before income taxes
for the three months ended March 31, 2017 was $(1,154,000), a decrease in the loss of $932,000, or a 44.7% improvement, compared
to the loss before income taxes of $(2,086,000) for the three months ended March 31, 2016. Our Complex Machining segment had a
pre-tax profit of approximately $1,085,000. Our Aerostructures &amp; Electronics segment experienced a pre-tax loss of approximately
$(1,279,000). Our Turbine &amp; Engine segment experienced a pre tax loss of approximately $(827,000).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Net Loss:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Net loss for the three
months ended March 31, 2017 was $(1,154,000), a decrease of $276,000, or 19.3%, compared to net loss of $(1,430,000) for the three
months ended March 31, 2016 for the reasons discussed above.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Years ended December 31, 2016 and 2015:</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The results of operations
of the businesses we have acquired are included in our financial results for the year ended December 31, 2015 from their respective
dates of acquisition; March 1, 2015, in the case of Sterling and September 1, 2015, in the case of Compac.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Selected Financial Information:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">66,915,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">80,442,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Cost of sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">60,195,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">63,161,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,720,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,281,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Operating expenses, acquisition costs and interest and financing costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,105,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">18,513,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Other income (expense) net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(126,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">114,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Provision for (benefit from) income taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,112,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(286,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net (loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Balance Sheet Data:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Cash and cash equivalents</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,304,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">529,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Working capital</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,903,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,171,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">88,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total stockholders&rsquo; equity</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">24,890,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">28,805,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>


<P STYLE="margin: 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:&nbsp;</FONT></P>

<P STYLE="margin: 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Year Ended December 31,</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; font-weight: bold; font-style: italic; text-align: left">COMPLEX MACHINING</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">37,124,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">42,356,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,382,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,412,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,432,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,825,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">45,073,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">48,353,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; font-weight: bold; font-style: italic; text-align: left">AEROSTRUCTURES &amp; ELECTRONICS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">18,818,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">27,134,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,489,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,553,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,985,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">386,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,843,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,229,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; font-weight: bold; font-style: italic; text-align: left">TURBINE ENGINE COMPONENTS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,973,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,952,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(151,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">316,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,084,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,329,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,235,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,076,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; font-weight: bold; font-style: italic">CORPORATE</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(10,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">649,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">592,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; font-weight: bold; font-style: italic">CONSOLIDATED</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">66,915,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">80,442,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,720,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,281,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(13,511,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,118,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Provision for (Benefit from) Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,112,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(286,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">88,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Net Sales:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Consolidated net sales
for the year ended December 31, 2016 were approximately $66,915,000, a decrease of $13,527,000, or 16.8%, compared with $80,442,000
for the year ended December 31, 2015. Net sales of our Complex Machining segment were approximately $37,124,000, a decrease of
$5,232,000, or 12.4%, from $42,356,000 in the prior year. The decline in sales at our Complex Machining segment was due to delays
in producing products exacerbated by disruptions in receipt of materials, and reductions in government procurement orders due to
Sequestration. Net sales of our Aerostructures &amp; Electronics segment were approximately $18,818,000 and decreased by $8,316,000,
or 30.6%, from $27,134,000 in the prior year. This decline can be attributed to decreased volume at each of the divisions within
our Aerostructures &amp; Electronics segment other than Compac which experienced an increase in annual sales largely due to the
fact that it was owned for all of 2016 as compared to four months in 2015. Approximately $4.2 million of the decrease is attributed
to the expected loss of a biennial contract with Raytheon which was awarded in 2015, but not in 2016. An additional $2.2 million
of the decline resulted from a delay in the shipment of a single $3 million order received in 2016. The balance of the decline
is attributable to delays in producing products. Net sales in our Turbine Engine Components segment were approximately $10,973,000,
an increase from net sales of $10,952,000 in the prior year. The stability of sales in our Turbine Engine Components reflects the
fact that during 2016 they included the results of both Sterling and AMK, and an increase in sales of $453,000 at AMK was substantially
offset by a decrease in sales at Sterling, despite the fact that the results of Sterling were included for only ten months in 2015.
AMK was sold in January 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As indicated in the
table below, four customers represented 56.4% and four customers represented 59.3% of total sales for the years ended December
31, 2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Sales</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Sikorsky Aircraft</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">19.1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">20.5</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Goodrich Landing Gear Systems</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12.3</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15.4</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">United States Department of Defense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14.3</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12.0</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Northrup Grumman Corporation</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10.7</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11.4</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As indicated in the table below, one customer
represented 19.9% and four customers represented 61.1% of gross accounts receivable at December 31, 2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Receivables</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Goodrich Landing Gear Systems</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">19.9<FONT STYLE="font-size: 10pt">%</FONT></TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">26.6</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Northrop Grumman Corporation</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">13.6</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Sikorsky Aircraft</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10.5</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">GKN Aerospace</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10.4</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
</TABLE>


<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">*</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">Customer was less than 10% of Gross Accounts Receivable at December 31, 2016.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Gross Profit:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Consolidated gross profit
from operations for the year ended December 31, 2016 was $6,720,000, a decrease of approximately $10,561,000, or 61.1%, as compared
to gross profit of $17,281,000 for the year ended December 31, 2015. Consolidated gross profit as a percentage of sales was 10.0%
and 21.5% for the years ended December 31, 2016 and 2015, respectively. The decrease in gross profit is due to the effects of lower
total sales and related absorption of non-variable manufacturing costs into cost of sales, increased slow moving reserves, and
less profitable contracts. The decline in gross profit percentage resulted from under absorption of factory overhead expenses.
The decrease in consolidated gross profit reflects decreases in each of our operating segments, caused, in the case of our Complex
Machining and Aerostructures &amp; Electronics segments, by a substantial reduction in sales.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Selling, General &amp; Administrative (&ldquo;SG&amp;A&rdquo;):</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Consolidated SG&amp;A
costs for the year ended December 31, 2016 totaled approximately $17,509,000 and increased by $952,000 or 5.7% compared to $16,557,000
for the year ended December 31, 2015. The increase in SG&amp;A costs reflects the addition of a number of management level personnel
at the Company&rsquo;s headquarters. Due to the failure of sales to increase as anticipated, we have begun to take steps to reduce
the increase in SG&amp;A costs.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt; text-align: justify">Interest and financing costs of approximately
$2,596,000 for the year ended December 31, 2016 increased $738,000 or 39.7% as compared to $1,858,000 for the year ended December
31, 2015. This increase can be attributed to additional amounts of debt incurred from term loans due to the AMK and Sterling acquisitions,
the purchase of inventory from Circor Aerospace which was not sold in 2016 and cash used for operations to fund our losses. In
addition to increasing our debt in absolute terms, the convertible debt issued during 2016 bears a higher per annum rate of interest
than our bank debt. Due to our inability to generate significant cash from operations, however, during 2016 we paid the interest
accrued on our convertible debt &ldquo;in&ndash;kind&rdquo; through the issuance of additional debt, which further increased the
amount of our debt outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We had an income tax
expense of $2,112,000 for the year ended December 31, 2016 compared to an income tax benefit of $286,000 for the year ended December
31, 2015. The tax provision for 2016 was primarily the result of providing a full valuation allowance on our deferred tax asset.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Net Loss</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Net loss for the year
ended December 31, 2016 was $15,623,000, an increase of $14,791,000, compared to a net loss of $832,000 for the year ended December
31, 2015, for the reasons discussed above.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Impact of Inflation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">Inflation has not had a material effect
on our results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>LIQUIDITY AND CAPITAL RESOURCES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are highly leveraged
and rely upon our ability to continue to borrow under our Loan Facility with PNC or to raise debt and equity from third parties
to support operations and acquisitions. Substantially all of our assets are pledged as collateral under our Loan Facility. We are
required to maintain a lockbox account with PNC, into which substantially all of our cash receipts are paid. If PNC were to cease
providing revolving loans to us under the Loan Facility, we would lack funds to continue our operations. Over the past twelve months
we have also relied upon our ability to borrow money from certain stockholders and raise debt and equity capital to support our
operations. Should we continue to need to borrow funds from our principal stockholders or raise debt or equity, there is no assurance
that we will be able to do so or that the terms on which we borrow funds or raise equity will be favorable to us or our existing
shareholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Loan Facility has
been amended many times during its term. The Loan Facility was amended in June 2016 (the &ldquo;Twelfth Amendment&rdquo;), September
2016 (the &ldquo;Thirteenth Amendment&rdquo;), January 2017 (the &ldquo;Fourteenth Amendment&rdquo;) and June 2017 (the &ldquo;Fifteenth
Amendment&rdquo;).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Twelfth Amendment
provides for a $33,000,000 revolving loan. In addition, in the Twelfth Amendment the four term loans (Term Loan A, Term Loan B,
Term Loan C and Term Loan D) then outstanding were consolidated into a single term loan with the initial principal amount of $7,387,854.
Further, in the Twelfth Amendment we acknowledged that there were then outstanding excess advances under the revolver in the amount
of $12,500,000. At the closing of the Twelfth Amendment we paid $1,500,000 to reduce the outstanding excess under the revolving
loan. We also agreed to reduce the excess advances by $100,000 each week commencing the second week after the closing of the Twelfth
Amendment. In connection with the Twelfth Amendment, we paid PNC a fee of $100,000 and reimbursed PNC for the fees and expenses
of its counsel.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under the terms of the
Loan Facility, as amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters
of one percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent
(4.50%) with respect to LIBOR Rate Loans. The amount outstanding under the revolving loan (including excess advances) was $24,393,000
and $29,604,000, as of December 31, 2016 and December 31, 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Loan Facility was
further amended pursuant to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be the lesser
of (i) 75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, an
increase from 85%, subject to the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper. In addition, in
the Thirteenth Amendment the lender waived any default resulting from our failure to comply with the minimum EBITDA covenant for
the period ended June 30, 2016, consented to the issuance of our 12% Subordinated Convertible Notes and the amendment to our Articles
of Incorporation to increase the authorized number of shares of Preferred Stock and Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt; text-align: justify">The repayment terms of the Term Loan provided
for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first fifty-nine (59) of which
are in the amount of $123,133 commencing on the first business day of July, 2016, and continuing on the first business day of each
month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal and interest payable on the last
business day of June, 2021.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The terms of the Loan
Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA for
specified periods. In addition, we are limited in the amount of Capital Expenditures we can make. We are also limited to the amount
of dividends we can pay our shareholders as defined in the Loan Facility. As of December 31, 2016, we were not in compliance with
the minimum EBITDA covenant, the Fixed Charge Coverage Ratio and the Capital Expenditures covenant. At March 31, 2017, we were
not in compliance with the minimum EBITDA covenant.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
sale of AMK to Meyer Tool, Inc., on January 27, 2017 we, together with our wholly-owned subsidiaries, entered into the Fourteenth
Amendment to the Loan Facility which amended certain terms and conditions of the Loan Facility and released AMK from its obligations
under the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The proceeds of the
sale of AMK, net of a working adjustment in the amount of ($240,000), were applied as follows: $1,700,000 to the payment of the
Term Loan, $1,800,000 to the payment of outstanding revolving loans, and $500,000 to the payment of existing accounts payable.
The remaining $260,000 will be applied to outstanding accounts payable on a future date to be determined by PNC or used to reduce
the revolving loans. The Fourteenth Amendment to the Loan Facility also waived the noncompliance at September 30, 2016 with the
Fixed Charge Coverage Ratio and the minimum EBITDA covenants for the period then ended, and required that we maintain a Fixed Charge
Coverage Ratio of not less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis&#894; however,
for the quarter ending June 30, 2017, which was to be tested based upon the prior six (6) months, we were required to maintain
a Fixed Charge Coverage Ratio of not less than 1.00 to 1.00 and for the quarter ending September 30, 2017, which was to be tested
based upon the prior nine (9) months, we were required to maintain a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00.
The amendment also reduced the amount to be paid weekly in repayment of excess advances under the revolving credit facility from
$100,000 to $50,000 for each Monday during the months of January, February and March of 2017. Thereafter, the weekly payments were
to return to $100,000 until such excess advances were repaid in full.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On June 19, 2017, we
entered into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant
for the periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December
31, 2016. The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated
basis beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the
prior three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months
and (iii) 1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine (9) months and that we maintain
EBITDA of not less than $345,000 for the period ending June 30, 2017. The amendment also provided that we were not required to
maintain a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending
December 31, 2016 and March 31, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing
will be required of the Fixed Charge Coverage Ratio for the period ending June 30, 2017. In addition, the amendment reduces the
weekly payments we are required to make to reduce our $2,244,071 over-advance under the revolving credit facility as of June 19,
2017 from $100,000 to $25,000 per week during the period commencing May 22, 2017 through and including July 10, 2017. We paid $50,000
to PNC in connection with the amendment and reimbursed PNC&rsquo;s counsel fees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of March 31, 2017,
our outstanding indebtedness to PNC was $23,427,000 and consisted of revolving loans in the amount of $18,847,000 (including excess
advances of $3,044,071) and the term loan of $4,580,000, as compared to December 31, 2016, when our debt to PNC was $31,042,000
and consisted of revolving loans of $24,393,000 (including excess advances of $5,694,071) and the term loan of $6,649,000. In addition,
as of March 31, 2017 we had capitalized lease obligations to third parties of $3,902,000, as compared to capitalized lease obligations
of $4,215,000 as of December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of June 30, 2017,
our debt to PNC was approximately $23,203,866, and consisted of revolving loans in the amount of $18,993,611 (including excess
advances of $2,194,071) and the term loan in the amount of $4,210,254.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Significant Transactions Since January 1, 2016 Which Have
Impacted Our Liquidity</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Dispositions</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 11, 2016 we
sold our South Windsor, Connecticut property for a purchase price of $1,700,000, less closing adjustments of approximately $200,000,
pursuant to a Real Estate Purchase and Sale Contract dated as of December 7, 2015, as amended, and entered into a lease with the
purchaser of the property for an initial term of 15 years, with an option to renew the lease for an additional five years. In addition
to rent, initially $155,000 per annum, subject to annual escalation increase of 3%, we also will be responsible for real estate
taxes and the maintenance of the buildings and the property. The net proceeds from the sale of the property were applied to the
amounts owed to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 27, 2017,
we sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017,
for a purchase price of $4,500,000, net of a working capital adjustment of $(240,000), plus additional quarterly payments, not
to exceed $1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. The proceeds of the sale were
applied in accordance with the terms of the Fourteenth Amendment to the Loan Facility, as discussed above.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">AMK, based in South
Windsor, Connecticut, is a provider of sophisticated welding and machining services for diversified aerospace and industrial customers
which we acquired in October 2014.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Series A Preferred Stock Financing</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 25, 2016, and
June 1, 2016, we completed a private placement of 700,000 shares of our Series A Preferred Stock for $10.00 per share and received
gross cash proceeds of $5,250,000, net of $1,750,000 principal amount of our promissory notes exchanged by Michael N. Taglich and
Robert F. Taglich, two of our principal stockholders, for shares of Series A Preferred Stock. We had issued the promissory notes
to Michael N. Taglich and Robert F. Taglich for amounts borrowed from September 2015 through May 2016. The September 2015 loan
bore interest at the rate of 4% per annum and was to be paid on September 7, 2016. The other loans bore interest at the rate of
7% per annum and were to be repaid on June 30, 2016, or, if earlier, upon the sale of the Company&rsquo;s equity from which it
derived proceeds of $1,800,000 or $2,000,000 depending upon the promissory notes issued.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The shares of Series
A Preferred Stock have a stated value of $10.00 per share and are initially convertible into shares of common stock at a price
of $4.92 per share (subject to adjustment upon the occurrence of certain events). The dividend rate on the Series A Preferred Stock
is 12% per annum, payable quarterly. The dividend rate increases to 15% per annum if we issue PIK Shares in lieu of payment of
cash dividends payable until June 15, 2018.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Although holders of
Series A Preferred Stock may convert their shares into common stock they are unlikely to convert if we are unable to pay cash dividends
and the price of the common stock does not increase significantly above $4.92 per share, the conversion price, for a sustained
period. We have the right to redeem the Series A Preferred Stock after May 26, 2018 for a redemption price of $10.00, plus accrued
and unpaid dividends; however, we may not have sufficient cash available to effect such redemption.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of June 30, 2017,
we had outstanding 1,294,441 shares of Series A Preferred Stock, including 46,010 PIK Shares issued on March 15, 2017 and 46,787
PIK Shares issued on June 15, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In July 2017, we
amended the Certificate of Designation authorizing the issuance of the Series A Preferred Stock to provide for the automatic
conversion of the outstanding shares of Series A Preferred Stock into common stock at a conversion price of $1.50, the
offering price of the shares of common stock in the public offering of our shares of common stock consummated on July 12,
2017, subject to stockholder approval in accordance with the applicable rules of the NYSE MKT. In addition, the amendment to
the Certificate of Designation eliminated the liquidation preference and quarterly dividend payable to holders of the Series
A Preferred Stock. Holders of the Series A Preferred Stock now share ratably with the holders of the common stock on an
as-converted basis (2.0325 shares of common stock for each share of Series A Preferred Stock held of record) with respect to
dividends declared, paid or set aside for payment, assets available for distribution to stockholders upon the liquidation,
dissolution or winding up of our affairs, in addition to voting upon the election of directors and other matters submitted to
stockholders for approval, except for matters requiring a class vote of the holders of the Series A Preferred Stock specified
in the Certificate of Designation or under applicable law. At a meeting on June 24, 2017, our Board of Directors adopted a
further amendment to the Certificate of Designation, subject to approval by holders of a majority of the outstanding shares
of Series A  Preferred Stock, to provide for the automatic conversion of the outstanding shares of Series A  Preferred Stock
into shares of common stock at a conversion price of $1.50 per share if stockholders do not approve the Restructuring
Transactions at our 2017 Annual Meeting of Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
private placement of the Series A Preferred Stock, we incurred approximately $606,000 of direct offering costs and $57,000 in legal
expenses and granted to the placement agents warrants to purchase 8% of the number of shares of our common stock (113,820 shares)
issuable upon conversion of the Series A Preferred Stock sold in the offering. The warrants are exercisable in whole or in part,
at an initial exercise price per share of $6.15, and are exercisable for cash or on a cashless basis commencing on November 26,
2016 and expiring on May 26, 2021. The exercise price and number of shares of common stock issuable under the warrants are subject
to adjustments for stock dividends, splits, combinations and similar events.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Of the proceeds generated
by the sale of our shares of Series A Preferred Stock, $1,500,000 was paid to PNC to reduce the amount outstanding under our Loan
Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>12% Subordinated Convertible Note Financing</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In August 2016, we completed
the private placement of $2,720,000 principal amount of our 12% Subordinated Convertible Notes due December 31, 2017 (the &ldquo;12%
Notes&rdquo;), together with warrants to purchase an aggregate of 110,658 shares of common stock, for a total purchase price of
$2,720,000, from which we derived net proceeds of approximately $2,319,800, which was used to pay down our indebtedness under the
Loan Facility and for working capital. We also issued to Michael N. Taglich a 12% Note in the principal amount of $1,520,713, together
with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of promissory notes in the aggregate principal
amount of $1,500,000, together with accrued interest thereon and on notes previously exchanged for Series A Preferred Stock of
$20,713. We had issued the promissory notes to Michael N. Taglich for amounts borrowed in August 2016. The promissory notes bore
interest at the rate of 7% per annum and were to be repaid on December 31, 2016, or, if earlier, upon the sale of our equity securities
from which we derived proceeds of $2,000,000. In addition, we issued to Robert F. Taglich a 12% Note in the principal amount of
$4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness of interest of $4,373
accrued on notes previously exchanged for Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The 12% Notes provided
for the automatic conversion of the principal and accrued interest of the 12% Notes into shares of Series A Preferred Stock at
a price of $10.00 per share, the stated value of the Series A Preferred Stock, upon the filing of an amendment to our Articles
of Incorporation increasing the number of shares of preferred stock we are authorized to issue from 1,000,000 shares to 3,000,000
shares, including 2,000,000 shares of Series A Preferred Stock (the &ldquo;Charter Amendment&rdquo;). We issued 438,770 shares
of Series A Preferred Stock to the holders of the 12% Notes on November 30, 2016, the date we filed the certificate of amendment
effecting the Charter Amendment. As a result of the automatic conversion of the 12% Notes into shares of Series A Preferred Stock,
no 12% Notes are outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the offering of the 12% Notes, we paid Taglich Brothers, Inc. (&ldquo;Taglich Brothers&rdquo;)
a fee of $295,400 and issued to Taglich Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise
price of $6.15, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Private Placements of 8% Subordinated Convertible Notes</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">From November 23, 2016
through March 21, 2017, we received gross proceeds of $4,775,000 from the sale of our 8% Notes, together with warrants to purchase
a total of 383,032 shares of our common stock, in private placement transactions with accredited investors (the &ldquo;8% Note
Offerings&rdquo;). In connection with the 8% Notes offerings, we issued 8% Notes in the aggregate principal amount of $382,000
to Taglich Brothers, placement agent for the 8% Note Offerings, in lieu of payment of cash compensation for sales commissions,
together with warrants to purchase a total of 180,977 shares of our common stock. Of the $5,147,000 principal amount of 8% Notes
issued in connection with the Note Offerings, $2,781,000 principal amount is due November 30, 2018 (the &ldquo;2018 Notes&rdquo;)
and $2,366,000 principal amount is due January 31, 2019 (the &ldquo;2019 Notes&rdquo;). Payment of the principal and accrued interest
on the 8% Notes are junior and subordinate in right of payment to our indebtedness under the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on
the outstanding principal of the 2018 Notes is payable quarterly commencing February 28, 2017 at the annual rate of 8%, in
cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest in
cash, or we otherwise elect to do so, we may pay accrued interest, in additional 2018 Notes (&ldquo;PIK Notes&rdquo;),
provided that if accrued interest with respect to the 2018 Notes issued in December 2018 (which represented approximately
$1,269,000 in principal amount when issued in December 2016, and as of May 31, 2017, represented approximately $1,336,770 in
principal amount after giving effect to the issuance of PIK Notes) is paid in additional 2018 Notes, interest for that
quarterly   interest payment will be calculated at the rate of 12% per annum. Upon the occurrence and
continuation of an event of default, interest shall accrue at the rate of 12% per annum.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest in
cash, or we otherwise elect to do so, we may pay accrued interest, in additional 2019 Notes. Upon the occurrence and continuation
of an event of default, interest shall accrue at the rate of 12% per annum.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Since covenant defaults
under our Loan Facility have prohibited us from paying accrued interest in cash on our 8% Notes, we have paid accrued interest
on the 8% Notes through the issuance of additional Notes. We intend to pay accrued interest on the 8% Notes for the interest period
ending August 15, 2017 in cash; however, there can be no assurance that we will be able to do so.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 28, 2017,
we issued an additional $61,596 principal amount of 2018 Notes in payment of accrued interest. As of March 1, 2017, we had $5,262,596
principal amount of 8% Notes outstanding, consisting of $2,842,596 principal amount of 2018 Notes and $2,420,000 principal amount
of 2019 Notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 31, 2017, we
issued 2018 Notes and 2019 Notes in the aggregate principal amount of $68,871 and $72,285, respectively, in lieu of cash payment
of accrued interest for the period then ended.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The outstanding principal
amount plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock at conversion
prices ranging from $2.25 to $4.00 per share, subject to certain anti-dilution and other adjustments, including stock splits, and
in the event of certain fundamental transactions such as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For a more detailed
description of the 8% Notes, see &ldquo;Description of Securities &ndash; 8% Subordinated Convertible Notes.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The exercise price of
the warrants issued in connection with the 8% Note Offerings ranges from $3.00 to $4.53 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the common stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November
30, 2021 and 243,307 warrants may be exercised until January 31, 2022.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Recent Loans from Principal Stockholders</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 17, 2017, we
borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, directors and principal stockholders
of our company, and issued our promissory notes in the principal amounts of $200,000 and $300,000, respectively, to evidence our
obligation to repay that indebtedness (the &ldquo;Taglich Notes&rdquo;). The Taglich Notes bear interest at the rate of 7% per
annum and are payable on March 17, 2017. The Taglich Notes  have been amended to provide for the automatic conversion
of the indebtedness evidenced thereby into shares of common stock at a conversion price of $1.50 per share, the public offering
price of the shares of our common stock sold in the Public Offering, following the stockholder vote on the Restructuring Transactions
at our 2017 Annual Meeting of Stockholders, even if the Restructuring Transactions are not approved by stockholders in accordance
with applicable rules of the NYSE MKT.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 2 and 10, 2017,
we borrowed an aggregate of $1,500,000 from Michael N. Taglich and Robert F. Taglich, each of whom loaned us $750,000. The demand
loans were exchanged for May 2018 Notes in the same principal amount of indebtedness.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>May Note Financing</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 12 and May 19,
2017, we issued and sold to a total of 17 accredited investors (including Michael N. Taglich and Robert F. Taglich individually
and a partnership of which they are partners), our May 2018 Notes in the aggregate principal amount of $4,158,624, together with
warrants to purchase an aggregate of 501,039 shares of common stock, for gross proceeds (net of the exchange of indebtedness totaling
$1,503,288 due to Michael N. Taglich and Robert F. Taglich for working capital advances made on May 2 and 10, 2017) of $2,534,196.
Roth Capital LLC and Taglich Brothers acted as placement agents in connection with the sale of the May 2018 Notes and warrants
for which they are to be paid commissions in the aggregate amount of $191,155.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The May 2018 Notes
and warrants were issued for a purchase price equal to 97% of the principal amount of the May 2018 Notes. The principal
amount of each May 2018 Note will be increased by 2% for each 30 days it remains outstanding commencing August 1, 2017. Upon the
occurrence of, and during the continuance of an Event of Default (as defined in the May 2018 Notes), the May 2018 Notes will accrue
late interest at the rate of 10% per annum. Payment of the principal and accrued interest, if any, on the May 2018 Notes is junior
and subordinate in right of payment to our indebtedness under the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The principal amount,
together with accrued interest, if any, of the May 2018 Notes, when issued, were convertible into shares of common stock until
November 12, 2017 at a conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock splits and
certain fundamental transactions, including recapitalizations, mergers and other business combination transactions (the &ldquo;Fixed
Conversion Price&rdquo;), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5) Weighted Average Prices
(as defined in the May 2018 Notes) of the common stock during the five consecutive trading day period ending on the trading day
immediately preceding the day of a request by the holder for conversion of the May 2018 Note. We have the right to redeem all,
or a portion of (on a pro rata basis), the May 2018 Notes upon written notice to the holders not less than three trading days prior
to the applicable redemption date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We issued warrants
to purchase 501,039 shares of common stock as part of the private placement of the May 2018 Notes. The warrants, when issued,
were exercisable at an initial exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis
for a lesser number of shares based upon prevailing market prices when exercised. The exercise price of the warrants is subject
to anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations,
mergers and other business combination transactions. In accordance with the terms of the warrants, the exercise price was reduced
to $1.50 per share, the public offering price of the shares of common stock sold in a Public Offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B><I>Effect of the Public Offering and
Restructuring Transactions on our Capitalization</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On July 12, 2017,
we sold 5,175,000 shares of common stock at a price of $1.50 per share for gross proceeds of $7,762,500 in the Public
Offering. We received net proceeds of approximately $6,819,125 from the sale of our shares in the Public Offering, of which
approximately $4,000,000 was used to pay outstanding trade payable, $463,501 was used to redeem an equal principal amount of
May 2018 Notes at a redemption price of 100% of the principal amount thereof and approximately $2,355,624 was added to our
working capital.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in">In connection with
the Public Offering, approximately $1,860,908 aggregate principal amount of the May 2018 Notes were converted into an aggregate
of 1,240,605 shares of our common stock at a conversion price of $1.50 per share, the public offering price of the shares sold
in the Public Offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in">In addition, the Restructuring
Transactions, described below, contemplated by the Public Offering, are to be effected at a conversion price of $1.50 per share,
the public offering price of the shares sold in the Public Offering, following a stockholder vote thereon at our 2017 Annual Meeting
of Stockholders, which we expect to hold in September 2017:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Holders of an additional $1,834,214 aggregate principal amount of May 2018 Notes have agreed to
convert their 2018 Notes into additional 1,222,809 shares of common stock.</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Holders of our outstanding 1,294,441 shares of Series A Preferred Stock will be automatically converted
into 8,629,606 shares of common stock.</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">The Taglich Notes in the aggregate principal amount of $500,000, together with accrued
                                                                                                               interest thereon, will automatically be converted into approximately 344,667 shares of common stock.</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Upon consummation of
the Restructuring Transactions, we will have outstanding approximately 24,252,852 shares of common stock and no shares of preferred
stock. In addition, other than the indebtedness under our Loan Facility, which as of June 30 2017, was approximately $23,203,866,
our only other indebtedness for money borrowed is the indebtedness for our 8% Notes, which as of May 31, 2017 was $5,359,420.</P>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Cash Flow</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following table
summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months<BR> Ended March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Year Ended<BR> December 31,</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Cash provided by (used in)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 52%; font-size: 10pt; text-align: left">Operating activities</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 14%; font-size: 10pt; text-align: right">900</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(692</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(894</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Investing activities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,926</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(924</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(8,560</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Financing activities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,087</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,391</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8,565</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net (decrease) increase in cash and cash equivalents</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(261</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">775</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(889</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Cash Provided By (Used In) Operating Activities</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Cash provided by operating
activities primarily consists of our net income (loss) adjusted for certain non-cash items and changes to working capital items.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the three months
ended March 31, 2017, our net cash provided by operating activities of $900,000 was comprised of a net loss of $1,154,000 offset
by a positive adjustment of $1,258,000 provided by changes in operating assets and liabilities, plus a net positive adjustment
for non-cash items of $796,000. Adjustments for non-cash items consisted primarily of depreciation of property and equipment of
$728,000, amortization of capitalized engineering costs, intangibles and other items of $616,000. These non-cash items were offset
by $10,000 of deferred gain on the sale of real estate, forfeiture of non-cash compensation of $73,000, bad debt recovery of $14,000
and $451,000 from the gain on sale of our AMK subsidiary. The net decrease in operating assets and liabilities consisted of a net
decrease in operating assets of $2,097,000 and a net decrease in operating liabilities of $839,000. The net decrease in operating
assets was comprised of a decrease in accounts receivable of $578,000 due to the timing of shipments to and cash receipts from
customers, an increase in prepaid expenses and other assets of $102,000, an increase in deposits and other assets of $276,000,
a decrease in prepaid taxes of 178,000 and decrease in inventory of $1,719,000. The net decrease in operating liabilities was comprised
of decreases in accounts payable and accrued expenses of $621,000 due to the timing of the receipt and payment of invoices, and
increases in deferred rent of $6,000 and a decrease of deferred revenue of $224,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the year ended
December 31, 2016, our net cash used in operating activities of $692,000 was comprised of a net loss of $15,623,000 offset by
a $6,712,000 positive adjustment provided by changes in operating assets and liabilities plus a net positive adjustment for non-cash
items of $8,219,000. Adjustments for non-cash items consisted primarily of depreciation of property and equipment of $3,347,000,
amortization of capitalized engineering costs, intangibles and other items of $2,229,000, bad debt expense of $274,000, representing
amounts reserved for as potentially uncollectible, and non-cash compensation of $167,000, deferred income taxes of $2,063,000,
loss on sale of fixed assets held for sale of $5,000, loss on extinguishment of debt of $172,000, and prepaid taxes of $126,000.
These non-cash items were offset by $38,000 of deferred gain on the sale of real estate. The increase in operating assets and
liabilities consisted of a net decrease in operating assets of $2,045,000 and a net increase in operating liabilities of $4,667,000.
The increase in operating assets was comprised of an increase in inventory of $2,902,000, and a net decrease in prepaid expenses
and other current assets, and deposits and other assets of $394,000, partially offset by a decrease in accounts receivable of
$4,616,000. The net increase in operating liabilities was comprised of increases in accounts payable and accrued expenses of $4,495,000
due to the timing of the receipt and payment of invoices, an increase in deferred rent of $82,000, and an increase in deferred
revenue of $84,000, partially offset by, an increase in income taxes payable of $6,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Cash Used in Investing Activities</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Cash used in investing
activities consists of capital expenditures for property and equipment, capitalized engineering costs and the cash received from
the businesses we sold. A description of capitalized engineering costs can be found below and in Note 3 Summary of Significant
Accounting Policies in our Consolidated Financial Statements for the year ended December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the three months
ended March 31, 2017, cash provided by investing activities was $3,926,000. This was comprised of the proceeds from the sale of
the AMK subsidiary of $4,260,000 offset by $245,000 for capitalized engineering costs and $89,000 for the purchase of property
and equipment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the year ended December
31, 2016 net cash used in investing activities was $924,000. This was comprised of $963,000 for capitalized engineering costs,
$1,632,000 for the purchase of property and equipment, partially offset by $1,671,000 in proceeds from the sale of fixed assets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Cash Provided By (Used In) Financing Activities</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Cash provided by (used
in) financing activities consists of the borrowings and repayments under our credit facilities with our senior lender, increases
in and repayments of capital lease obligations and other notes payable.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the three months
ended March 31, 2017, cash used by financing activities was $5,087,000. This was comprised of repayments of $2,069,000 on our term
loan, $5,545,000 on our revolving loans, $173,000 on our capital lease obligations, offset by proceeds from notes payable issuances
of $850,000 and $1,850,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the year ended December
31, 2016, net cash provided by financing activities was $2,391,000. This was comprised of proceeds of $4,500,000 and $3,695,000
from the issuance of notes, proceeds from the issuance of Series A Preferred of $5,250,000 reduced by repayments of $5,211,000
under our revolving credit facility, repayments on our term loans of $3,184,000, repayments under our capital leases of $1,226,000,
expense for issuance of preferred stock of $663,000, expense for issuance of debt of $547,000 and deferred financing costs of $223,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>CONTRACTUAL OBLIGATIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">The following table sets forth our future
contractual obligations as of December 31, 2016:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="19" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Payment due by period (in thousands)</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Total</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Less than<BR> 1 year*</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">1-3<BR> years</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">3-5<BR> years</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">More than<BR> 5 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 45%; font-size: 10pt; text-align: left">Debt and capital leases</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">37,363</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">34,197</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">2,637</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">529</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Operating leases</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,459</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,947</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,402</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,082</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,028</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Total</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">52,822</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">36,144</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,039</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,611</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,028</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>


<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">*</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">The revolving loans and term loans with our senior lender are classified as due in less than 1 year, see Note 11 to our Consolidated Financial Statements. </FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>OFF-BALANCE SHEET ARRANGEMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">We did not have any off-balance sheet
arrangements as of March 31, 2017 and December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Going Concern</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We suffered net losses
from operations of $10,789,000 and $519,000 and net losses of $15,623,000 and $1,154,000 for the year ended December 31, 2016 and
the three months ended March 31, 2017, respectively. We also had negative cash flows from operations for the year ended December
31, 2016. In addition, in 2015 we ceased paying dividends on our common stock and in 2016 disposed of the real estate on which
one of our operating subsidiaries was located through a sale leaseback transaction, and in January 2017 sold this operating subsidiary.
During the year ended December 31, 2016 and subsequent thereto, we sold debt and equity securities to secure funds to operate.
Since September 2016, we have been issuing additional shares of Series A Preferred Stock in lieu of cash payment of accrued dividends
on outstanding shares of Series A Preferred Stock and since February 2017 have issued additional convertible notes in lieu of cash
payment of accrued interest on outstanding convertible notes. Furthermore, as of December 31, 2016 and March 31, 2017 we were not
in compliance with two financial covenants under our Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On June 19, 2017, we
entered into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant
for the periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December
31, 2016. The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated
basis beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the
prior three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months
and (iii) 1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine (9) months and that we maintain
EBITDA of not less than $345,000 for the period ending June 30, 2017. The amendment also provided that we were not required to
maintain a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending
December 31, 2016 and March 31, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing
will be required of the Fixed Charge Coverage Ratio for the period ending June 30, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The continuation of
our business is dependent upon future issuances of equity or other financing to fund ongoing operations. Although no assurances
can be given, management believes that the net proceeds from the Public Offering, together with borrowings under the Loan Facility
and anticipated cash flow, should provide the necessary funding for us to continue as a going concern for the foreseeable future.
The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a
going concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Critical Accounting Policies</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have identified the
policies below as critical to our business operations and the understanding of our financial results.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Inventory Valuation</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For annual reporting,
the Company values inventory at the lower of cost on a first-in-first-out basis or market.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company presents
inventory net of progress billings in accordance with the specified contractual arrangements with the United States Government,
which results in the transfer of title of the related inventory from the Company to the United States Government, when such progress
payments are received.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company does not
take physical inventories at interim quarterly reporting periods. Approximately 85% of the inventory value at March 31, 2017 has
been estimated using a gross profit percentage based on sales of previous periods to the net sales of the current period. The remainder
of the inventory value at March 31, 2017 is estimated based on the Company&rsquo;s standard cost perpetual inventory system. Adjustments
to reconcile the annual physical inventory to the Company&rsquo;s books are treated as changes in accounting estimates and are
recorded in the fourth quarter. The Company valued inventory at December 31, 2016 at the lower of cost on a first-in-first-out
basis or market.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We generally purchase
raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable
contracts for orders have been received for finished goods. We occasionally produce larger more complex products, such as landing
gear, in excess of purchase order quantities in anticipation of future purchase order demand. Historically this excess has been
used in fulfilling future purchase orders. We purchase supplies and materials useful in a variety of products as deemed necessary
even though orders have not been received. The Company periodically evaluates inventory items that are not secured by purchase
orders and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow-moving goods,
and for other impairments of value.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company presents
inventory net of progress billings in accordance with the specified contractual arrangements with the United States Government,
which results in the transfer of title of the related inventory from the Company to the United States Government, when such progress
payments are received.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Capitalized Engineering Costs</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company has contractual
agreements with customers to produce parts, which the customers design. Though the Company has not designed and thus has no proprietary
ownership of the parts, the manufacturing of these parts requires pre-production engineering and programming of our machines. The
pre-production costs associated with a particular contract are capitalized and then amortized beginning with the first shipment
of product pursuant to such contract. These costs are amortized on a straight line basis over the shorter of the estimated length
of the contract, or three years.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as progress billings (a reduction of the associated inventory) until the appropriate revenue recognition criteria have been met.
The Terms and Conditions contained in customer purchase orders may provide for liquidated damages in the event that a stop-work
order is issued prior to the final delivery of the product.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Revenue Recognition</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company recognizes
revenue in accordance with Staff Accounting Bulletin No. 104, &ldquo;Revenue Recognition.&rdquo; The Company recognizes revenue
when products are shipped and/or the customer takes ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Payments received in advance
from customers for products delivered are recorded as customer deposits until earned, at which time revenue is recognized. The
Terms and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop work
order is issued prior to the final delivery. The Company utilizes a Returned Merchandise Authorization or RMA process for determining
whether to accept returned products. Customer requests to return products are reviewed by the contracts department and if the request
is approved, a credit is issued upon receipt of the product. Net sales represent gross sales less returns and allowances. Freight
out is included in operating expenses.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company recognizes
certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement,
the Company makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition. The customer must
initiate the request for the bill and hold arrangement. The customer must have made this request in writing in addition to their
fixed commitment to purchase the item. The risk of ownership has passed to the customer, payment terms are not modified and payment
will be made as if the goods had shipped.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Income Taxes</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for income taxes in accordance with accounting guidance now codified as FASB ASC 740, &ldquo;Income Taxes,&rdquo; which requires
that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected
to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities.
A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for uncertainties in income taxes under the provisions of FASB ASC 740-10-05, &ldquo;Accounting for Uncertainty in Income Taxes.&rdquo;
The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise&rsquo;s financial statements. The
ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Stock-Based Compensation</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for stock-based compensation expense in accordance with FASB ASC 718, &ldquo;Compensation &ndash; Stock Compensation.&rdquo; Under
the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair
value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton
option pricing model.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Goodwill</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Goodwill represents
the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill is not amortized,
but is tested at least annually for impairment, or if circumstances change that will more likely than not reduce the fair value
of the reporting unit below its carrying amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for the impairment of goodwill under the provisions of ASU 2011-08 (&ldquo;ASU 2011-08&rdquo;), &ldquo;Intangibles Goodwill and
Other (Topic 350): Testing Goodwill for Impairment.&rdquo; ASU 2011-08 updated the guidance on the periodic testing of goodwill
for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company performs
impairment testing for goodwill annually, or more frequently when indicators of impairment exist, using a three-step approach.
Step &ldquo;zero&rdquo; is a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Step one compares the fair value of the net assets of the relevant reporting unit (calculated
using a discounted cash flow method) to its carrying value, a second step is performed to compute the amount of the impairment.
In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to
its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Long-Lived and Intangible Assets</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Identifiable intangible
assets are amortized using the straight-line method over the period of expected benefit. Long-lived assets and intangible assets
subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that
the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found
to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying
amount of the asset to fair value. There has been no impairment as of March 31, 2017 and December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Recently Issued Accounting Pronouncements</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In January 2016, the
FASB issued ASU 2016-01, &ldquo;Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)&rdquo;
(&ldquo;ASU 2016-01&rdquo;).The main objective of ASU 2016-01 is enhancing the reporting model for financial instruments to provide
users of financial statements with more decision-useful information. The amendments address certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company does not expect the adoption of this amended to have a significant
impact on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In February 2016, the
FASB issued ASU 2016-02, &ldquo;Leases (Topic 842)&rdquo; (&ldquo;ASU 2016-02&rdquo;). The main objective of ASU 2016-02 is to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards
Codification and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company does not expect the adoption of this amended to have a significant impact
on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In March 2016, the
FASB issued ASU 2016-09, &ldquo;Compensation&mdash;Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment&rdquo;
(&ldquo;ASU 2016-09&rdquo;). ASU 2016-09 is part of the FASB Simplification Initiative. The objective of the Simplification Initiative
is to identify, evaluate, and improve areas of generally accepted accounting principles for which cost and complexity can be reduced
while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2016-09 will affect
all entities that issue share-based payment awards to their employees. The areas for simplification involve several aspects of
the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The Company adopted this ASU during the first quarter
of 2017, and the adoption did not materially impact its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in">In April 2016, the
FASB issued ASU 2016-10 &ldquo;Revenue from Contracts with Customers (Topic 606)&rdquo; (&ldquo;ASU 2016-10&rdquo;). The core principle
of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2016-10
affect the guidance in ASU 2014-09, &ldquo;Revenue from Contracts with Customers&rdquo;, which is not yet effective. The effective
date and transition requirements of ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09.
They are effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The
Company is currently assessing the impact of the adoption of these amendments on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In May 2016, the FASB
issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide
clarifying guidance in certain arrow areas and add some practical expedients. These amendments are effective at the same date that
Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017,
including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for nonpublic
entities one year later. The Company is currently assessing the impact of the adoption of the amendments to Topic 606 and these
amendments on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In November 2016, the
FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted
cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should
be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash,
cash equivalents, restricted cash or restricted cash equivalents are presented in more than one-line item within the statement
of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount
shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard
is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard on our financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In January 2017, the
FASB issued ASU 2017-01 (&ldquo;ASU 2017-01&rdquo;), Business Combinations, which clarifies the definition of a business, particularly
when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first
part of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In January 2017, FASB
issued ASU No. 2017-04, Intangibles&mdash;Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step
2 of the goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit with
its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities having one
or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting units, (2) the amount
of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU No. 2017-04 is effective
as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard
on our financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company does not
believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>JOBS Act</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 5, 2012, the
JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements
for qualifying public companies. As an &ldquo;emerging growth company,&rdquo; we may, under Section 7(a)(2)(B) of the Securities
Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise
apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that
we (i) are no longer an &ldquo;emerging growth company&rdquo; or (ii) affirmatively and irrevocably opt out of this extended transition
period. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements
may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date
that we are no longer an &ldquo;emerging growth company&rdquo; or affirmatively and irrevocably opt out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our consolidated financial
statements and that has a different effective date for public and private companies, we will disclose the date on which adoption
is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>DIRECTORS AND EXECUTIVE OFFICERS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">Our directors and executive officers are:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 43%"><FONT STYLE="font-size: 10pt"><B>Name:</B></FONT></TD>
    <TD STYLE="width: 10%; text-align: center"><FONT STYLE="font-size: 10pt"><B>Age</B></FONT></TD>
    <TD STYLE="width: 47%; text-align: center"><FONT STYLE="font-size: 10pt"><B>Position</B></FONT></TD></TR>
<TR STYLE="background-color: rgb(204,238,255)">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Peter D. Rettaliata</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">66</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Acting President and CEO and Director</FONT></TD></TR>
<TR STYLE="background-color: White">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Michael E. Recca</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">66</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Chief Financial Officer</FONT></TD></TR>
<TR STYLE="background-color: rgb(204,238,255)">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Michael N. Taglich</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">52</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Chairman of the Board</FONT></TD></TR>
<TR STYLE="background-color: White">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Seymour G. Siegel</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">74</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR STYLE="background-color: rgb(204,238,255)">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Robert F. Taglich</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">50</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR STYLE="background-color: White">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">David J. Buonnano</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">61</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR STYLE="background-color: rgb(204,238,255)">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Robert C. Schroeder</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">50</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR STYLE="background-color: White">
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">Michael Brand</FONT></TD>
    <TD STYLE="vertical-align: bottom; text-align: center"><FONT STYLE="font-size: 10pt">59</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Peter D. Rettaliata</I>
has been our Acting President and Chief Executive Officer since March 2, 2017, and has been a director of our company since 2005.
He served as our President and Chief Executive Officer from November 30, 2005 to December 31, 2014. He also served as the President
of our wholly-owned subsidiary, AIM, from 1994 to 2008. Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman
Aerospace Corporation for twenty-two years. Professionally, Mr. Rettaliata has served as the Chairman of &ldquo;ADDAPT&rdquo;,
an organization of regional aerospace companies, as a member of the Board of Governors of the Aerospace Industries Association,
and as a member of the Executive Committee of the AIA Supplier Council. He is a graduate of Niagara University where he received
a B.A. in History and Harvard Business School where he completed the PMD Program. Mr. Rettaliata&rsquo;s extensive experience in
the aerospace industry and his knowledge of our operations qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Michael E. Recca
</I>has been our Chief Financial Officer since October 1, 2016. Mr. Recca has been engaged by us since September 2008 in a variety
of positions related to our capital finance and acquisition programs. Most recently he served as Chief of Corporate Development
&amp; Capital Markets, a position in which he directed our acquisition program and coordinated with our lenders. Mr. Recca received
a Bachelor of Arts degree from the SUNY Stony Brook and an MBA from Columbia University.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Michael N. Taglich
</I>has been Chairman of our Board of Directors since September 22, 2008. He is Chairman and President of Taglich Brothers, a
New York City based securities firm which he co-founded in 1992 and which is focused on public and private micro-cap companies.&nbsp;
Mr. Taglich is currently Chairman of the Board of&nbsp;Mare Island Dry Dock LLC, a&nbsp;company engaged in ship repair services,
and BioVentrix, Inc., a privately held medical device company whose products are directed at heart failure. He also serves as
a Director of Bridgeline Digital Inc.,&nbsp;a publicly traded company, Icagen Inc., a reporting but not trading company engaged
in early stage pharmaceutical research, Decision Point Systems Inc., a private company engaged in Field service automation, Dilon
Technologies, a private medical device company and Autonet Mobile Inc., a private company focused on connecting automobiles to
the internet. &nbsp; Mr. Taglich&rsquo;s extensive experience in the capital markets and his knowledge of the general industry
qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Seymour G. Siegel
</I>has been a director of our company since 2005. A Certified Public Accountant no longer in practice, he was a principal emeritus
at Rothstein Kass (now KPMG), an international firm of accountants and consultants until July 2014. Mr. Siegel was a founder of
Siegel Rich &amp; Co., CPAs, which eventually merged with what is now known as WeiserMazars LLP, where he was a senior partner
until January 1995, when he sold his interest in the firm and co-founded a business advisory firm which later became a part of
Rothstein Kass. In addition to serving as a Director and Chairman of the Audit Committees of our Board, Mr. Siegel also serves
as a Director and Chairman of the Audit Committee of Root 9B Technologies Inc. Mr. Siegel received his Bachelor of Business Administration
from the Bernard M. Baruch School of the City College of New York. Mr. Siegel&rsquo;s extensive knowledge and experience in accounting
matters and familiarity with the issues of manufacturing businesses qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Robert F. Taglich
</I>has been a director of our company since 2008. He is a Managing Director of Taglich Brothers, which he co-founded in 1992.
Prior to founding Taglich Brothers, Mr. Taglich was a Vice President at Weatherly Securities. Mr. Taglich has served in various
positions in the brokerage securities industry for the past 25 years. Mr. Taglich is a Director of Bridgeline Digital, Inc., a
publicly traded company He also serves on the board of privately held BioVentrix, Inc., a medical device company whose products
are directed at heart failure. Mr. Taglich holds a Bachelor&rsquo;s degree from New York University. Mr. Taglich&rsquo;s extensive
experience in the capital markets and his knowledge of the aerospace industry qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>David J. Buonanno</I>
has been a director of our company since 2008. He is the Founder and President of Buonanno Enterprises Consulting, providing strategic
management, supply chain/operations and recruitment services to aerospace and defense industry clients.  Mr. Buonanno has extensive experience in manufacturing,
supply management and operations. He was employed by Sikorsky Aircraft, Inc., a subsidiary of United Technologies Corporation,
as Vice President, Supply Management and International Offset (from January 1997 to July 2006) and as Director, Systems Subcontracts
(from November 1992 to January 1997). From May 1987 to November 1992, he was employed by General Electric Company serving as Operations
Manager and Manager, Program Materials Management of GE&rsquo;s Astro-Space Division. From June 1977 to May 1987, he was employed
by RCA and affiliated companies. Mr. Buonanno attended Lehigh University College of Electrical Engineering and holds a B.S. in
Business Administration from Rutgers University. He completed the Program for Management Development at Harvard Business School
in 1996. Mr. Buonanno&rsquo;s extensive experience in the aerospace and defense industries and familiarity with the operations
of companies in the industry qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Robert C. Schroeder</I>
has been a director of our company since 2008. He is Vice President - Investment Banking of Taglich Brothers and specializes in
advisory services and capital raising for small public and private companies. Mr. Schroeder joined Taglich Brothers in April 1993
as an Equity Analyst publishing sell-side research. Prior to joining Taglich Brothers, he served in various positions in the brokerage
and public accounting industry. Mr. Schroeder also serves as a director of the following publicly traded companies: DecisionPoint
Systems, Inc., a leading provider and integrator of Enterprise Mobility, Wireless Applications and RFID solutions, and Intellinetics,
Inc., a provider of cloud-based enterprise content management solutions. Mr. Schroeder received a B.S. degree in accounting and
economics from New York University. He is a Chartered Financial Analyst and a member of the Association for Investment Management
and Research and a member of the New York Society of Security Analysts. Mr. Schroeder&rsquo;s extensive experience in the capital
markets qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><I>Michael Brand</I>
has been a director of our company since 2012, and since March 2017 has served as a consultant to our company focused on day to
day production issues, scheduling of the products to be manufactured and related operational issues such as the maintenance of
appropriate inventory levels. He was the President of Goodrich Landing Gear, a unit of Goodrich Corporation, from July 2005 to
June 2012. Prior to joining Goodrich for over 25 years he held senior management positions in the Aerospace industry. He began
his career at General Electric Corporation and rose to senior management in its jet engine manufacturing operations. Mr. Brand
is a graduate of Clarkson University, with advanced degrees and certificates from Xavier University and the Wharton School. Mr.
Brand&rsquo;s extensive experience in the aerospace and defense industries and familiarity with the operations of companies in
the industry qualify him to serve as a Director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Michael N. Taglich and Robert F. Taglich are brothers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">All directors hold office
until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers are elected
by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services
as directors. Non-employee directors are entitled to receive compensation per year for serving as directors and may receive option
grants from our company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Information Concerning the Board of Directors</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Board Leadership Structure and Risk Oversight</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Board does not have
a policy requiring separation of the roles of Chief Executive Officer and Chairman of the Board. Nevertheless, Michael N. Taglich
is Chairman of the Board and Peter D. Rettaliata is Acting Chief Executive Officer of the Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Board has determined
that a non-employee director serving as Chairman is in the best interests of our stockholders at this time. This structure ensures
a greater role of non-employee Directors in the active oversight of our business, including risk management oversight, and in setting
agendas and establishing Board priorities and procedures. This structure also allows the Chief Executive Officer to focus to a
greater extent on the management of our day-to-day operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Board of Directors
as a whole is responsible for consideration and oversight of risks facing the Company, and is responsible for ensuring that material
risks are identified and managed appropriately. Certain risks are overseen by committees of the Board of Directors and these committees
make reports to the full Board of Directors, including reports on noteworthy risk-management issues. Members of the Company&rsquo;s
senior management team regularly report to the full Board about their areas of responsibility and a component of these reports
is risk within the area of responsibility and the steps management has taken to monitor and control such exposures. Additional
review or reporting on risks is conducted as needed or as requested by the Board or one of its committees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Board Independence</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our Board of Directors
has determined that Robert Schroeder, Seymour G. Siegel, David Buonanno and Michael Brand are &ldquo;independent directors&rdquo;
within the meaning of NYSE MKT Rule 803A(2).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Director Compensation</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Non-employee Directors
are entitled to receive compensation for serving as directors and may receive option grants from our company. Each Director also
is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred
in attending meetings of our Board of Directors or committees of our Board of Directors or shareholder meetings or otherwise in
connection with the discharge of his duties as a Director. The compensation committee will assist the directors in reviewing and
approving the compensation structure for our directors.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following table
sets forth certain information regarding the compensation paid to, earned by or accrued for, our directors during the fiscal year
ended December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="29" STYLE="font-size: 10pt; font-weight: bold; text-align: center">DIRECTOR COMPENSATION</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold">Name</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center"><P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>Fees Earned</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>or Paid in</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Cash</B></FONT></P>
                                                                                <P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>($)</B></FONT></P></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Stock</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Awards</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>($)</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Option</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Awards ($)</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Non-Equity</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Incentive Plan</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Compensation</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>($)</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>Non-Qualified</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Deferred</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Compensation</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Earnings</B></FONT></P>
                                                                                <P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>($)</B></FONT></P></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>All Other</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Compensation</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>($)</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center"><P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>Total</B></FONT></P>
                                                                                <P STYLE="margin-top: 0; margin-bottom: 0"><FONT STYLE="font-size: 10pt"><B>($)</B></FONT></P></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left; width: 23%">Michael N. Taglich</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">57,500</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">1,276</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">58,776</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Robert F. Taglich</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">57,500</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">58,776</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Robert Schroeder</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">31,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">32,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">David Buonanno</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">31,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">32,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Seymour G. Siegel</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">43,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">44,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Michael Brand</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">31,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">36,400</TD><TD STYLE="font-size: 10pt; text-align: left">(1)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">68,676</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Peter D. Rettaliata</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">50,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">50,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>__</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(1) Consulting/advisory fees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Board Meetings; Committees and Membership</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Board of Directors
held four meetings during the fiscal year ended December 31, 2016 (&ldquo;fiscal 2016&rdquo;). During fiscal 2016, each of the
directors then in office attended more than 75% of the aggregate of (i) the total number of meetings of the Board of Directors
and (ii) the total number of meetings of all committees of the Board on which such director served.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We maintain the following
committees of the Board of Directors: the Audit Committee, the Compensation Committee and the Nominating Committee. Each committee
is comprised entirely of directors who are &ldquo;independent&rdquo; within the meaning of NYSE MKT Rule 803A(2). Each committee
acts pursuant to a separate written charter, and each such charter has been adopted and approved by the Board of Directors. Copies
of the committee charters are available on our website at airindustriesgroup.com under the heading &ldquo;Investor Relations.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>Audit Committee</B>.
Messrs. Siegel, Schroeder and Buonanno are members of the Audit Committee. Mr. Siegel serves as Chairman of the Audit Committee
and also qualifies as an &ldquo;audit committee financial expert,&rdquo; as that term is defined in Item 407(d)(5)(ii) of Regulation
S-K. The Board has determined that each member of our Audit Committee meets the financial literacy requirements under the Sarbanes-Oxley
Act and SEC rules and the independence requirements under NYSE MKT Rule 803A(2).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our Audit Committee
is responsible for preparing reports, statements and charters of audit committees required by the federal securities laws, as well
as:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>

<P STYLE="font: 10pt Symbol; margin: 0pt 0">&nbsp;</P>


</FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">overseeing and monitoring the integrity of our consolidated financial statements, our
                                                                                                                           compliance with legal and regulatory requirements as they relate to financial statements or accounting matters, and our
                                                                                                                           internal accounting and financial controls;</FONT></TD>
</TR></TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><FONT STYLE="font-size: 10pt"></FONT>

<P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>



<FONT STYLE="font-size: 10pt"></FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">preparing the report that SEC rules require be included
in our annual proxy statement;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><FONT STYLE="font-size: 10pt"></FONT>

<P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>



<FONT STYLE="font-size: 10pt"></FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">overseeing and monitoring our independent registered
public accounting firm&rsquo;s qualifications, independence and performance;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>


</TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">providing the Board with the results of its monitoring
and its recommendations; and</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>


</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">providing to the Board additional information and materials
as it deems necessary to make the Board aware of significant financial matters that require the attention of the Board.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>Compensation Committee</B>.
Our Compensation Committee is composed of Messrs. Siegel, Buonanno and Brand. The Compensation Committee is responsible for:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">establishing the Company&rsquo;s general compensation
policy, in consultation with the Company&rsquo;s senior management, and overseeing the development and implementation of compensation
programs;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">reviewing and approving corporate goals and objectives
relevant to the compensation of the CEO, and evaluating the performance of the CEO at least annually in light of those goals and
objectives and communicating the results of such evaluation to the CEO and the Board, and determining the CEO&rsquo;s compensation
level based on this evaluation, subject to ratification by the independent directors on the Board. In determining the incentive
component of CEO compensation, the Committee will consider, among other factors, the Company&rsquo;s performance and relative
stockholder return, the value of similar incentive awards to CEOs at comparable companies, the awards given to the CEO in past
years, and such other factors as the Committee may determine to be appropriate;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">reviewing and approving the compensation of all other
executive officers of the Company, such other managers as may be directed by the Board, and the directors of the Company;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">overseeing the Board&rsquo;s benefit and equity compensation
plans, overseeing the activities of the individuals and committees responsible for administering these plans, and discharging
any responsibilities imposed on the Committee by any of these plans;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">approving issuances under, or any material amendments
to, any stock option or other similar plan pursuant to which a person not previously an employee or director of the Company, as
an inducement material to the individual&rsquo;s entering into employment with the Company, will acquire stock or options;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">in consultation with management, overseeing regulatory
compliance with respect to compensation matters, including overseeing the Company&rsquo;s policies on structuring compensation
programs to preserve related tax objectives;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">reviewing and approving any severance or similar termination
payments proposed to be made to any current or former officer of the Company; and</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">preparing an annual report on executive compensation
for inclusion in our proxy statement for the election of directors, if required under the applicable SEC rules.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"><B>Nominating Committee</B>.
Our Nominating Committee is composed of Messrs. Schroeder, Siegel and Brand. The purpose of the Nominating Committee is to seek
and nominate qualified candidates for election or appointment to our Board of Directors. The Nominating Committee will seek candidates
for election and appointment that possess the integrity, leadership skills and competency required to direct and oversee the Company&rsquo;s
management in the best interests of its stockholders, customers, employees, communities it serves and other affected parties.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">A candidate must be
willing to regularly attend Committee and Board of Directors meetings, to develop a strong understanding of the Company, its businesses
and its requirements, to contribute his or her time and knowledge to the Company and to be prepared to exercise his or her duties
with skill and care. In addition, each candidate should have an understanding of all corporate governance concepts and the legal
duties of a director of a public company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Stockholders may contact
the Nominating Committee Chairman, the Chairman of the Board or the Corporate Secretary in writing when proposing a nominee. This
correspondence should include a detailed description of the proposed nominee&rsquo;s qualifications and a method to contact that
nominee if the Nominating Committee so chooses.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Stockholder Communications</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Any stockholder who
desires to contact any of our Directors can write to Air Industries Group, 360 Motor Parkway, Suite 100, Hauppauge, NY 11788 Attention:
Stockholder Relations. Your letter should indicate that you are an Air Industries Group stockholder. Depending on the subject matter,
our stockholder relations personnel will:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">forward the communication to the Director(s) to whom
it is addressed;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">forward the communication to the appropriate management
personnel;</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">attempt to handle the inquiry directly, for example
where it is a request for information about the Company, or it is a stock-related matter; or</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">not forward the communication if it is primarily commercial
in nature or if it relates to an improper or irrelevant topic.</FONT></TD>
</TR></TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Code of Ethics</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have adopted a written
code of ethics that applies to our principal executive officers, senior financial officers and persons performing similar functions.
Upon written request to our corporate secretary, we will provide you with a copy of our code of ethics, without cost.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>EXECUTIVE COMPENSATION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Summary Compensation Table</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following summary
compensation table shows, for the periods indicated, information regarding the compensation awarded to, earned by or paid to our
principal executive officer and our chief accounting officer (our only other executive officer whose compensation exceeded $100,000),
for all services rendered in all capacities to our company and its subsidiaries. The individuals listed in the following table
are referred to herein collectively as our &ldquo;named executive officers.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Executive Compensation Table</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Name and principal Position</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Year</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Salary<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Bonus<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Stock<BR> awards<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Option<BR> awards<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Non-equity<BR> Incentive<BR> Plan<BR> Information<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Nonqualified<BR> deferred<BR> compensation<BR> earnings<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">All other<BR> compensation<BR> ($)</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Total<BR> ($)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">Daniel R. Godin<SUP>(1)</SUP></FONT></TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">2016</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">244,995</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">9,600</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left"><SUP>(3)</SUP></TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">254,595</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">President and CEO</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2015</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">232,115</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">125,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">9,600</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(3)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">366,715</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt"><FONT STYLE="font-size: 10pt">Marianne Giglio<SUP>(2)</SUP></FONT></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2016</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">121,896</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">4,500</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(3)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">120,396</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left">Chief Accounting Officer</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>


<P STYLE="margin: 0"></P>

<P STYLE="margin-top: 0; margin-bottom: 0"><B><I>__</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt">(1)</FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">Mr. Godin resigned as our President and CEO effective
as of March 24, 2017.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt">(2)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Ms. Giglio joined our company on March 7, 2016, became
our Chief Accounting Officer on April 22, 2016 and served in that capacity until October 1, 2016.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: right"><FONT STYLE="font-size: 10pt">(3)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Represents car allowance.</FONT></TD>
</TR></TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">None of our executive
officers or key employees named in the above table has an employment agreement providing for a fixed term of employment. All are
employees at will terminable at any time without any severance, other than that payable to employees generally.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Peter D. Rettaliata
receives $50,000 per annum for serving as a director of, and consultant to, our company. We have not yet reached agreement on the
compensation he is to receive for serving as our Acting President and Chief Executive Officer.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">Michael E. Recca receives a salary of $200,000
per annum for serving as our Chief Financial Officer.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Executive Compensation Policies as They Relate to Risk Management</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Compensation Committee
and management have considered whether our compensation policies might encourage inappropriate risk taking by the Company&rsquo;s
executive officers and other employees. The Compensation Committee has determined that the current compensation structure aligns
the interests of the executive officers with those of the Company without providing rewards for excessive risk taking by awarding
a mix of fixed and performance based or discretionary bonuses with the performance based compensation focused on profits as opposed
to revenue growth.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During the years ended
December 31, 2016 and 2015, less than 1% of the total compensation paid to employees was paid in performance-based compensation,
including commissions and bonuses.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Equity Awards &ndash; 2016</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We did not grant any
equity awards in the form of shares to any of the named Executive Officers during 2016 and consequently have omitted the table
which would have described such awards.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Outstanding Equity Awards at 2016 Year-End</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following table
shows certain information regarding outstanding equity awards held by our named Executive Officers as of December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD COLSPAN="14" STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Option Awards</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD COLSPAN="5" STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Stock Awards</B></FONT></TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold">Name</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Number of</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Securities</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Underlying</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Unexercised</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Options (#)</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Exercisable</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Number of</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Securities</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Underlying</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Unexercised</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Options (#)</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Unexercisable</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Option</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Exercise</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Price ($)</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD COLSPAN="2" STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Option</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Expiration</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Date</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Equity Incentive</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Plan Awards:</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Number of</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Unearned Shares,</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Units or Other</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Rights That Have</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Not Vested (#)</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center"><FONT STYLE="font-size: 10pt"><B>Equity Incentive Plan</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Awards: Market or</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Payout Value of</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Unearned Shares,</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>Units or Other Rights</B></FONT><BR> <FONT STYLE="font-size: 10pt"><B>That Have Not Vested</B></FONT></TD><TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left">Daniel R. Godin</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">120,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: center">10.12</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">11 /30/2021*</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left; width: 10%">Marianne Giglio</TD><TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center; width: 11%">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center; width: 11%">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center; width: 11%">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center; width: 11%">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center; width: 11%">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center; width: 11%">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left; width: 1%">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>___</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">*Mr. Godin&rsquo;s options expired unexercised upon termination
of his employment on March 24, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Equity Incentive Plans</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have four equity incentive plans, the 2017 Equity Incentive
Plan (the &ldquo;2017 Plan&rdquo;), which our Board of Directors adopted in July 2017, and which we will submit to stockholders
for approval at our 2017 Annual Meeting of Stockholders, the 2016 Equity Incentive Plan (&ldquo;the &ldquo;2016 Plan&rdquo;),
which our Board of Directors adopted in June 2016 and our stockholders approved on November 30, 2016, the 2015 Equity Incentive
Plan (the &ldquo;2015 Plan&rdquo;), which our Board of Directors adopted in March 2015 and our stockholders approved in June 2015,
and the 2013 Equity Incentive Plan (the &ldquo;2013 Plan&rdquo;), which our Board of Directors adopted in May 2013 and our stockholders
approved in July 2013. The Plans are virtually identical, except that the 2017 Plan authorizes the issuance of 1,200,000 shares
of common stock, each of the 2016 Plan and the 2015 Plan authorizes the issuance of 350,000 shares of common stock and the 2013
Plan authorizes the issuance of 600,000 shares of common stock. As of June 30, 2017, options to purchase 138,000 shares have been
granted and remain outstanding under the 2015 Plan, and 212,000 shares remained available for grant, and options to purchase 564,342
shares remain outstanding and 33,000 shares remain available for issuance under the 2013 Plan. As of June 30, 2017, no stock awards
had been made or options granted under the 2016 Plan. <FONT STYLE="font-family: Times New Roman, Times, Serif; font-size: 10pt">On
July 24, 2017, we granted options to purchase a total of 525,000 shares under the 2013 Plan, 2015 Plan and 2016 Plan.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We adopted the Plans
to provide a means by which employees, directors, and consultants of our Company and those of our subsidiaries and other designated
affiliates, which we refer to together as our affiliates, may be given an opportunity to purchase our common stock, to assist
in retaining the services of such persons, to secure and retain the services of persons capable of filling such positions, and
to provide incentives for such persons to exert maximum efforts for our success and the success of our affiliates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The following table
sets forth information known to us regarding beneficial ownership of our Series A Preferred Stock and our common stock as of July
15, 2017 by (i) each person known by us to own beneficially more than 5% of our outstanding Series A Preferred Stock or common
stock, (ii) each of our directors, (iii) our chief executive officer, and (iii) all of our directors and executive officers as
a group. Except as otherwise indicated, we believe, based on information provided by each of the individuals named in the table
below, that such individuals have sole investment and voting power with respect to such shares, subject to community property laws,
where applicable. As of July15, 2017 we had outstanding 1,294,441 shares of our Series A Preferred Stock and 14,065,770 shares
of our common stock. Each share of Series A Preferred Stock is convertible into 2.0325 shares of common stock (at the current conversion
price of $4.92) and holders of Series A Preferred Stock vote together with holders of common stock as a single class, except on
certain matters specified in the Certificate of Designation authorizing the issuance of the Series A Preferred Stock and as required
under applicable law and the rules of any exchange upon which the common stock is listed. Holders of Series A Preferred Stock are
entitled to the number of votes equal to the number of shares of common stock into which the shares of Series A Preferred Stock
owned of record by such shareholder could have been converted on July 15, 2017 (2.0325 times the number of shares of Series A Preferred
Stock owned of record) and each share of common stock entitled to one vote. Except as stated in the table, the address of the holder
is c/o our company, 360 Motor Parkway, Suite 100, Hauppauge, New York 11788.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Number of Shares</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percent of Class</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Name</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Series A<BR> Preferred</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Common</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Series A<BR> Preferred</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Common</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Directors and Executive Officers:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 52%; font-size: 10pt; text-align: left">Michael N. Taglich</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; font-size: 10pt; text-align: right">298,968</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; font-size: 10pt; text-align: right">2,530,282</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left"><SUP>(1)</SUP></TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; font-size: 10pt; text-align: right">23.10</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right; width: 8%">15.61</TD>
    <TD STYLE="font-size: 10pt; text-align: left; width: 1%">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Robert F. Taglich</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">105,696</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(2)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,675,383</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(3)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8.17</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">10.93</TD>
    <TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Peter D. Rettaliata</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">67,035</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(4)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">*</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Seymour G. Siegel</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,039</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(5)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">*</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">David Buonanno</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,797</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">26,550</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(6)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"></TD><TD STYLE="font-size: 10pt; text-align: left">*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">*</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Robert Schroeder</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">122,207</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(7)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">*</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Michael Brand</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,250</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(8)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">*</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Daniel Godin</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(9)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">All Directors and Executive Officers as a group (9 persons)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">407,461</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,302,571</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(10)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">31.48</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right; vertical-align: bottom">25.54</TD>
    <TD STYLE="font-size: 10pt; text-align: left; vertical-align: bottom">%</TD></TR>
</TABLE>


<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">Less than 1%</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(1)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 30,736 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 607,652 shares he may acquire upon conversion of the Series A Preferred Stock, 727,340
shares he may acquire upon conversion of 8% Notes (including 144,281 shares that may be acquired by Taglich Brothers upon conversion
of 8% Notes), 393,572 shares he may acquire upon conversion of May 2018 Notes (including 82,642 shares which may be acquired by
a partnership of which he is a partner), 395,245 shares he may acquire upon exercise of warrants (including 17,385 shares which
may be acquired by Taglich Brothers and 24,792 shares which may be acquired by a partnership of which he is a partner) and 15,250
shares he may acquire upon exercise of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(2)</FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">Includes 6,478 shares owned as custodian for his children.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(3)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 30,736 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 214,827 shares he may acquire upon conversion of the Series A Preferred Stock (13,646
of which are owned as custodian for his children), 371,698 shares he may acquire upon conversion of 8% Notes (including 144,281
shares that may be acquired by Taglich Brothers upon conversion of 8% Notes), 393,572 shares he may acquire upon conversion of
May 2018 Notes (including 82,642 shares which may be acquired by a partnership of which he is a partner), 271,397 shares he may
acquire upon exercise of warrants (including 17,385 shares which may be acquired by Taglich Brothers, 24,792 shares which may
be acquired by a partnership of which he is a partner and 2,436 shares which may be acquired as custodian for his children) and
15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(4)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 64,216 shares he may acquire upon exercise
of options exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(5)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 15,250 shares he may acquire upon exercise
of options exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="margin: 0">&nbsp;</P>

<P STYLE="margin: 0"></P>

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<P STYLE="margin: 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(6)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 5,684 shares he may acquire upon conversion
of Series A Preferred Stock, 1,016 shares he may acquire upon exercise of warrants and 15,250 shares he may acquire upon exercise
of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(7)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 70,520 shares he may acquire upon exercise
of warrants and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(8)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Represents shares he may acquire upon exercise of options
exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(9)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Mr. Godin resigned as President and CEO effective March
24, 2017. Options to purchase 100,000 shares of common stock expired unexercised as of that date.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(10)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify">Includes 828,163 shares that may be acquired upon conversion of Series A Preferred
Stock, 954,757 shares that may be acquired upon conversion of 8% Notes, 393,572 shares that may be acquired upon conversion of
May 2018 Notes, 624,465 shares that may be acquired upon exercise of warrants and 401,768 shares that may be acquired upon exercise
of options, in each case exercisable within 60 days.</TD>
</TR></TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Security Ownership After Consummation
of the Restructuring Transactions&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">After giving effect
to the Restructuring Transactions, as a result of which 1,294,441 shares of Series A Preferred Stock automatically will be converted
into 8,629,606 shares of common stock, an additional 1,222,809 shares of common stock
will be issued upon conversion of $1,914,215 principal amount of the May 2018 Notes, approximately 334,667 shares of common stock
will be issued upon automatic conversion of the Taglich Notes, and assuming we do not
issue any other shares of common stock, or securities convertible, exercisable or exchangeable for shares of common stock, subsequent
to July 15, 2017, we will have outstanding 24,252,852 shares of common stock and no shares of Series A Preferred Stock, and the
number and percent of the outstanding shares of common stock beneficially owned by (i) each person known by us to own beneficially
more than 5% of our outstanding common stock, (ii) each of our directors, (iii) our chief executive officer, and (iii) all of
our directors and executive officers as a group will be as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Directors and Executive Officers:</TD><TD STYLE="font: 10pt Times New Roman, Times, Serif; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="3" NOWRAP STYLE="font: 10pt Times New Roman, Times, Serif; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><B>Number of Shares</B></P> <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><B>Beneficially Owned</B>&nbsp;</P></TD><TD STYLE="font-size: 10pt; font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Percent</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Michael N. Taglich</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">4,309,395</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left"><SUP>(1)</SUP></TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">16.98</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Robert F. Taglich</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,625,758</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(2)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10.54</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Peter D. Rettaliata</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">67,035</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(3)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Seymour G. Siegel</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,039</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(4)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">David Buonanno</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">54,159</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(5)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Robert Schroeder</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">122,207</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(6)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Michael Brand</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,250</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(7)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Daniel Godin</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(8)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">All Directors and Executive Officers as a group (9
    persons) </TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,005,142</TD><TD STYLE="font-size: 10pt; text-align: left"><SUP>(9)</SUP></TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">26.70</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left"></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">Less than 1%</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(1)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 167,923 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 727,340 shares he may acquire upon conversion of 8% Notes (including 144,281 shares
that may be acquired by Taglich Brothers upon conversion of 8% Notes), 395,245 shares he may acquire upon exercise of warrants
(including 17,385 shares which may be acquired by Taglich Brothers and 24,792 shares which may be acquired by a partnership of
which he is a partner) and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(2)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 167,923 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 43,187 shares owned by custodial accounts for the benefit of his children under the
NY UGMA, 371,698 shares he may acquire upon conversion of 8% Notes (including 144,281 shares that may be acquired by Taglich Brothers
upon conversion of 8% Notes), 271,397 shares he may acquire upon exercise of warrants (including 17,385 shares which may be acquired
by Taglich Brothers, 24,792 shares which may be acquired by a partnership of which he is a partner and 2,436 shares which may
be acquired as custodian for his children) and 15,250 shares he may acquire upon exercise of options, in each case exercisable
within 60 days.</FONT></TD>
</TR></TABLE>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">&nbsp;&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(3)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 64,216 shares he may acquire upon exercise
of options exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(4)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 15,250 shares he may acquire upon exercise
of options exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(5)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 1,016 shares he may acquire upon exercise of
warrants and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(6)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Includes 70,528 shares he may acquire upon exercise
of warrants and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(7)</FONT></TD><TD STYLE="width: 4pt"></TD><TD><FONT STYLE="font-size: 10pt">Represents shares he may acquire upon exercise of options
exercisable within 60 days.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left"><FONT STYLE="font-size: 10pt">(8)</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Mr.
Godin resigned as President and CEO effective March 24, 2017. Options to purchase 100,000 shares of common </FONT>Stock
expired unexercised as of that date.</TD>
</TR></TABLE>
<TR STYLE="vertical-align: top">
    <TD></FONT></TD></TR>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 16pt; text-align: left">(9)</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify">Includes 954,757 shares that may be acquired upon conversion of 8% Notes, 695,739
shares that may be acquired upon exercise of warrants and 272,492 shares that may be acquired upon exercise of options, in each
case exercisable within 60 days.</TD>
</TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our Policy Concerning Transactions with Related Persons</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under Item 404 of SEC
Regulation S-K, a related person transaction is any actual or proposed transaction, arrangement or relationship or series of similar
transactions, arrangements or relationships, including those involving indebtedness not in the ordinary course of business, to
which we or our subsidiaries were or are a party, or in which we or our subsidiaries were or are a participant, in which the amount
involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last
two completed fiscal years and in which any of our directors, nominees for director, executive officers, beneficial owners of more
than 5% of any class of our voting securities (a &ldquo;significant shareholder&rdquo;), or any member of the immediate family
of any of the foregoing persons, had or will have a direct or indirect material interest.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We recognize that transactions
between us and any of our Directors or Executives or with a third party in which one of our officers, directors or significant
shareholders has an interest can present potential or actual conflicts of interest and create the appearance that our decisions
are based on considerations other than the best interests of our Company and stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Audit Committee
of the Board of Directors is charged with responsibility for reviewing, approving and overseeing any transaction between the Company
and any related person (as defined in Item 404 of Regulation S-K), including the propriety and ethical implications of any such
transactions, as reported or disclosed to the Committee by the independent auditors, employees, officers, members of the Board
of Directors or otherwise, and to determine whether the terms of the transaction are not less favorable to us than could be obtained
from an unaffiliated party.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Transactions with Related Persons</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following includes
a summary of transactions since January 1, 2014, or any currently proposed transaction, in which we were or are to be a participant
and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end
for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">From time to time when
needed, we have borrowed funds from Michael Taglich and Robert F. Taglich, directors and principal stockholders of our company,
as discussed below. In addition, as discussed below, Taglich Brothers, of which Michael Taglich and Robert F. Taglich are the principals,
has acted as placement agent for offerings of our securities and provided us with other investment banking and advisory services.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 1, 2014,
we entered into a Capital Market Advisory Agreement with Taglich Brothers pursuant to which Taglich Brothers provided us, on a
non-exclusive basis, business advisory services for a monthly fee of $7,000 and a warrant to purchase 10,000 shares of our common
stock at an exercise price of $8.72 per share. This agreement renewed annually until terminated in October 2016. We paid Taglich
Brothers $1,500 per month for posting its research reports on our company on its website pursuant to a research distribution agreement,
or a total of $18,000 for each of 2014 and 2015 and $9,000 for 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with our
public offering of 1,170,000 shares of common stock completed on June 3, 2014, we paid Taglich Brothers, which acted as placement
agent for the offering, $842,400, representing 8% of the gross proceeds of the offering as a sales commission, plus an additional
$75,000 in reimbursement of counsel fees. In addition, we granted Taglich Brothers placement agent warrants to purchase 46,800
shares of common stock, representing 4% of the shares sold in the offering as additional compensation. The warrants are exercisable
for cash or on a cashless basis at a per share exercise price equal to $11.25, commencing May 29, 2015 and expiring May 28, 2019.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On September 8, 2015,
we borrowed $350,000 from Michael N. Taglich and issued our promissory note in the principal amount of $350,000 to evidence our
obligation to repay that indebtedness. The note bore interest at the rate of 4% per annum and was payable on September 7, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 8, 2016, we
borrowed $350,000 from each of Michael N. Taglich and Robert F. Taglich and issued our promissory notes in the principal amount
of $350,000 to evidence our obligation to repay that indebtedness. The notes bore interest at the rate of 7% per annum and were
payable on June 30, 2016, or earlier upon our receipt of proceeds from the sale of our equity securities in the aggregate amount
of $1,000,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 6, 2016, we borrowed
$400,000 from Michael N. Taglich and $300,000 from Robert F. Taglich and issued our promissory notes in the principal amount of
$400,000 to Michael N. Taglich and $300,000 to Robert F. Taglich to evidence our obligation to repay that indebtedness. The notes
bore interest at the rate of 7% per annum and were payable on June 30, 2016, or earlier upon our receipt of proceeds from the sale
of our equity securities in the aggregate amount of $2,000,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 26, 2016, we
issued 110,000 shares of our Series A Preferred Stock to Michael N. Taglich and 65,000 shares of our Series A Preferred Stock to
Robert F. Taglich, with a stated value of $10.00 per share, upon exchange of the aforementioned promissory notes in connection
with the private placement of 700,000 shares of our Series A Preferred Stock, for which Taglich Brothers acted as co-placement
agent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as co-placement agent for the private placement of our Series A Preferred Stock completed in June 2016, we paid Taglich
Brothers a fee of $326,000 and issued to Taglich Brothers five-year warrants to purchase 56,910 shares of common stock at an initial
exercise price of $6.15, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In August 2016, we borrowed
a total of $1,500,000 from Michael N. Taglich and issued two promissory notes to Michael N. Taglich in principal amounts of $500,000
and $1,000,000 to evidence our obligation to repay that indebtedness. The notes bore interest at the rate of 7% per annum. The
principal and interest were payable on December 31, 2016, or earlier upon our receipt of proceeds from the sale of our equity securities
in the aggregate amount of $2,000,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 19, 2016,
we issued to Michael N. Taglich our 12% Subordinated Convertible Note due December 31, 2017 in the principal amount of $1,520,713,
together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of promissory notes in the aggregate
principal amount of $1,500,000, together with accrued interest thereon and on notes previously exchanged for Series A Preferred
Stock of $20,713. In addition, we issued to Robert F. Taglich our 12% Subordinated Convertible Note due December 31, 2017 in the
principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness
of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock. On November 30, 2016, upon the automatic
conversion of the 12% Notes, we issued 157,191 shares of Series A Preferred Stock to Michael N. Taglich and 21,125 shares of Series
A Preferred Stock to Robert F. Taglich.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in August 2016 of our 12% Notes, we paid Taglich Brothers a fee of $295,400
and issued to Taglich Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15,
subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions
such as mergers and other business combinations. The warrants may be exercised until July 31, 2021 and may be exercised on a cashless
basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On November 23, 2016,
we issued and sold to Michael N. Taglich and Robert F. Taglich our 8% Subordinated Convertible Notes due November 30, 2018 (the
&ldquo;2018 Notes&rsquo;) in the principal amounts of $1,000,000 and $100,000, respectively, together with five-year warrants to
purchase 88,889 and 8,889 shares of common stock, respectively, for a purchase price of $1,000,000 and $100,000, respectively.
The 2018 Notes have a conversion price of $2.25 per share and the warrants have an exercise price of $3.00 per share. The conversion
price of the 2018 Notes and the exercise price of the warrants, as well as the number of shares issuable upon conversion of the
2018 Notes and the exercise of the warrants, are subject to certain anti-dilution and other adjustments, including stock splits,
and in the event of certain fundamental transactions such as mergers and other business combinations. The warrants may be exercised
until November 30, 2021 and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market
prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in November 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $112,000. We also issued to Taglich Brothers
a five-year warrant to purchase 62,222 shares of common stock. The warrants may be exercised until November 30, 2021, have an
exercise price of $3.00, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser
number of shares depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 22, 2016,
we issued and sold to Michael N. Taglich and Robert F. Taglich 2018 Notes in the principal amounts of $300,000 and $200,000, respectively,
together with warrants to purchase 22,815 shares and 15,209 shares, respectively, of common stock for a purchase price of $300,000
and $200,000, respectively. The outstanding principal amount plus accrued interest on the 2018 Notes are convertible at the option
of the holder into shares of common stock at an initial conversion price of $2.63, subject to certain anti-dilution and other adjustments,
including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations. The
warrants may be exercised until November 30, 2021 and have an exercise price of $3.00 per share, subject to certain anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business
combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market prices at
the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in December 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $94,000. We also issued to Taglich Brothers five-year
placement agent warrants to purchase 44,677 shares of common stock at an exercise price pf $3.00 per share and having the same
terms as the warrants issued to purchasers of the 2018 Notes in the December 2016 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 7, 2017,
we issued and sold to Robert F. Taglich our 8% Subordinated Convertible Notes due January 31, 2019 in the principal amount of $250,000
(one of a series of our 8% Subordinated Convertible Notes due January 31, 2019, hereinafter referred to as the &ldquo;2019 Notes&rdquo;),
together with a five year warrant to purchase 19,230 shares of common stock for a purchase price of $250,000. The 2019 Note issued
to Robert F. Taglich has a conversion price of $3.71 per share, and the warrant issued to Robert F. Taglich has an exercise price
of $3.71 per share. The conversion price of the 2019 Notes and the exercise price of the warrants, as well as the number of shares
issuable upon conversion of the 2019 Notes and the exercise of the warrants, are subject to certain anti-dilution and other adjustments,
including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations. The
warrants may be exercised until January 31, 2022 and may be exercised on a cashless basis for a lesser number of shares depending
upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in February 2017 of the 2019 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2019 Notes in the principal amount of $80,000 (of which a 2019 Note in the principal
amount of $20,000 has a conversion price of $3.71 per share and a 2019 Note in the principal amount of $60,000 has a conversion
price of $4.45 per share). We also issued to Taglich Brothers five-year placement agent warrants to purchase 29,816 shares of common
stock at an exercise price of $4.45 per share having the same terms as the warrants issued to purchasers of the 2019 Notes in the
February 2019 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 8, 2017, we
issued and sold to Robert F. Taglich a 2019 Note in the principal amount of $100,000, together with a five year warrant to purchase
7,692 shares of common stock for a purchase price $100,000. The 2019 Note issued to Robert F. Taglich has a conversion price of
$3.30 per share, and the warrant issued to Robert F. Taglich has an exercise price of $3.30 per share. The conversion price of
the 2019 Notes and the exercise price of the warrants, as well as the number of shares issuable upon conversion of the 2019 Notes
and the exercise of the warrants, are subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations. The warrants may be exercised until
January 31, 2022 and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market prices
at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in March 2017 of the 2019 Notes, we issued to Taglich Brothers, in lieu
of cash payment of sales commissions, 2019 Notes in the principal amount of $96,000 (of which a 2019 Note in the principal amount
of $44,400 has a conversion price of $3.30 per share, a 2019 Note in the principal amount of $43,600 has a conversion price of
$3.78 per share and a 2019 Note in the principal amount of $8,000 has a conversion price of $3.25 per share) and five-year warrants
to purchase a total of 7,386 shares of common stock (of which warrants to purchase 3,416 shares have an exercise price of $3.30
per share, warrants to purchase 3,354 shares have an exercise price of $3.78 and warrants to purchase 616 shares have an exercise
price of $4.00). We also issued to Taglich Brothers placement agent warrants to purchase a total of 36,877 shares of common stock,
of which warrants to purchase 17,030 shares have an exercise price of $3.30 per share, warrants to purchase 16,770 shares have
an exercise price of $3.78 and warrants to purchase 3,077 shares have an exercise price of $4.00, and having the same terms as
the warrants issued to purchasers of the 2019 Notes in the March 2019 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, directors and principal
stockholders of our company, and issued our promissory notes in the principal amounts of $200,000 and $300,000 to Michael N. Taglich
and Robert F. Taglich, respectively, to evidence our obligation to repay that indebtedness (the &ldquo;Taglich Notes&rdquo;).
The Taglich Notes bear interest at the rate of 7% per annum and are payable on March 17, 2018. The Taglich Notes have been amended
to provide for the automatic conversion of the indebtedness evidenced thereby into shares of common stock at a conversion price
of $1.50 per share, the public offering price of the shares of our common stock sold in the Public Offering, following the stockholder
vote upon the Restructuring Transactions at our 2017 Annual Meeting of Stockholders, even if stockholders do not approve the Restructuring
Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 2, 2017, we borrowed
$500,000 from each of Michael N. Taglich and Robert F. Taglich, and on May 10, 2017 we borrowed an additional $250,000 from each
of Michael N. Taglich and Robert F. Taglich (collectively, the &ldquo;Taglich Loans&rdquo;). The Taglich Loans were exchanged for
May 2018 Notes in the same principal amount of indebtedness.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 12, 2017
each of Michael N. Taglich and Robert F. Taglich acquired $774,217 principal amount of our May 2018 Notes, together with
warrants to purchase 93,279 shares of our common stock, in consideration for the cancellation of the indebtedness related to
the Taglich Loans. For a discussion of the terms of the May 2018 Notes, see the section of this prospectus captioned
&ldquo;Description of Securities &ndash; May 2018 Notes&rdquo;. On May 19, 2017, a partnership of which Michael N. Taglich
and Robert F. Taglich are partners, acquired $205,780 principal amount of May 2018 Notes and warrants to purchase 24,792
shares of our common stock for a purchase price of $199,786. The warrants, when issued, were exercisable at an initial
exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a lesser number of shares
based upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution and other
adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations, mergers
and other business combination transactions. In accordance with the terms of the warrants, the exercise price has been
reduced to $1.50 per share, the public offering price of the shares of common stock sold in the Public Offering. We have
agreed to pay Taglich Brothers $176,155 in sales commissions in connection with the May 2018 Note financing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The May 2018 Notes beneficially owned by Michael N. Taglich and Robert F. Taglich have been
amended to require stockholder approval for the conversion thereof to comply with applicable rules of the NYSE MKT. At a meeting
on July 24, 2017, the Board of Directors adopted a resolution authorizing the conversion of the May 2018 Notes at a conversion
price of $1.50 per share following the stockholder vote upon the Restructuring Transactions at our 2017 Annual Meeting of Stockholders,
even if stockholders do not approve the Restructuring Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
Public Offering, on July 12, 2017, we amended the Certificate of Designation authorizing the issuance of the Series A Preferred
Stock, to provide for the automatic conversion of the outstanding shares of Series A Preferred Stock into shares of common stock
at a conversion price of $1.50 per shares, the public offering price of the shares sold in the Public Offering, subject to stockholder
approval in accordance with the applicable rules of the NYSE MKT, including the automatic conversion of 298,968 shares of Series
A Preferred Stock beneficially owned by Michael N. Taglich and 105,696 shares of Series A Preferred Stock beneficially owned by
Robert F. Taglich, principal partners of Taglich Brothers and principal stockholders and directors of our company, into 1,993,120
shares and 704,640 shares, respectively, of common stock. At a meeting on July 24, 2017, the Board of Directors adopted a further
amendment to the Certificate of Designation, subject to approval by a majority of the holders of the Series A Preferred Stock,
authorizing the automatic conversion of the outstanding shares of Series A Preferred Stock at a conversion price of $1.50 per share
following the stockholder vote upon the Restructuring Transactions at our 2017 Annual Meeting of Stockholders, even if stockholders
do not approve the Restructuring Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Taglich Brothers or
its affiliates may in the future provide investment banking, commercial banking and/or other services to us from time to time,
for which they may in the future receive customary fees and expenses.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The foregoing transactions
were reviewed and approved by the Audit Committee or our Board of Directors. We believe that the terms of each transaction were
not less favorable to us than those terms that could be obtained from an unaffiliated third party.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>SELLING STOCKHOLDERS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">This prospectus relates
to the offering by the Selling Stockholders named below of 1,293,938 shares of common stock acquired or to be acquired upon conversion
of our May 2018 Notes, subject to stockholder approval in accordance with the applicable rules of the NYSE MKT. The conversion
of the May 2018 Notes into shares of common stock at a conversion price of $1.50 per share, the offering price of the shares of
common stock sold in the Public Offering, will be consummated following the stockholder vote on the Restructuring Transactions
at our 2017 Annual Meeting of Stockholders which we expect to hold in September 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The following table
sets forth, based on information provided to us by the Selling Stockholders or known to us, the name of each Selling Stockholder,
the nature of any position, office or other material relationship, if any, which the Selling Stockholder has had, within the past
three years, with us or with any of our predecessors or affiliates, and the number of shares of our common stock beneficially owned
by the Selling Stockholder before this offering.&nbsp;We have not independently verified this information. The Selling Stockholders
identified in each table may have sold, transferred or otherwise disposed of some or all of their shares since the date on which
the information in the following table is presented in transactions exempt from, or not subject to, the registration requirements
of the Securities Act.&nbsp;Information concerning the Selling Stockholders may change from time to time and, if necessary, we
will amend or supplement this prospectus accordingly.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The number of shares
owned are those beneficially owned, without regard to any limitations on conversions or exercises, as determined under the rules
of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose.&nbsp;Under these rules,
beneficial ownership includes any shares of Common Stock as to which a person has sole or shared voting power or investment power
and any shares of common stock which the person has the right to acquire within 60 days through the exercise of any option, warrant
or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a
trust, discretionary account or similar arrangement. The percentage of outstanding shares beneficially owned prior to the offering
is based on 14,065,770 shares of our common stock outstanding as of July 15, 2017 and is calculated in accordance with Rule 13d-3
under the Exchange Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have assumed all
shares reflected in the tables will be sold from time to time in the offering covered by this prospectus.&nbsp;Because the Selling
Stockholders may offer all or any portions of the shares listed in the table, no estimate can be given as to the amount of those
shares covered by this prospectus that will be held by the Selling Stockholders upon the termination of the offering. The Selling
Stockholders also may sell, transfer or otherwise dispose of all or a portion of their shares in transactions exempt from the registration
requirements of the Securities Act, including under Rule 144. For purposes of the tables, we have assumed that, after completion
of the offering, all of the shares covered by this prospectus will be sold by the Selling Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The shares of common
stock being offered by the Selling Stockholders includes all shares issuable upon conversion of the 8% Notes and outstanding warrants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We are registering
the shares of common stock offered by this prospectus pursuant to an agreement we entered into with the Selling Stockholders in
order to induce them to convert their May 2018 Notes into shares of common stock in connection with the public offering we completed
on July 12, 2017 so as to permit the Selling Stockholders to offer the shares for resale from time to time. Except as set forth
in the following sentence, the Selling Stockholders have not had any material relationship with us within the past three years.
The Selling Stockholders have entered into lock-up agreements pursuant to which they have agreed not to offer, sell, assign, transfer
or otherwise dispose of their shares, or enter into any agreement to do any of the foregoing, prior to October 11, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
may sell all, some or none of their shares in this offering. See &quot;Plan of Distribution.&quot;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have agreed to indemnify
each Selling Stockholder whose shares we have included in this prospectus from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement of which this prospectus is a part.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">If the registration statement of which this prospectus is a part is not declared effective on or before
August 11, 2017, we have agreed to issue to each Selling Stockholder a number of shares of common stock equal to 8% of the number
of shares of common stock held by such Selling Stockholder, plus for each additional 30 days thereafter during which the registration
statement is not declared effective, a number of shares of common stock equal to an additional one percent (1%) of the number of
shares offered by this prospectus, provided that no Selling Stockholder shall receive in the aggregate more than ten percent (10%)
of the number of shares of common stock being offered by this prospectus by such Selling Stockholder.</P>

<P STYLE="margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="3" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: left; vertical-align: bottom"><B>Selling&nbsp;Stockholder</B></TD>
    <TD STYLE="text-align: left; vertical-align: bottom"><B>Shares&nbsp;of Common&nbsp;Stock Owned Before&nbsp;this Offering&nbsp;&nbsp;</B></TD>
    <TD STYLE="text-align: left; vertical-align: bottom"><B>Percentage&nbsp;of Common&nbsp;Stock Beneficially Owned&nbsp;Before
    this&nbsp;Offering&nbsp;(1)</B></TD>
    <TD STYLE="text-align: left; vertical-align: bottom"><B>Shares&nbsp;of Common Stock&nbsp;Being Offered&nbsp;in this&nbsp;Offering
    (2)</B></TD>
    <TD STYLE="text-align: left; vertical-align: bottom"><B>Shares&nbsp;of Common Stock Owned After&nbsp;this Offering&nbsp;(3</B></TD>
    <TD STYLE="text-align: left; vertical-align: bottom"><B>Percentage&nbsp;of Common&nbsp;Stock Beneficially Owned&nbsp;After&nbsp;this
    Offering&nbsp;</B></TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,238,255)">
    <TD STYLE="width: 25%; border-left: Black 1pt solid; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">Dolphin Offshore Partners</FONT></TD>
    <TD STYLE="width: 15%; border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">666,666</FONT></TD>
    <TD STYLE="width: 15%; border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">4.74%</FONT></TD>
    <TD STYLE="width: 15%; border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">666,666 </FONT></TD>
    <TD STYLE="width: 15%; border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;0</FONT></TD>
    <TD STYLE="width: 15%; border-left: Black 1pt solid; border-top: Black 1pt solid; border-right: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">--</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Shadow Capital LLC</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">344,344 </FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">2.45% </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">&nbsp;137,333</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">207,011</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">1.47%</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P></TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,238,255)">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Broms Financial LLC</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">103,000</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">*</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center">103,000&#9; </TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;0</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">--</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Barktones LLC</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">155,500(4)</P></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&#9;1.11%</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center">&nbsp;&#9;
68,666(4)</P></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">86,834</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,238,255)">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Bridgitte Ferrada-Stetson</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">68,666</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center">*</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center">&nbsp;</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">68,666 </FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;0</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">--</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Edward J. Cook</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">59,307</P></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">*&nbsp;</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center">51,500&#9; </TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;7,807</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">* </FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,238,255)">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Alvin R. Bonette Revocable Trust</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">72,536 &nbsp;</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">* </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center">50,470&#9; </TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center">21,796</TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">* </FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Robert Brooks</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">39,099&nbsp;</P></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid; text-align: center">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">*&nbsp;</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">&nbsp;34,333</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; border-top: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">4,766&nbsp;</P></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">*</P></TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,238,255)">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Brent Eastwood</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;34,333 &#9;&nbsp;</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">* </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">34,333 </FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">0 &nbsp;</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">--</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Norper Investments</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">49,035 &nbsp;</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">* </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">34,333 </FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">14,702 &nbsp;</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,238,255)">
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Roger Lunstra and Joyce
Lunstra Trust</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;32,799 &nbsp;</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">* </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">27,466 </FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid"><FONT STYLE="font-size: 10pt">5,333 </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-right: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="border-top: Black 1pt solid; border-bottom: Black 1pt solid; border-left: Black 1pt solid"><FONT STYLE="font-size: 10pt">Jeffrey Golden</FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-bottom: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">24,166 </FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">* </FONT></TD>
    <TD STYLE="border-top: Black 1pt solid; border-bottom: Black 1pt solid; border-left: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">17,166</FONT></TD>
    <TD STYLE="border-left: Black 1pt solid; text-align: center; border-top: Black 1pt solid; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">7,000 &nbsp;</FONT></TD>
    <TD STYLE="border: Black 1pt solid; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD></TR>
</TABLE>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">_____</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: left">*</TD><TD STYLE="width: 4pt"></TD><TD>Represents less than 1%.</TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: left">(1)</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><P STYLE="margin: 0pt 0">Based
on 14,065,770 shares of common stock outstanding as of&nbsp;July 15, 2017.&nbsp;</P>


</TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: left">(2)</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Represents
shares acquired or to be acquired upon conversion of May 2018 Notes at a conversion price of $1.50 per share.&nbsp;</P>


</TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: left">(3)</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><P STYLE="margin: 0pt 0">Assumes
that (i) all of the shares of common stock to be registered on the registration statement of which this prospectus is a part are
sold in the offering and (ii) that no other shares of common stock are acquired or sold by the selling stockholder prior to the
completion of the offering. However, the selling stockholders may sell all, some or none of the shares offered pursuant to this
prospectus or sell some or all of their shares pursuant to an exemption from the registration provisions of the Securities Act,
including under Rule 144.&nbsp;</P>


</TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; margin-left: 0pt; text-indent: 0pt"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: left">(4)</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><P STYLE="margin: 0pt 0">Includes
53,333 shares to be acquired upon conversion of $80,000 principal amount of May 2018 Notes, subject to stockholder approval&nbsp;in
accordance with the applicable rules of the NYSE MKT.</P>


</TD>
</TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B></B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PLAN OF DISTRIBUTION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We are registering
the shares of common stock offered by the Selling Stockholders pursuant to this prospectus to permit the resale of these shares
by the Selling Stockholders from time to time after the date of this prospectus.&nbsp;&nbsp;We will not receive any of the proceeds
from the sale by the Selling Stockholders of the shares of common stock offered by this prospectus.&nbsp;We will bear all fees
and expenses incident to our obligation to register the shares of common stock, other than any underwriting discounts or commissions
or agent&rsquo;s commissions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Each Selling Stockholder
of the shares of common stock offered hereby and any of their pledgees, assignees and successors-in-interest may, from time to
time, sell any or all of their shares covered hereby on the NYSE MKT or any other stock exchange, market or trading facility on
which shares of the common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling
Stockholder may use any one or more of the following methods when selling securities:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>purchases by a broker-dealer as principal and resale by the broker-dealer for its account;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>an exchange distribution in accordance with the rules of the applicable exchange;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>privately negotiated transactions;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>settlement of short sales;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>in transactions through broker-dealers that agree with the Selling Shareholders to sell a specified number of such shares of
common stock at a stipulated price per share;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>a combination of any such methods of sale; or</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>any other method permitted pursuant to applicable law.</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
may also sell securities under Rule 144 or any other exemption from registration under the Securities Act, if available, rather
than under this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Broker-dealers engaged
by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares of common stock,
from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with FINRA IM-2440.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In connection with
the sale of the shares of common stock offered hereby, the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions
they assume. The Selling Stockholders may also sell shares of common stock short and deliver shares of common stock to close out
their short positions, or loan or pledge shares of common stock to broker-dealers that in turn may sell these shares of common
stock. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions
or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of
the shares of common stock offered by this prospectus, which securities such broker-dealer or other financial institution may resell
pursuant to this prospectus (as supplemented or amended to reflect such transaction).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
and any broker-dealers or agents that are involved in selling the shares of common stock offered hereby may be deemed to be &ldquo;underwriters&rdquo;
within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act. Each Selling Shareholder has informed the Company that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to distribute the shares of common stock offered hereby.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We are required to
pay certain fees and expenses incurred by us incident to the registration of the shares of common stock offered hereby. We have
agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under
the Securities Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We agreed to keep this
prospectus effective until the earlier of (i) the date on which the shares of common stock may be resold by the Selling Stockholders
without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement
for us to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar
effect or (ii) all of the shares of common stock offered hereby have been sold pursuant to this prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The shares of common stock offered hereby will be sold only through registered
or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the shares of
common stock covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is complied with.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution of the shares of common stock offered hereby may
not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as
defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the
timing of purchases and sales of the shares of common stock by the Selling Shareholders or any other person. We will make copies
of this prospectus available to the Selling Shareholders and have informed them of the need to deliver a copy of this prospectus
to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>DESCRIPTION OF SECURITIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>General</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our authorized capital
stock consists of 25,000,000 shares of common stock, par value $0.001 per share, of which, as of July 15, 2017, 14,065,758 shares
are issued and outstanding, and 3,000,000 shares of preferred stock, 2,000,000 of which have been designated as Series A Convertible
Preferred Stock, of which as of July 15, 2015, 1,294,441 shares are outstanding. The outstanding shares of Series A Preferred Stock
will be automatically converted into 8,629,606 shares of common stock following the stockholder vote upon the Restructuring Transactions,
as discussed below under the caption &ldquo;Series A Preferred Stock.&rdquo; At a meeting of our Board of Directors on July 24,
2017, we adopted an amendment, subject to stockholder approval, to amend our Articles of Incorporation to increase the number of
shares of common stock we are authorized to issue from 25,000,000 to 50,000,000 (the &ldquo;Charter Amendment&rdquo;). The Charter
Amendment will be submitted to stockholders for approval at our 2017 Annual Meeting of Stockholders scheduled to be held in September
2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The authorized and unissued
shares of common stock and preferred stock are available for issuance without further action by our stockholders, unless such action
is required by applicable law or the rules of any stock exchange on which our securities may be listed. Unless approval of our
stockholders is so required, our board of directors will not seek stockholder approval for the issuance and sale of our common
stock or our preferred stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Common Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of our common
stock are entitled to one vote per share on all matters submitted to a stockholder vote, including the election of directors. Holders
our common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of our common stock voting
for the election of directors will be able to elect all of the directors. A vote by the holders of a majority of our outstanding
shares of common stock will be required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment
to our articles of incorporation. In the event of liquidation, dissolution or winding up of our affairs, either voluntarily or
involuntarily, each outstanding share of our common stock will be entitled to share equally in our assets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of our common
stock do not have pre-emptive rights or conversion rights and there are no redemption provisions applicable to our common stock.
Holders of our common stock are entitled to receive dividends when and as declared by our board of directors, out of funds legally
available therefor.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">All shares of our common
stock offered hereby will, when issued, be fully paid and non-assessable, including shares of common stock issued on the conversion
of preferred stock, the exercise of common stock warrants or subscription rights, if any.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Preferred Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our Articles of Incorporation
gives our Board of Directors authority to issue shares of &ldquo;blank check&rdquo; preferred stock from time to time in one or
more series, pursuant to resolutions adopted by the Board in accordance with Section 78.196 of the Nevada Revised Statutes, each
having the voting powers, if any, designations, powers, preferences, and the relative, participating, optional, or other rights,
if any, and the qualifications, limitations, or restrictions thereof, of any unissued series of preferred stock, to fix the number
of shares constituting such series, and to increase or decrease the number of shares of any such series, but not below the number
of shares thereof then outstanding, without the delay attendant to obtaining stockholder approval for such issuance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Prior to the issuance
of shares of each series of preferred stock, the board of directors is required to adopt resolutions and file a certificate of
designation with the Secretary of State of the State of Nevada for that series. The purpose of authorizing the board of directors
to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage
a third party from acquiring, a majority of a corporation&rsquo;s outstanding voting stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We may issue preferred
stock to effect a business combination, to raise capital or for other reasons. In addition, preferred stock could be utilized
as a method of discouraging, delaying or preventing a change in control of our company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our board of directors
has no intention at the present time to create any additional series of preferred stock. The issuance of any new series of preferred
stock could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Any future issuance
of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by
the shareholders and may adversely affect the voting and/or other rights of the holders of common stock or any other securities
we may issue in the future. The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could
be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the holders to block such a transaction, or facilitate
a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition,
under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common
stock. Although our board of directors is required to make any determination to issue such stock based on its judgment as to the
best interests of our stockholders, the board of directors could act in a manner that would discourage an acquisition attempt or
other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders
might receive a premium for their stock over the then market price of such stock. Our board of directors does not at present intend
to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Series A Convertible Preferred Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following summary
of the powers, preferences, rights, qualifications and limitations of the Series A Preferred Stock is qualified in its entirety
by the Certificate of Designation authorizing the issuance of the Series A Preferred Stock, as amended on July 12, 2017, as filed
with the Office of the Secretary of State of Nevada incorporated as an exhibit to the Registration Statement of which this prospectus
is a part.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">As of July 15, 2017, we had outstanding 1,294,441
shares of Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of the Series
A Preferred Stock (the &ldquo;Preferred Shares&rdquo;) are entitled to receive dividends when, if and as declared, paid or set
side by the Board of Directors ratably on an as-converted basis (2.0325 shares of common stock for each share of Series A Preferred
Stock owned of record) with the holders of our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Upon any voluntary or
involuntary liquidation, dissolution or winding up of our affairs, holders of Preferred Shares are entitled to be paid out of our
assets legally available for distribution to stockholders, after payment of or provision for our debts and other liabilities, ratably
on an as-converted basis (2.0325 shares of common stock for each share of Series A Preferred Stock owned of record) with the holders
of our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of Series A
Preferred Stock may elect at any time to convert their Preferred Shares into shares of common stock at the conversion rate of 2.0325
shares of common stock for each Preferred Share (equivalent to an initial conversion price of approximately $4.92 per share of
common stock. The conversion rate and the corresponding conversion price are subject to certain anti-dilution and other adjustments,
including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions such
as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On July 12, 2017, we
filed a Certificate of Amendment to the Certificate of Designation in connection with the Public Offering, pursuant to which each
share of Series A Preferred Stock is automatically convertible, without any action on the part of the holders thereof, into 6.6667
shares of our common stock, upon stockholder approval in accordance with the applicable rules of the NYSE MKT. The automatic conversion
of the outstanding 1,294,441 shares of Series A Preferred Stock into 8,629,606 shares of common stock will be submitted to stockholders
for their approval at our 2017 Annual Meeting of Stockholders which we expect to hold in September 2017. At a meeting on July 24,
2017, our Board of Directors adopted a further amendment to the Certificate of Designation, subject to approval by the holders
of a majority of the Series A Preferred Stock, which provides for the automatic conversion of the outstanding shares of Series
A Preferred Stock at a conversion price of $1.50 per share following the stockholder vote on the Restructuring Transactions, even
if stockholders do not approve the Restructuring Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We may at our option,
at any time and from time to time after the market price of a share of common stock is in excess of $9.84 for 30 consecutive trading
days, cause all of the Preferred Shares to be converted into shares of common stock at the then-prevailing conversion rate, subject
to the certain conditions set forth in the certificate of designation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Commencing May 26, 2018,
we may redeem all of the Preferred Shares for a redemption price of $10.00, plus accrued and unpaid dividends.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of Preferred
Shares vote on an as-converted basis, together with holders of common stock, as a single class, on the election of directors and
all other matters presented to stockholders, except for matters as to which under applicable law and the certificate of designation
a class vote of the holders of the Series A Preferred Stock is required. The Certificate of Designation provides that the affirmative
vote of the holders of a majority of the then outstanding shares of Series A Preferred Stock is required to (a) alter or change
adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Certificate of Designation,
(b) amend our articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders
of the Series A Preferred Stock, (c) increase the number of authorized shares of Series A Preferred Stock, (d) authorize a new
series of preferred stock with dividend, liquidation or redemption rights senior or pari passu to the Series A Preferred Stock
or (e) enter into any agreement with respect to any of the foregoing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Upon the automatic conversion
of 1,294,441 shares of Series A Preferred Stock, we will have 3,000,000 authorized shares of preferred stock, none of which will
be outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>8% Subordinated Convertible Notes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In November 2016 we
issued our 8% Subordinated Convertible Notes due November 30, 2018 (the &ldquo;2018 Notes&rdquo;) in the original aggregate principal
amount of $1,512,000 (the &ldquo;First Tranche of 2018 Notes&rdquo;), including First Tranche of 2018 Notes in the principal amount
of $112,000 issued to Taglich Brothers in lieu of cash payment of sales commissions for the private placement of the First Tranche
of 2018 Notes, and in December 2016 we issued our 8% Notes in the original aggregate principal amount of $1,269,000 (the &ldquo;Second
Tranche of 2018 Notes&rdquo;), including Second Tranche of 2018 Notes in the principal amount of $94,000 issued to Taglich Brothers
in lieu of cash payment of sales commissions for the private placement of the Second Tranche of 2018 Notes. Except as set forth
below, the terms of the First Tranche of 2018 Notes and the Second Tranche of 2018 Notes are the same. Payment of the principal
and accrued interest on the 8% Notes is junior and subordinate in right of payment to our indebtedness under the Loan Facility.
All of our 8% Notes will remain outstanding following this offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the 2018
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28,
2017, in cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest
in cash, or we otherwise elect to do so, we may pay accrued interest on the First Tranche of 2018 Notes by the issuance of additional
2018 Notes having the same terms as the First Tranche of 2018 Notes, and in the case of the Second Tranche of 2018 Notes, by issuing
additional 2018 Notes having the same terms as the Second Tranche of 2018 Notes (2018 Notes issued in lieu of the cash payment
of accrued interest is hereinafter referred to as &ldquo;2018 PIK Notes&rdquo;), except that if accrued interest for any quarterly
interest period on the Second Tranche of 2018 Notes (including the 2018 PIK Notes issued in lieu of cash payment of accrued interest
thereon) is paid in additional Second Tranche of 2018 PIK Notes interest for that quarterly interest payment is calculated at the
rate of twelve percent (12%) per annum. Upon the occurrence and continuation of an event of default, interest on the 2018 Notes
will accrue at the rate of 12% per annum.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In February and March
of 2017, we issued our 8% Subordinated Convertible Notes due January 31, 2019 (the &ldquo;2019 Notes&rdquo;) in the original aggregate
principal amount of $2,376,000, including 2019 Notes in the aggregate principal amount of $176,000 issued to Taglich Brothers in
lieu of cash payment of sales commissions for the private placements of the 2019 Notes in February and March of 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest in
cash, or we otherwise elect to do so, we may pay accrued interest, in additional 2019 Notes, provided that if accrued interest
is paid in additional 2019 Notes, interest for that quarterly interest payment is calculated at the rate of 12% per annum. Upon
the occurrence and continuation of an event of default, interest will accrue at the rate of 12% per annum.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Since covenant defaults
under our Loan Facility have prohibited us from paying accrued interest in cash on our 8% Notes, we have paid accrued interest
on the 8% Notes through the issuance of additional 8% Notes. If and when the Loan Facility is no longer in default, we will no
longer be restricted from paying cash interest on the 8% Notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 28, 2017,
we issued 2018 PIK Notes in the principal amount of $32,477 in respect of the First Tranche of 2018 Notes and in the principal
amount of $23,908 in respect of the Second Tranche of 2018 Notes in lieu of cash payment of accrued interest for the interest
period then ended.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 31, 2017, we
issued 2018 PIK Notes in the principal amount of $30,489 in respect of the First Tranche of 2018 Notes and in the principal amount
of $38,383 in respect of the Second Tranche of 2018 Notes in lieu of cash payment of accrued interest for the interest period then
ended, and we issued 2019 PIK Notes in the principal amount of $72,285 in lieu of cash payment of accrued interest on the 2019
Notes for the interest period then ended.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of May 31, 2017,
we had outstanding $5,359,420 principal amount of our 8% Notes, including $1,574,965 principal amount of First Tranche of 2018
Notes, $1,336,170 principal amount of Second Tranche of 2018 Notes and $2,448,285 principal amount of 2019 Notes. We intend to
pay accrued interest on the 8% Notes for the period ending August 15, 2017 in cash, although there is no assurance that we will
be able to do so.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The outstanding principal
amount plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock at conversion
prices ranging from $2.25 to $4.00, subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>May 2018 Notes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of July 15, 2017,
we had outstanding $3,695,123 principal amount of May 2018 Notes. The principal amount of each May 2018 Note will be increased
by 2% for each 30 days it remains outstanding commencing August 1, 2017. Upon the occurrence of, and during the continuance of
an Event of Default (as defined in the May 2018 Notes), the May 2018 Notes will accrue late interest at the rate of 10% per annum.
Payment of the principal and accrued interest, if any, on the May 2018 Notes is junior and subordinate in right of payment to our
indebtedness under the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The principal amount,
together with accrued interest, if any, of the May 2018 Notes are convertible into
shares of our common stock until November 12, 2017 at an initial conversion price of $2.49 per share, subject to anti-dilution
and other adjustments for stock splits and certain fundamental transactions, including recapitalizations, mergers and other business
combination transactions (the &ldquo;Fixed Conversion Price&rdquo;), and thereafter at the lower of the Fixed Conversion Price
and 75% of the five (5) Weighted Average Prices (as defined in the May 2018 Notes) of the common stock during the five consecutive
trading day period ending on the trading immediately preceding the day of a request by the holder for conversion of the May 2018
Note. We have the right to redeem all, or a portion of (on a pro rata basis), the May 2018 Notes upon written notice to the holders
not less than three trading days prior to the applicable redemption date. Subject to the subordination provisions of the May 2018
Notes, holders of the May 2018 Notes have the right to request the redemption of their May 2018 Notes at any time, and following
an Event of Default or in advance of a Change of Control (as defined in the May 2018 Notes).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
Public Offering, holders of approximately $1,780,908 aggregate principal amount of our May 2018 Notes converted their May 2018
Notes into an aggregate of 1,240,605 shares of our common stock at a conversion price of $1.50 per share, the offering price of
the shares offered in the Public Offering. We also redeemed an additional $463,501 aggregate principal amount of May 2018 Notes
for a redemption price equal to 100% of the principal amount thereof from the net proceeds of the Public Offering. Immediately
prior to the closing of the sale of the shares in the Public Offering and the conversion of the May 2018 Notes, we were advised
by the NYSE MKT that the conversion of the remaining $1,914,215 aggregate principal amount of May 2018 Notes at a conversion price
of $1.50 per share and the exercise of all 501,039 of the warrants issued as part of the sale of the 2018 Notes in May 2017 at
a price of $1.50 per share, the public offering price of the shares sold in the Public Offering, was subject to stockholder approval
in accordance with the applicable rules of the NYSE MKT since the conversion of the May 2018 Notes and exercise of the warrants
at the $1.50 per share price would result in the issuance of 20% or more of the shares of common stock outstanding. At a meeting on July 24, 2017, our Board of
Directors adopted a resolution authorizing the conversion of the May 2018 Notes at a conversion price of $1.50 per share following
the stockholder vote at our 2017 Annual Meeting of stockholders, even if stockholders do not approve the Restructuring Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The warrants to purchase
501,039 shares of common stock, when issued, were exercisable at an initial exercise price of $2.49 per share until May 12, 2022,
and may be exercised on a cashless basis for a lesser number of shares based upon prevailing market prices when exercised. The
exercise price of the warrants is subject to anti-dilution and other adjustments, including stock splits, and in the event of
certain fundamental transactions such as recapitalizations, mergers and other business combination transactions. In accordance
with the terms of the warrants, the exercise price was reduced to $1.50 per share, the public offering price of the shares
of common stock sold in the Public Offering, subject to stockholder approval in accordance with the applicable rules of the NYSE
MKT for the reason discussed in the immediately preceding paragraph. At a meeting on July 24, 2017, our Board of Directors adopted
a resolution authorizing the reduction of the exercise price of the warrants to $1.50 per share following the stockholder vote
at our 2017 Annual Meeting of Stockholders, even if stockholders do not approve the Restructuring Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We intend to
submit the conversion of the remaining $1,914,215 aggregate principal amount of May 2018 Notes at a conversion price of $1.50
per share and the exercise of all 501,039 of the warrants issued as part of the sale of the May 2018 Notes at a $1.50 per
share to our stockholders at the 2017 Annual Meeting of Stockholders, which we expect to hold in September 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Taglich Notes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, and issued our promissory
notes in the principal amounts of $200,000 and $300,000 to Michael N. Taglich and Robert F. Taglich, respectively, to evidence
our obligation to repay that indebtedness. The notes bear interest at the rate of 7% per annum and are payable on March 17, 2018.
These notes were to be amended to provide for the conversion of the indebtedness evidenced thereby into shares of common stock
at a conversion price of $1.50 per share, the public offering price of the shares sold in the Public Offering, as part of the
Restructuring Transactions which we will to submit to stockholders for approval in compliance with the applicable rules of the
NYSE MKT at our 2017 Annual Meeting of Stockholders which we expect to hold in September 2017. Following a meeting of our Board
of Directors on July 24, 2017, the Taglich Notes were amended to provide for the automatic conversion of the indebtedness evidenced
thereby at a conversion price of $1.50 per share following our 2017 Annual Meeting of Stockholders, even if stockholders do not
approve the Restructuring Transactions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Warrants</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of July 15,
2017, we had outstanding warrants to purchase a total of 1,469,530 shares of common stock. The exercise price of the warrants
ranges from $2.49 to $11.25 per share (including 501,039 shares issuable upon the exercise of warrants having an exercise
price of $2.49 per share), subject to adjustment for stock splits and certain fundamental transactions, including
recapitalizations, mergers and other business combination transactions. The warrants may be exercised on a cashless basis for
a lesser number of shares depending upon prevailing market prices at the time of exercise. The warrants have various
expiration dates extending until May 12, 2022.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Stock Options</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">At July 15, 2017, we
had outstanding options to purchase a total of 516,342 shares of common stock, exercisable at prices ranging from $4.50 to $11.73
per share, with a weighted average exercise price of $6.29 per share and expiration dates ranging from July 2018 to April 2021.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Articles of Incorporation and Bylaws</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Our Articles of Incorporation
and Bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes
in our control or our management, including, but not limited to the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 60pt; text-align: right"><FONT STYLE="font-family: Symbol; font-size: 10pt">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Our Bylaws provide that special meetings of our stockholders
may be called only by the Chairman of the Board, President, or a majority of the Board.</FONT></TD>
</TR></TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 60pt; text-align: right"><FONT STYLE="font-family: Symbol; font-size: 10pt">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Our Bylaws provide that stockholders seeking to present
proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must
provide timely notice in writing and also specify requirements as to the form and content of a stockholder&rsquo;s notice. These
provisions may delay or preclude stockholders from bringing matters before a meeting of our stockholders or from making nominations
for directors at a meeting of stockholders, which could delay or deter takeover attempts or changes in our management.</FONT></TD>
</TR></TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 60pt; text-align: right"><FONT STYLE="font-family: Symbol; font-size: 10pt">&middot;</FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Our Articles of Incorporation do not include a provision
for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class
of shares could be able to ensure the election of one or more directors.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; text-align: left"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">These and other provisions
contained in our Articles of Incorporation and Bylaws are expected to discourage coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board.
However, these provisions could delay or discourage transactions involving an actual or potential change in control of us, including
transactions in which stockholders might otherwise receive a premium for their shares over then current prices. Such provisions
could also limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to
be in their best interests and, therefore, could adversely affect the price of our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">See &ldquo;Where You
Can Find Additional Information About Us&rdquo; elsewhere in this prospectus for information on where you can obtain copies of
our Articles of Incorporation and our Bylaws, which have been filed with and are publicly available from the SEC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Limitations on Indemnification of Directors and Officers</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.138 of the
NRS provides that a director or officer will not be individually liable unless it is proven that (i) the director&rsquo;s or officer&rsquo;s
acts or omissions constituted a breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud
or a knowing violation of the law.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Article 9 of our Articles of Incorporation (&ldquo;Limitation
on Liability&rdquo;) provides as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&ldquo;Unless otherwise
provided by law, a director or officer is not individually liable to the Corporation or its stockholders or creditors for any damages
as a result of any act or failure to act in his individual capacity as a director or officer unless it is proven that his act or
failure to act constituted a breach of his fiduciary duties as a director or officer and his breach of those duties involved intentional
misconduct, fraud, or a knowing violation of law. If the NRS is amended to further eliminate or limit or authorize corporate action
to further eliminate or limit the liability of directors or officers, the liability of directors and officers of the Corporation
shall be eliminated or limited to the fullest extent permitted by the NRS as so amended from time to time. Neither any amendment
nor repeal of this Article, nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article,
shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director or officer of the
Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.7502 of the
Nevada Revised Statutes (&ldquo;NRS&rdquo;) permits a company to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action,
suit or proceeding if the officer or director (i) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner
the officer or director reasonably believed to be in or not opposed to the best interests of the corporation and, if a criminal
action or proceeding, had no reasonable cause to believe the conduct of the officer or director was unlawful.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.751 of NRS
permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending a civil or criminal
action, suit or proceeding as they are incurred and in advance of final disposition thereof, upon receipt of an undertaking by
or on behalf of the officer or director to repay the amount advanced if it is ultimately determined by a court of competent jurisdiction
that such officer or director is not entitled to be indemnified by the company. Section 78.751 of NRS further permits the company
to grant its directors and officers additional rights of indemnification under its articles of incorporation or bylaws or otherwise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.752 of NRS
provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director,
officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, for any liability asserted
against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, or arising out
of his status as such, whether or not the company has the authority to indemnify him against such liability and expenses.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">Article 10 of our Articles of Incorporation
(&ldquo;Indemnification&rdquo;) provides as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&ldquo;Every person
who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she, or a person with whom he or she is a legal representative,
is or was a director or officer of the Corporation, or who is serving at the request of the Corporation as a director or officer
of another corporation, or is a representative in a partnership, joint venture, trust or other enterprise, shall be indemnified
and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys&rsquo; fees, judgments, fines, and amounts paid or to be paid in a settlement)
reasonably incurred or suffered by him or her in connection therewith. The right of indemnification shall be a contract right
which may be enforced in any manner desired by such person. The expenses of officers and directors incurred in defending a civil
suit or proceeding must be paid by the Corporation as incurred and in advance of the final disposition of the action, suit, or
proceeding, under receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the Corporation. Such right
of indemnification shall not be exclusive of any other right such directors, officers or representatives may have or hereafter
acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification
under any bylaw, agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this article.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Without limiting the
application of the foregoing, the Board of Directors may adopt bylaws from time to time with respect to indemnification, to provide
at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the Corporation to purchase
or maintain insurance on behalf of any person who is or was a director or officer of the corporation or who is serving at the request
of the Corporation as an officer, director or representative of any other entity or other enterprise against any liability asserted
against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have
the power to indemnify such person.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Any repeal or modification
of the above provisions of this Article 10, approved by the stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the liability of a director or officer of the Corporation existing as of the time of such
repeal or modification. In the event of any conflict between the above indemnification provisions, and any other Article of the
Articles, the terms and provisions of this Article shall control.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">We maintain a director and officer insurance
policy on behalf of any person who is or was a director or officer of our company. Under such insurance policy, the directors and
officers of our company are insured, within the limits and subject to the limitations of the policy, against certain expenses in
connection with the defense of certain claims, actions, suits or proceedings, and certain liabilities which might be imposed as
a result of such claims, actions, suits or proceedings, which may be brought against them by reason of being or having been such
directors or officers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Insofar as indemnification
by us for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling the Company
pursuant to provisions of our articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the
SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification by such director, officer or controlling person of us (other than the payment by us of expenses
incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Market Information</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Our common stock is listed on the NYSE MKT under the ticker
symbol &ldquo;AIRI.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Holders</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of July 24,
2017 there were 197 stockholders of record of our common stock. The number of record holders does not include persons who
held our common stock in nominee or &ldquo;street name&rdquo; accounts through brokers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Transfer Agent and Registrar</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The transfer agent
and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc. Its address is 51 Mercedes Way, Edgewood, New
York 11717, and its telephone number is (631) 254-7400.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>SHARES AVAILABLE FOR FUTURE SALES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Future sales of our
common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market
prices prevailing from time to time. As described below, the sale of a portion of our shares will be limited after this offering
due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions
lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability
to raise equity capital in the future.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have outstanding
14,065,770 shares of common stock. All of our directors and officers have entered into lock-up agreements with the representative
of the underwriters for our Public Offering restricting the transfer or sale of shares of common stock beneficially owned by them,
including securities convertible or exercisable for common stock, until October 11, 2017. Upon consummation of the Restructuring
Transactions following the stockholder vote thereon at our 2017 Annual Meeting of Stockholders, which we expect to hold in September
2017, we will have outstanding approximately 24,252,852 shares, assuming we do not issue any other shares of common stock, or
securities convertible into, exercisable or exchangeable for, shares of our common stock, subsequent to July 15, 2017. Except
for shares of our common stock subject to lock-up agreements and shares of common stock issued upon the automatic conversion of
the Series A Preferred Stock, substantially all of our outstanding shares will be freely tradable, except that any shares held
by our affiliates (as that term is defined in Rule 144 under the Securities Act), may only be sold in compliance with Rule 144,
including the volume limitations described below. The shares issuable upon the automatic conversion of the Series A Preferred
Stock, may be sold under Rule 144, and all of those shares will have satisfied the one-year holding period requirement of Rule
144 by the end of August 2017. Holders of an aggregate of 1,293,938 shares of common stock issuable upon conversion of the May
2018 Notes will be able to sell those shares pursuant to this prospectus. For information concerning the number of shares of common
stock beneficially owned by our directors, officers and principal stockholders, see the section of this prospectus entitled &ldquo;Security
Ownership of Management and Certain Beneficial Owners.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Rule 144</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In general, under Rule
144 of the Securities Act, as in effect on the date of this prospectus, any person who is not our affiliate at any time during
the preceding three months, and who has beneficially owned their shares for at least six months (including the holding period of
any prior owner other than one of our affiliates), would be entitled to sell shares of our common stock, subject to the provisions
of Rule 144, including the volume limitations set forth below, provided current public information about us is available, and after
owning such shares for at least one year (including the holding period of any prior owner other than one of our affiliates), would
be entitled to sell an unlimited number of shares of our common stock without restriction, provided current public information
about us is available.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">A person who is our
affiliate or who was our affiliate at any time during the preceding three months, and who has beneficially owned restricted securities
for at least six months, including the affiliates, is entitled to sell within any three-month period a number of shares that does
not exceed the greater of:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>


</TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">1% of the number of shares of our common stock then
outstanding, which will equal approximately 140,657 based on the number of shares of our common stock outstanding as of July 15,
2017; or</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; text-align: left"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; width: 100%"><TR STYLE="vertical-align: top">
<TD STYLE="width: 20pt; text-align: right"><FONT STYLE="font-size: 10pt"></FONT>

<P STYLE="font: 10pt Symbol; margin: 0pt 0">&middot;</P>



<FONT STYLE="font-size: 10pt"></FONT></TD><TD STYLE="width: 4pt"></TD><TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">the average weekly trading volume of our common stock
on the NYSE MKT during the four calendar weeks preceding the filing of a Form 144 notice with respect to the sale.</FONT></TD>
</TR></TABLE>

<P STYLE="font-size: 10pt; margin-top: 0; margin-bottom: 0pt; text-align: left"><FONT STYLE="font-size: 10pt">&nbsp;</FONT></P>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Sales under Rule 144
by our affiliates are also subject to manner of sale provisions and notice requirements and all sales of our securities pursuant
to Rule 144 are subject to the availability of current public information about us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>LEGAL MATTERS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The validity of the shares of common stock offered hereby will
be passed upon for us by Eaton &amp; Van Winkle LLP, New York, New York. Eaton &amp; Van Winkle LLP and its partners own in the
aggregate 14,028.506 shares of Series A Preferred Stock and 38,040 shares of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center">&#9;<B>EXPERTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Rotenberg Meril Solomon
Bertiger &amp; Guttilla, P.C, an independent registered public accounting firm, has audited, as set forth in its report thereon
appearing elsewhere herein, our consolidated financial statements at December 31, 2016 and 2015 and for the years then ended that
appear in the prospectus. The financial statements referred to above are included in this prospectus in reliance upon the independent
registered public accounting firm&rsquo;s report given on their authority as experts in accounting and auditing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>WHERE YOU CAN FIND MORE INFORMATION ABOUT
US</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We have filed a registration
statement on Form S-1 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Air Industries
Group filed as part of the registration statement, and it does not contain all information in the registration statement, as certain
portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We are subject to the
informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected
at public reference facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549 on official business days during the hours
of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission
at 1-800-SEC-0330. Copies of such material can be obtained from the Public Reference Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information
by visiting the SEC&rsquo;s Internet website at http://www.sec.gov.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As a smaller reporting
company, the SEC allows us to &ldquo;incorporate by reference&rdquo; information from reports, proxy statements and other documents
that we file with them after the date of this prospectus, which information will automatically update and supersede the information
in this prospectus. We hereby incorporate by reference all reports and other documents subsequently filed by us pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, after the date of this prospectus and prior to the
termination of this offering, which reports and documents shall be deemed to be incorporated by reference in this prospectus and
to be a part hereof from the date of filing such reports and other documents (unless otherwise noted, the SEC file number for each
of the reports and documents incorporated herein by reference is&nbsp;001-35927).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A
statement contained in a document incorporated by reference into this prospectus shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document
which is also incorporated in this prospectus modifies or replaces such statement. Any statements so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this prospectus,</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We will provide
to each person, including any beneficial owner, to whom a prospectus is delivered, upon request and without cost, a copy of
any or all of the reports or documents that have been incorporated by reference in this prospectus after the date hereof. All
reports and other documents we file with the SEC also are available on our website at airindustriesgroup.com. In addition,
you may request a copy of these filings, at no cost, by writing, telephoning or e-mailing us at the following addresses:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Air Industries Group</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">360 Motor Parkway, Suite 100</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Hauppauge, New York 11788</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Attention: Investor Relations</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center">Telephone: (631) 881-4920 or e-mail:cmcgivney@airindustriesgroup.com.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1.75in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1.75in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1.75in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>INDEX TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
&nbsp;&nbsp;&nbsp;<BR>
AIR INDUSTRIES GROUP<BR>
&nbsp;&nbsp;&nbsp;<BR>
CONSOLIDATED FINANCIAL STATEMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD>
    <TD COLSPAN="3" STYLE="text-align: center"><FONT STYLE="font-size: 10pt"><B>Page</B></FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 93%"><FONT STYLE="font-size: 10pt"><B>Consolidated Financial Statements for the Years Ended December 31, 2016 and 2015</B></FONT></TD>
    <TD STYLE="width: 1%; text-align: right">&nbsp;</TD>
    <TD STYLE="width: 5%; text-align: right">&nbsp;</TD>
    <TD STYLE="width: 1%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Report of Independent Registered Accounting Firm</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-1</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Consolidated Balance Sheets as of December 31, 2016 and 2015</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-2</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Consolidated Statements of Operations for the years ended December 31, 2016 and 2015</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-3</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Consolidated Statements of Stockholders&rsquo; Equity for the years ended December 31, 2016 and 2015</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-4</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-5</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Notes to Consolidated Financial Statements for the years ended December 31, 2016 and 2015</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-7</FONT></TD>
    <TD>&nbsp;</TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0"></P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD><FONT STYLE="font-size: 10pt"><B>Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016 (Unaudited)</B></FONT></TD>
    <TD COLSPAN="3" STYLE="text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 93%"><FONT STYLE="font-size: 10pt">Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016</FONT></TD>
    <TD STYLE="width: 1%; text-align: right">&nbsp;</TD>
    <TD STYLE="width: 5%; text-align: right"><FONT STYLE="font-size: 10pt">F-39</FONT></TD>
    <TD STYLE="width: 1%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (Unaudited)</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-40</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-41</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2017 and 2016 (Unaudited)</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-42</FONT></TD>
    <TD>&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">To the Board of Directors and Stockholders of Air Industries
Group</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">We have audited the accompanying consolidated
balance sheets of Air Industries Group and Subsidiaries (the &ldquo;Company&rdquo;) as of December 31, 2016 and 2015 and the related
consolidated statements of operations, changes in stockholders&rsquo; equity and cash flows for the years then ended. The consolidated
financial statements are the responsibility of the Company&rsquo;s management. Our responsibility is to express an opinion on these
financial statements based on our audits.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company&rsquo;s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2016 and 2015 and the results of their operations and cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, among other going concern matters discussed, the Company has suffered a net loss in 2016 and has had negative
cash flows from operating activities, and is dependent upon future issuances of equity or other financing to fund ongoing operations,
all of which raise substantial doubt about its ability to continue as a going concern. Management&rsquo;s plans in regard to these
matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">/s/ ROTENBERG MERIL SOLOMON BERTIGER &amp; GUTTILLA, P. C.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">ROTENBERG MERIL SOLOMON BERTIGER &amp; GUTTILLA, P. C.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Saddle Brook, New Jersey</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">April 19, 2017</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Consolidated Balance Sheets</B></P>

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<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">ASSETS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Current Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left; text-indent: 10pt">Cash and Cash Equivalents</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,304,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">529,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Accounts Receivable, Net of Allowance for Doubtful Accounts of $756,000 and $985,000, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">13,662,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-indent: 10pt">Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">39,851,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">36,923,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Tax Asset, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,725,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Prepaid Expenses and Other Current Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">557,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,048,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Prepaid Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">409,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">535,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Assets Held for Sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,700,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Current Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">56,221,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">56,122,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Property and Equipment, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12,219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,299,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Capitalized Engineering Costs - Net of Accumulated Amortization of $4,957,000 and $4,595,000, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,027,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred Financing Costs, Net, Deposits and Other Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,096,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,094,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Intangible Assets, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,754,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,852,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred Tax Asset, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">338,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">9,883,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,518,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL ASSETS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">88,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">LIABILITIES AND STOCKHOLDERS' EQUITY</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Current Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Notes Payable and Capitalized Lease Obligations - Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">33,999,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">40,895,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Accounts Payable and Accrued Expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">16,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12,046,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Gain on Sale - Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">38,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">38,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Revenue</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">946,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">958,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Liabilities Directly Associated with Assets Held for Sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,155,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Income Taxes Payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Total Current Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">53,318,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">53,951,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Long Term Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Notes Payable and Capitalized Lease Obligations -</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Net of Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,971,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,917,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Gain on Sale - Net of Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">333,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">371,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Rent</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,288,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,206,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL LIABILITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">57,910,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">59,445,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Commitments and Contingencies</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Stockholders' Equity</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Preferred Stock, par value $. 001-Authorized 2,000,000 shares Designated as Series A Convertible Preferred Stock - par value $. 001, Authorized 1,000,000 shares, 1,202,548 shares and -0- shares issued and outstanding as of December 31, 2016 and 2015, respectively, Aggregate liquidation preference $12,025,480 and $0 as of December 31, 2016 and 2015, respectively.</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Common Stock - Par Value $. 001 - Authorized 25,000,000 Shares, 7,626,945 and 7,560,040 Shares Issued and Outstanding as of December 31, 2016 and 2015, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Additional Paid-In Capital</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">55,862,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">44,155,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Accumulated Deficit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(30,980,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(15,357,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL STOCKHOLDERS' EQUITY</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">24,890,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">28,805,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">88,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See Notes to Consolidated Financial Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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    <DIV STYLE="page-break-before: always; margin-top: 6pt; margin-bottom: 6pt"><P STYLE="margin: 0pt; text-align: right; font-size: 8pt"></P></DIV>
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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Consolidated Statements of Operations For the Years Ended December 31,</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">66,915,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">80,442,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Cost of Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">60,195,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">63,161,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,720,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,281,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Operating Expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,509,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">16,557,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Acquisition Costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">98,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">(Loss) Income from Operations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(10,789,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">626,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Interest and Financing Costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,596,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,858,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Other (Expense) Income, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(126,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">114,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Loss before Provision for (Benefit from) Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(13,511,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,118,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Provision for (Benefit from) Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,112,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(286,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Loss per share - basic</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(2.06</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(0.11</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Loss per share - diluted</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(2.06</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(0.11</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Weighted average shares outstanding - basic</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,579,419</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,478,223</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Weighted average shares outstanding - diluted</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,579,419</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,478,223</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See Notes to Consolidated Financial Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Consolidated Statements of Stockholders' Equity<BR>
For the Years Ended December 31, 2016 and 2015</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Preferred Stock</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Common Stock</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Additional</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Total</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Paid-in</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Accumulated</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Stockholders&rsquo;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Shares</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Shares</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Capital</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Deficit</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Equity</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt">Balance, January 1, 2015</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,108,677</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">42,790,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(14,525,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">28,272,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Issuance of Shares For Acquisitions and Restricted Stock Grants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">425,005</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,666,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,666,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Issuance of Shares For Records Correction</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">539</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Exercise of Options/Warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">25,819</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Dividends Paid</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,401,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,401,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Stock Compensation Expense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">100,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">100,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD NOWRAP STYLE="font-size: 10pt; font-weight: bold">Balance, December 31, 2015</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,560,040</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">7,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">44,155,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(15,357,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">28,805,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Issuance of Preferred Stock</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,202,548</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,304,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,305,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt">Fair Value Allocation of Warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,236,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,236,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Issuance of Restricted Stock</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">42,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Exercise of Options and warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">24,905</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Stock Compensation Expense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">167,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">167,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold">Balance, December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,202,548</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,626,945</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">7,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">55,862,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(30,980,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">24,890,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See Notes to Consolidated Financial Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Consolidated Statements of Cash Flows For the Years Ended December 31,</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">CASH FLOWS FROM OPERATING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Adjustments to reconcile net loss to net cash used in operating activities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Depreciation of property and equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,347,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,090,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of intangible assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,279,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,262,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of capitalized engineering costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">362,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">341,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Bad debt expense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">274,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">176,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Non-cash compensation expense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">167,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">100,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of deferred financing costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">371,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">204,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred gain on sale of real estate</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(38,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(38,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Loss on sale of fixed assets held for sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred income taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,063,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(215,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Loss on extinguishment of debt</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">172,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of convertible notes payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">217,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 0pt">Changes in Assets and Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">(Increase) Decrease in Operating Assets:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Assets Held for Sale - AMK Cash</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(39,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Accounts receivable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,616,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">91,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-indent: 20pt">Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,902,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(8,412,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Prepaid expenses and other current assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">394,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(748,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Prepaid taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">126,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deposits and other assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(150,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(18,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Increase (Decrease) in Operating Liabilities:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Accounts payable and accrued expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,495,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,593,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred rent</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">82,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">29,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred revenue</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">84,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">540,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Income taxes payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(57,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET CASH USED IN OPERATING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(692,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(894,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">CASH FLOWS FROM INVESTING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Capitalized engineering costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(963,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(656,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Purchase of property and equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,632,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,564,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from the sale of fixed assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,671,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Cash paid for acquisitions</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(6,945,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Cash acquired in acquisitions</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">605,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET CASH USED IN INVESTING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(924,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(8,560,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">CASH FLOWS FROM FINANCING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Note payable - revolver, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,211,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,933,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from note payable - term loans</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,500,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Payments of note payable - term loans</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,184,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,030,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Capital lease obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,226,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(717,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from capital lease financing</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">500,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from notes payable - related party</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,500,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">350,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from notes payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,695,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred financing costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(223,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(402,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Notes payable - sellers</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(41,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Payments related to lease impairment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(60,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Expense for issuance of preferred stock</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(663,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Expenses for issuance of debt offering</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(547,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from the issuance of preferred stock</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Dividends paid</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,468,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET CASH PROVIDED BY FINANCING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,391,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8,565,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">775,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(889,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">529,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,418,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">CASH AND CASH EQUIVALENTS AT END OF YEAR</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,304,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">529,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">See
Notes to Consolidated Financial Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-right: 0; margin-bottom: 0pt; text-align: left">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Supplemental cash flow information</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left; text-indent: 10pt">Cash paid during the period for interest</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,494,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,649,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Cash paid during the period for income taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">13,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">445,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Supplemental schedule of non-cash investing and financing activities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Preferred shares issued for notes payable - related party</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">3,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Preferred shares issued for notes payable - other</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,745,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Preferred shares issued for PIK dividends</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">502,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Acquisition of property and equipment financed by capital lease</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,096,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,811,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Classification of assets held for sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">6,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,700,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Liabilities directly associated with assets held for sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(2,155,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Purchase of assets of Compac and assumption of liabilities in the acquisition as follows:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Fair Value of tangible assets acquired</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">406,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Intangible assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">600,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-indent: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">560,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Liabilities assumed</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(95,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Cash paid for acquisition</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,471,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Purchase of stock of The Sterling Engineering Corporation and assumption of liabilities in the acquisition as follows:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Fair Value of tangible assets acquired</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">8,181,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-indent: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,540,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Cash acquired</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">588,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Liabilities assumed</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,169,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Common stock issued</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,666,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Cash paid for acquisition</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">5,474,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See Notes to Consolidated Financial Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 1. FORMATION AND BASIS OF PRESENTATION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Organization</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 30, 2013,
Air Industries Group, Inc. (&ldquo;Air Industries Delaware&rdquo;) changed its state of incorporation from Delaware to Nevada as
a result of a merger with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation (&ldquo;Air
Industries Nevada&rdquo; or &ldquo;AIRI&rdquo;) and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation
was approved by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is
deemed to be the successor.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The accompanying consolidated
financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (&ldquo;AIM&rdquo;),
Welding Metallurgy, Inc. (&ldquo;WMI&rdquo; or &ldquo;Welding&rdquo;), Miller Stuart, Inc. (&ldquo;Miller Stuart&rdquo;), Nassau
Tool Works, Inc. (&ldquo;NTW&rdquo;), Woodbine Products, Inc. (&ldquo;Woodbine&rdquo; or &ldquo;WPI&rdquo;), Decimal Industries,
Inc. (&ldquo;Decimal&rdquo;), Eur- Pac Corporation (&ldquo;Eur - Pac&rdquo; or &ldquo;EPC&rdquo;), Electronic Connection Corporation
(&ldquo;ECC&rdquo;), AMK Welding, Inc. (&ldquo;AMK&rdquo;), Air Realty Group, LLC (&ldquo;Air Realty&rdquo;), the Sterling Engineering
Corporation (&ldquo;Sterling&rdquo;) effective March 1, 2015, and Compac Development Corporation (&ldquo;Compac&rdquo;) effective
September 1, 2015, (together, the Company ).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Going Concern</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company suffered
a net loss from operations of $10,789,000 and a net loss of $15,623,000 for the year ended December 31, 2016. The Company also
had negative cash flows from operations for the year ended December 31, 2016. In addition, in 2015 the Company ceased paying dividends
on its common stock and in 2016 it disposed of the real estate on which one of its operating subsidiaries is located through a
sale leaseback transaction, and in January 2017 sold of one of its operating subsidiaries. During the year ended December 31, 2016
and subsequent thereto, the Company has had to sell its debt and equity securities to secure funds to operate its business. Since
September 2016 the Company has been issuing additional shares of its Series A Convertible Preferred Stock in lieu of cash payment
of accrued dividends on its outstanding shares of Series A Convertible Preferred Stock and since February 2017 it has issued additional
convertible notes in lieu of cash payment of accrued interest on its outstanding convertible notes. Furthermore, as of December
31, 2016 the Company was not in compliance with its debt covenants under the Company&rsquo;s loan facility with PNC Bank.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The continuation of
the Company&rsquo;s business is dependent upon future issuances of equity or other financing to fund ongoing operations. Management
of the Company plans to obtain additional financing during the second quarter and the remainder of 2017 through the issuance of
common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the
extent available, may be on terms that result in dilution to the Company&rsquo;s existing shareholders. Although no assurances
can be given, management of the Company believes that potential additional issuances of equity or other potential financing transactions
as discussed above should provide the necessary funding for the Company to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Subsequent Events</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Management has evaluated subsequent events through the date
of this filing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Sale of AMK</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 27, 2017,
the Company sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January
27, 2017 for a purchase price of $4,500,000, subject to a working capital adjustment, plus additional quarterly payments, not to
exceed $ 1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">At December 31, 2016,
AMK&rsquo;s assets and liabilities have been reclassified as Assets Held for Sale and Liabilities Directly Associated with Assets
Held for Sale, respectively. The carrying value of the assets, net of liabilities, held for sale was less than the contract sales
price and accordingly no loss or impairment was recorded for the year ended December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
sale of AMK to Meyer Tool, Inc., on January 27, 2017, the Company, together with its wholly-owned subsidiaries, entered into the
Fourteenth Amendment to the Amended and Restated Revolving Credit, Term Loan And Security Agreement with PNC Bank, N. A. (the &ldquo;PNC
Loan Agreement&rdquo;) which amends certain terms and conditions of the PNC Loan Agreement and releases AMK from its obligations
under the PNC Loan Agreement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The proceeds of the
sale of AMK were applied as follows: $1,700,000 to the payment of the Term Loan (as defined in the PNC Loan Agreement), $1,800,000
to the payment of outstanding Revolving Advances (as defined in the PNC Loan Agreement), and $500,000 to the payment of existing
accounts payable. The remaining $500,000 will be applied to outstanding accounts payable on a future date to be determined by PNC
or used to reduce the amount of the Revolving Advance. The amendment also waives the noncompliance at September 30, 2016 with the
Fixed Charge Coverage Ratio and the Minimum EBITDA covenants for the period then ended, and requires that the Company maintain
a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis;
however, for the quarter ending June 30, 2017, which shall be tested based upon the prior six (6) months, the Fixed Charge Coverage
Ratio shall not be less than 1.00 to 1.00 and for the quarter ending September 30, 2017, which shall be tested based upon the prior
nine (9) months, the Fixed Charge Coverage Ratio shall not be less than 1.10 to 1.00. The amendment also reduces the amount to
be paid weekly in repayment of excess advances in the amount of $5,294,071 under the revolving credit facility from $100,000 to
$50,000 for each Monday during the months of January, February and March of 2017. Thereafter, the weekly payments will return to
$100,000 until such excess advances have been repaid in full.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Related Party Transactions</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 7, 2017,
the Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the &ldquo;Placement Agent&rdquo;),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $1,200,000 of the
Company&rsquo;s 8% Subordinated Convertible Notes due January 31, 2019 (the &ldquo;2019 Notes&rdquo;) to accredited investors,
together with five-year warrants to purchase 7,692 shares of Common Stock for each $100,000 principal amount of 2019 Notes purchased
(the &ldquo;Warrants&rdquo;), in a private placement exempt from the registration requirements of the Securities Act. The conversion
price of the 2019 Notes, exercise price of the Warrants, as well as the number of shares issuable upon conversion of the 2019 Notes
and the exercise of the Warrants, are subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations. The Warrants may be exercised on a cashless
basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under the terms of the
Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 8% of the gross proceeds of the offering,
payable at the Company&rsquo;s option, in cash or additional convertible notes having the same terms and conditions as the 2019
Notes, and five year warrants to purchase 10% of the number of shares of the Common Stock (the &ldquo;Placement Agent Warrants&rdquo;)
issuable upon immediate conversion of the 2019 Notes sold in the offering. The Placement Agent Warrants are exercisable at a per
share price equal to the closing price of the Common Stock as of the closing immediately prior to the issuance of each 2019 Note.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 7, 2017,
the Company issued and sold to Robert Taglich a 2019 Note in the principal amount of $250,000, together with a Warrant to purchase
19,230 shares of Common Stock for a purchase price of $250,000. The 2019 Note issued to Robert Taglich has a conversion price of
$3.71 per share, and the Warrant issued to Robert Taglich has an exercise price of $3.71 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 8, 2017, the
Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the &ldquo;Placement Agent&rdquo;),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $1,250,000 of the
2019 Notes to accredited investors, together with Warrants to purchase 7,692 shares of Common Stock for each $100,000 principal
amount of 2019 Notes purchased, in a private placement exempt from the registration requirements of the Securities Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under the terms of
the Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 8% of the gross proceeds of
the offering, payable at the Company&rsquo;s option, in cash or additional convertible notes and warrants having the same terms
and conditions as the 2019 Notes and Warrants, and five year warrants to purchase 10% of the number of shares of the Company&rsquo;s
Common Stock (the &ldquo;Placement Agent Warrants&rdquo;) issuable upon immediate conversion of the 2019 Notes. The Placement
Agent Warrants are exercisable at a per share price equal to the closing price of the Common Stock as of the closing immediately
prior to the issuance of each 2019 Note.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 8, 2017, the
Company issued and sold to Robert Taglich a 2019 Note in the principal amount of $100,000, together with a Warrant to purchase
7,692 shares of Common Stock for a purchase price of $100,000. The 2019 Note issued to Robert Taglich has a conversion price of
$3.30 per share, and the Warrant issued to Robert Taglich has an exercise price of $3.30 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 17, 2017, Michael
Taglich and Robert Taglich, principal stockholders of the Company, loaned the Company $500,000 on terms to be determined.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Sale of Unregistered Equity Securities</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 7, 2017
and February 17, 2017, the Company issued an aggregate principal amount of $ 1,000,000 of its 2019 Notes, together with Warrants
to purchase an aggregate of 76,929 shares of Common Stock for a total purchase price of $1,000,000 to 9 accredited investors, including
Robert Taglich, a director and principal stockholder of the Company. Interest on the 2019 Notes is payable on the outstanding principal
amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017, in cash, or if the Company is prohibited by
applicable law or PNC Bank, National Association, its principal lender under the PNC Loan Agreement from paying interest in cash,
or otherwise elects to do so, the Company may pay interest at the rate of twelve percent (12%) per annum in the form of additional
notes having the same terms and conditions as the 2019 Notes. The outstanding principal amount plus accrued interest on the 2019
Notes is convertible at the option of the holder into shares of Common Stock at an initial conversion price of $3.25, subject to
certain anti-dilution and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event
of certain fundamental transactions such as mergers and other business combinations, except that the initial conversion price of
the Notes issued to Robert Taglich is $3.71. The Warrants are exercisable on or prior to January 31, 2022. Taglich Brothers, Inc.
acted as the placement agent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 8, 2017, March
15, 2017 and March 21, 2017, the Company issued an aggregate principal amount of $1,200,000 of its 2019 Notes, together with Warrants
to purchase an aggregate of 92,309 shares of Common Stock for a total purchase price of $1,200,000 to 23 accredited investors,
including Robert Taglich, a director and principal stockholder of the Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if the Company is prohibited by applicable law or PNC Bank, National Association, its principal lender under the PNC
Loan Agreement, from paying interest in cash, or otherwise elects to do so, the Company may pay interest at the rate of twelve
percent (12%) per annum in the form of additional notes having the same terms and conditions as the 2019 Notes. The outstanding
principal amount plus accrued interest on the 2019 Notes is convertible at the option of the holder into shares of Common Stock
at an initial conversion price of $3.25, subject to certain anti-dilution and other adjustments, including stock splits, and in
the event of certain fundamental transactions such as mergers and other business combinations, except that the initial conversion
price of the Notes issued to Robert Taglich is $3.30. The Warrants are exercisable on or prior to January 31, 2022. The Warrants
issued to the purchasers of the 2019 Notes have an exercise price of $3.30 per share, subject to certain anti-dilution and other
adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations,
and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.
The Warrants may be exercised until January 31, 2022. Taglich Brothers, Inc. acted as placement agent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 2. ACQUISITIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for all business combinations in accordance with Financial Accounting Standards Board (&ldquo;FASB&rdquo;) ASC 805, Business Combinations
(&ldquo;ASC 805&rdquo;), using the acquisition method of accounting. Under this method, assets and liabilities, including any
remaining non - controlling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price
over the fair value of assets acquired, net of liabilities assumed, and non-controlling interests is recognized as goodwill. Certain
adjustments to the assessed fair values of the assets, liabilities, or non-controlling interests made subsequent to the acquisition
date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent
to the measurement period are recorded in income. Results of operations of the acquired entity are included in the Company&rsquo;s
results from the date of the acquisition onward and include-amortization expense arising from acquired tangible and intangible
assets. The Company expenses all costs as incurred related to an acquisition in the condensed consolidated statements of income.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><U>Sterling</U></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 1, 2015, the
Company acquired all of the common stock of Sterling for $5.4 million in cash and 425,005 shares of its common stock. The common
stock was valued at $9.89 per share, which was the closing share price on February 27, 2015. The cash consideration is subject
to adjustment for working capital changes. The Company has also entered into employment and non-compete agreements for two and
three year periods with two of the principals of Sterling. In connection with these agreements, the Company granted 52,000 shares
of restricted common stock to these individuals, which was accounted for as additional purchase price. The Company financed the
acquisition of Sterling with the proceeds from the issuance of Term Loan D (see Note 11).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">At the time of acquisition,
Sterling had capital lease obligations for equipment with a remaining balance of approximately $1.3 million. On April 21, 2015,
the Company refinanced the $1.3 million capital lease obligations with the same financing company. This refinancing generated approximately
$588,000 of cash for the Company. This capital lease obligation has been accounted for and summarized with the remainder of the
Company's capital leases as disclosed in Note 11.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Sterling, founded in 1941, manufactures components for aircraft
and ground turbine engines.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The acquisition of Sterling was accounted
for under ASC 805. The provisional purchase price allocation is set forth below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt; text-align: left">Fair value of tangible assets acquired</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">8,181,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,540,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Cash acquired</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">588,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Liabilities assumed</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,169,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Total</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">10,140,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><U STYLE="text-decoration: none">&nbsp;</U></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><U>Compac</U></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On September 1, 2015,
the Company, through its wholly-owned subsidiary WMI, acquired certain assets, including production equipment, inventory and intangible
assets, of Compac in an asset acquisition for $1.2 million in cash plus a working capital adjustment of $271,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Compac located in Bay
Shore, New York specializes in the manufacture of RFI/EMI (Radio Frequency Interference Electro - Magnetic Interference) shielded
enclosures for electronic components.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
asset purchase, the Company has assumed Compac&rsquo;s lease for its Bay Shore facility which extends through April 30, 2018 and
has annual rent of approximately $ 80,000, which is offset by rent received from the sub-tenant of approximately $20,000 per year.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The acquisition of Compac was accounted
for under ASC 805. The provisional purchase price allocation is set forth below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt; text-align: left">Fair value of tangible assets acquired</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">406,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Intangible assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">600,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">560,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Liabilities assumed</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(95,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Total</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,471,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The below table sets forth selected financial
information for the 2015 acquisitions, which are included in our reported results of operations, for the year ended December 31,
2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>For the Year Ended December 31, 2015</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Sterling</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Compac</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">6,894,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">467,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Loss from operations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(1,196,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(14,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The below table sets forth selected proforma
financial information as if Sterling were owned for the year ended December 31, 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>For the Year Ended December 31, 2015</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">82,281,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Income from operations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">773,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Principal Business Activity</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company through
its AIM subsidiary is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors
in the aerospace industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16
and F-18 fighter aircraft. Welding is a specialty welding and products provider whose significant customers include the world's
largest aircraft manufacturers, subcontractors, and original equipment manufacturers. Miller Stuart is a manufacturer of aerospace
components whose customers include major aircraft manufacturers and the US Military. Miller Stuart specializes in electromechanical
systems, harness and cable assemblies, electronic equipment and printed circuit boards. Woodbine is a manufacturer of aerospace
components whose customers include major aircraft component suppliers. Woodbine specializes in welded and brazed chassis structures
housing electronics in aircraft. Eur-Pac specializes in military packaging and supplies. Eur-Pac s primary business is &ldquo;kitting&rdquo;
of supplies for all branches of the United States Defense Department including ordnance parts, hose assemblies, hydraulic, mechanical
and electrical assemblies. AMK is a provider of sophisticated welding and machining services for diversified aerospace and industrial
customers. Sterling manufactures components for aircraft and ground turbine engines. Compac specializes in the manufacture of RFI/EMI
(Radio Frequency Interference Electro-Magnetic Interference) shielded enclosures for electronic components. The Company&rsquo;s
customers consist mainly of publicly traded companies in the aerospace industry.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Principles of Consolidation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The accompanying consolidated
financial statements include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Cash and Cash Equivalents</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Cash and cash equivalents include all highly
liquid instruments with an original maturity of three months or less.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Accounts Receivable</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Accounts receivable
are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides
for allowances for uncollectible receivables based on management's estimate of uncollectible amounts considering age, collection
history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful
accounts when a balance is determined to be uncollectible.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Inventory Valuation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The Company values inventory at the lower of cost on a first
- in -first-out basis or market.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company generally
purchases raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only
when non-cancellable contracts for orders have been received for finished goods. It occasionally produces larger more complex
products, such as landing gear, in excess of purchase order quantities in anticipation of future purchase order demand. Historically
this excess has been used in fulfilling future purchase orders. The Company purchases supplies and materials useful in a variety
of products as deemed necessary even though orders have not been received. The Company periodically evaluates inventory items
that are not secured by purchase orders and establishes reserves for obsolescence accordingly. The Company also reserves for excess
quantities, slow-moving goods, and for other impairments of value.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Assets Held for Sale and Liabilities Directly Associated</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Assets held for sale
are reported at the lower of their carrying amount or fair value less cost to sell and included in current assets. Liabilities
associated to business units held for sale are classified as a current liability.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Capitalized Engineering Costs</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company has contractual
agreements with customers to produce parts, which the customers design. Even though the Company has not designed and thus has no
proprietary ownership of the parts, the manufacturing of these parts requires pre-production engineering and programming of the
Company&rsquo;s machines. The pre-production costs associated with a particular contract are capitalized and then amortized beginning
with the first shipment of product pursuant to such contract. These costs are amortized on a straight-line basis over the estimated
length of the contract, or if shorter, three years.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as deferred revenues until the appropriate revenue recognition criteria have been met. The Terms and Conditions contained in customer
purchase orders may provide for liquidated damages in the event that a stop-work order is issued prior to the final delivery of
the product.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Property and Equipment</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Property and equipment
are carried at cost net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred.
Property, equipment, and improvements are depreciated using the straight- line method over the estimated useful lives of the assets
or the particular improvements. Expenditures for repairs and improvements in excess of $1,000 that add to the productive capacity
or extend the useful life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed
from the accounts and any related gain or loss is reflected in earnings.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Long-Lived and Intangible Assets</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Identifiable intangible assets are amortized
using the straight-line method over the period of expected benefit.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Long-lived assets and
intangible assets subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash
flows are found to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce
the carrying amount of the asset to fair value. There has been no impairment as of December 31, 2016 and 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Deferred Financing Costs</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Costs incurred with
obtaining and executing revolving debt arrangements are capitalized and amortized using the effective interest method over the
term of the related debt. The amortization of such costs are included in interest and financing costs. Costs incurred with obtaining
and executing other debt arrangements are presented as a direct deduction from the carrying value of the associated debt.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Derivative Liabilities</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with the
issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances,
these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may
contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may
be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument.
The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Revenue Recognition</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company recognizes
revenue in accordance with Staff Accounting Bulletin No. 104, &ldquo;Revenue Recognition.&rdquo; The Company recognizes revenue
when products are shipped and/or the customer takes ownership and assumes risk of loss, collection of the relevant receivable
is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company recognizes
certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement,
the Company makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt">&bull;</FONT></TD>
    <TD STYLE="text-align: justify; width: 90%"><FONT STYLE="font-size: 10pt">The customer requests that the transaction be on a bill and hold basis. A customer must initiate the request for any bill and hold arrangement. Upon request for a bill and hold, the Company requires a signed letter from the customer upon which the customer specifically requests the bill and hold arrangement. Upon receipt of the letter, the Company begins its evaluation process to determine whether a bill and hold arrangement can be granted.</FONT></TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt">&bull;</FONT></TD>
    <TD STYLE="text-align: justify; width: 90%"><FONT STYLE="font-size: 10pt">The customer has made fixed commitment to purchase in written documentation. All customers&rsquo; orders are through firm written purchase orders.</FONT></TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt">&bull;</FONT></TD>
    <TD STYLE="text-align: justify; width: 90%"><FONT STYLE="font-size: 10pt">The goods are segregated from other inventory and are not available to fill any other customers&rsquo; orders. The Company&rsquo;s goods are made to customers&rsquo; or their customer&rsquo;s specifications and could not be sold to others.</FONT></TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt">&bull;</FONT></TD>
    <TD STYLE="text-align: justify; width: 90%"><FONT STYLE="font-size: 10pt">The risk of ownership has passed to the customer. The product is complete and ready for shipment. The earnings process is complete. An internal evaluation is made as to whether the product is complete and ready for shipment. This involves a review of the purchase order and a completed inspection process by the Company&rsquo;s quality control department.</FONT></TD></TR>
</TABLE>
<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt">&bull;</FONT></TD>
    <TD STYLE="text-align: justify; width: 90%"><FONT STYLE="font-size: 10pt">The date is determined by which the Company expects payment and the Company has not modified its normal billing and credit terms for this buyer. Payment is expected as if the goods had been shipped.</FONT></TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 2%"><FONT STYLE="font-size: 10pt">&bull;</FONT></TD>
    <TD STYLE="text-align: justify; width: 90%"><FONT STYLE="font-size: 10pt">The customer has the expected risk of loss in the event of a decline in the market value of goods. All goods are made to firm purchase orders with fixed prices. Any decline in value would not affect the pricing of the goods. The Company has not at any point, agreed to a price reduction on a bill and hold arrangement.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company had approximately
$2,914,000 and $150,000 of net sales that were billed but not shipped under such bill and hold arrangements as of December 31,
2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Payments received in
advance from customers for products delivered are recorded as deferred revenue until earned, at which time revenue is recognized.
The Terms and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop
work order is issued prior to the final delivery.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company utilizes
a Returned Merchandise Authorization or RMA process for determining whether to accept returned products. Customer requests to return
products are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt of the product.
Net sales represent gross sales less returns and allowances.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Use of Estimates</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In preparing the financial
statements, management is required to make estimates and assumptions that affect the reported amounts in the financial statements
and accompanying notes. The more significant management estimates are the allowance for doubtful accounts, useful lives of property
and equipment, provisions for inventory obsolescence, accrued expenses and whether to accrue for various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded
in the period in which they become known.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Credit and Concentration Risks</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">There were four customers
that represented 56.4% of total sales, and four customers that represented 59.3% of total sales, of total sales for the years ended
December 31, 2016 and 2015, respectively. This is set forth in the table below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Sales</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 31%; font-size: 10pt; text-align: center">1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">19.1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">20.5</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">2</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">14.3</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">12.0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">3</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">12.3</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">15.4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">10.7</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">11.4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">There was one customers that represented
19.9% of gross accounts receivable and four customers that represented 61.1% of gross accounts receivable at December 31, 2016
and 2015, respectively. This is set forth in the table below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Receivables</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 31%; font-size: 10pt; text-align: center">1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">19.9</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">26.6</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">2</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">10.4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">3</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">13.6</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">10.5</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>


<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">*</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">Customer was less than 10% of gross accounts receivable at December 31, 2016</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During the year, the
Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced
any losses on these accounts.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company has several
key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source
for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason,
its business could be severely harmed.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Income Taxes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for income taxes in accordance with accounting guidance now codified as FASB ASC 740, &ldquo;Income Taxes,&rdquo; which requires
that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected
to reverse.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The provision for, or
benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and
liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward
period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that
the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax
benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, &ldquo;Income Taxes,&rdquo;
includes the consideration of all available evidence, both positive and negative, regarding historical operating results including
recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated
future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which
may be employed to prevent an operating loss or tax credit carryforward from expiring unused.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for uncertainties in income taxes under the provisions of FASB ASC 740- 10 -05, &ldquo;Accounting for Uncertainty in Income Taxes.&rdquo;
The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Effective July 1,
2016, the Company adopted FASB Accounting Standards Update 2015 - 17, Balance Sheet Classification of Deferred Taxes. The ASU
is part of the Board's simplification initiative aimed at reducing complexity in accounting standards. To simplify
presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation
allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net
noncurrent deferred tax asset or liability. Importantly, the guidance does not change the existing requirement that only
permits offsetting within a jurisdiction - that is, companies are still prohibited from offsetting deferred tax liabilities
from one jurisdiction against deferred tax assets of another jurisdiction. The amendments in this Update may be applied
either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity
applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change, the
nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively
adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual
period of change the nature of and reason for the change in accounting principle and quantitative information about the
effects of the accounting change on prior periods. The Company has applied this guidance prospectively and has not
restated prior period balances.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Earnings per share</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Basic earnings per share
is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share
calculations for all periods when the effect of their inclusion is dilutive.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following is a reconciliation of the denominators of basic
and diluted earnings per share computations:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt">Weighted average shares outstanding used to compute basic earnings per share</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,579,419</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,478,223</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Effect of dilutive stock options and warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,579,419</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,478,223</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following securities have been excluded
from the calculation as the exercise price was greater than the average market price of the common shares:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Stock Options</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">633,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">234,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">520,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">46,800</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,153,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">280,800</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following securities have been excluded
from the calculation even though the exercise price was less than the average market price of the common shares because the effect
of including these potential shares was anti-dilutive due to the net loss incurred during the years:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Stock Options</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">3,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">330,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">321,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">118,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">324,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">448,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Stock-Based Compensation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounts
for stock-based compensation in accordance with FASB ASC 718, &ldquo;Compensation Stock Compensation.&rdquo; Under the fair value
recognition provision of the ASC, stock -based compensation cost is estimated at the grant date based on the fair value of the
award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing
model.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Goodwill</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Goodwill represents
the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amounts
of $9,883,000 and $10,518,000 at December 31, 2016 and 2015, respectively, relates to the acquisitions of Welding $291,000, NTW
$162,000, Woodbine $2,565,000, Eur-Pac $1,656,000, ECC $109,000, AMK $635,000, Sterling $4,540,000 and Compac $560,000. During
2016 AMK goodwill amount of $635,000 was reclassified to assets held for sale. Goodwill is not amortized, but is assessed and/or
tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting
unit below its carrying amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company
accounts for the impairment of goodwill under the provisions of ASU 2011-08 (&ldquo;ASU 2011-08&rdquo;), &ldquo;Intangibles
Goodwill and Other (Topic 350): Testing Goodwill for Impairment.&rdquo; ASU 2011-08 updated the guidance on the periodic
testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company performs
impairment testing for goodwill annually, or more frequently when indicators of impairment exist. As discussed above, the Company
adopted ASU 2011- 08 and performs an annual qualitative assessment in the fourth quarter each year to determine whether it was
more likely than not that the fair value of each of Welding, including Woodbine, NTW, Eur-Pac, ECC, AMK, Sterling and Compac was
less than its carrying amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company has determined that there has
been no impairment of goodwill at December 31, 2016 and 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Freight Out</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Freight out is included
in operating expenses and amounted to $180,000 and $197,000 for the years ended December 31, 2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>JOBS Act</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 5, 2012, the
JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements
for qualifying public companies. As an &ldquo;emerging growth company,&rdquo; the Company may, under Section 7(a)(2)(B) of the
Securities Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would
otherwise apply to private companies. An emerging growth company is one with less than $1.0 billion in annual sales, has less than
$700 million in market value of its shares of common stock held by non-affiliates and issues less than $1.0 billion of non-convertible
debt over a three year period. The Company may take advantage of this extended transition period until the first to occur of the
date that it (i) is no longer an &ldquo;emerging growth company&rdquo; or (ii) affirmatively and irrevocably opts out of this extended
transition period. The Company has elected to take advantage of the benefits of this extended transition period. Until the date
that it is no longer an &ldquo;emerging growth company&rdquo; or affirmatively and irrevocably opts out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to its consolidated financial
statements and that has a different effective date for public and private companies, the Company will disclose the date on which
adoption is required for non-emerging growth companies and the date on which the Company will adopt the recently issued accounting
standard.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Recently Issued Accounting Pronouncements</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In January 2016, the
Financial Accounting Standards Board (&ldquo;FASB&rdquo;) issued Accounting Standards Update (&ldquo;ASU&rdquo;) ASU 2016-01, Recognition
and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) (&ldquo;ASU 2016-01&rdquo;). The main objective
of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company does not expect the adoption of this amendment to have a significant impact on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In February 2016, the
FASB issued ASU 2016-02, &ldquo;Leases (Topic 842)&rdquo; (&ldquo;ASU 2016-02&rdquo;). The main objective of ASU 2016-02 is to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards
Codification and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company does not expect the adoption of this amendment to have a significant impact
on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In March 2016,
the FASB issued ASU 2016-09, &ldquo;Compensation&mdash;Stock Compensation (Topic 718) Improvements to Employee Share-Based
Payment (&ldquo;ASU 2016-09&rdquo;). ASU 2016-09 is part of the FASB Simplification Initiative. The objective of the
Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles for which
cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of
financial statements. ASU 2016-09 will affect all entities that issue share-based payment awards to their employees. The
areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. The Company does not expect the adoption of these amendments to have a significant impact on its consolidated
financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In April 2016, the FASB
issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606) (&ldquo;ASU 2016-10&rdquo;). The core principle of the guidance
in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
amendments in ASU 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective.
The effective date and transition requirements of ASU 2016-10 are the same as the effective date and transition requirements of
ASU 2014-09. They are effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not
permitted. The Company is currently assessing the impact of the adoption of these amendments on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In May 2016, the FASB
issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow -Scope Improvements and
Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide
clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same date
that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15,
2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for
nonpublic entities one year later. The Company is currently assessing the impact of the adoption of the amendments to Topic 606
and these amendments on its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard
provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including
beneficial interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables.
The standard is intended to reduce current diversity in practice. Early adoption is permitted, including adoption in an interim
period. The Company does not expect the adoption of these amendments to have a significant impact on its consolidated financial
statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In November 2016, the
FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted
cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should
be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash,
cash equivalents, restricted cash or restricted cash equivalents are presented in more than one-line item within the statement
of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount
shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard
is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard on our financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In January 2017, the
FASB issued ASU 2017-01 (&ldquo;ASU 2017-01&rdquo;), Business Combinations, which clarifies the definition of a business, particularly
when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first
part of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In January 2017,
FASB issued ASU No. 2017-04, Intangibles&mdash;Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment, Step 2 of the goodwill impairment test, which requires determining the implied fair value of goodwill and
comparing it with its carrying amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the
fair value of a reporting unit with its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU
No. 2017-04 requires entities having one or more reporting units with zero or negative carrying amounts to disclose (1) the
identity of such reporting units, (2) the amount of goodwill allocated to each, and (3) in which reportable segment the
reporting unit is included. ASU No. 2017-04 is effective as follows: (1) for a public business entity that is an SEC filer
for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently
in the process of evaluating the impact of the adoption of this standard on our financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company does not
believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Reclassifications</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Certain account balances in 2015 have been reclassified to conform
to the current year presentation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 4. ACCOUNTS RECEIVABLE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The components of accounts receivable at December 31, are detailed
as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Accounts Receivable Gross</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">8,806,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">14,647,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Allowance for Doubtful Accounts</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(756,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(985,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Accounts Receivable Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">8,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">13,662,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The allowance for doubtful accounts for the years ended December
31, 2016 and 2015 is as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Balance at<BR> Beginning of<BR> Year</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Charged to<BR> Costs and<BR> Expenses</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Deductions from<BR> Reserves</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Balance at End<BR> of Year</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">Year ended December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 40%; font-size: 10pt; text-align: left">Allowance for Doubtful Accounts</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">985,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">274,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">503,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">756,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Year ended December 31, 2015</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Allowance for Doubtful Accounts</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,566,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">177,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">758,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">985,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 5. INVENTORY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The components of inventory at December 31, consisted of the
following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Raw Materials</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,031,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">9,188,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Work In Progress</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">25,635,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,743,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Finished Goods</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,751,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,838,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Inventory Reserve</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,566,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,846,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">39,851,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">36,923,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company periodically
evaluates inventory and establishes reserves for obsolescence, excess quantities, slow-moving goods, and for other impairment of
value.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Balance at<BR> Beginning of<BR> Year</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Additions to<BR> Reserve</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Deductions from<BR> Reserves</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Balance at End<BR> of Year</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: left">Year ended December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 40%; font-size: 10pt; text-align: left">Reserve for Inventory</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(3,846,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(806,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">86,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(4,566,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Year ended December 31, 2015</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Reserve for Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(3,475,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(785,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">414,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(3,846,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 6. PROPERTY AND EQUIPMENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The components of property and equipment at December 31, consisted
of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD>
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 58%; font-size: 10pt">Land</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">300,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">300,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="width: 11%; font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Buildings and Improvements</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,650,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,658,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">31.5 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Machinery and Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14,032,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,109,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">5 - 8 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Capital Lease Machinery and Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,573,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,869,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">5 - 8 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Tools and Instruments</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,520,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,993,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">1.5 - 7 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Automotive Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">195,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">191,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">5 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Furniture and Fixtures</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">438,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">425,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">5 - 8 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Leasehold Improvements</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">966,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">910,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">Term of Lease</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Computers and Software</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">519,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">482,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left"><FONT STYLE="font-size: 10pt">4 - 6 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Property and Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">31,193,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">31,937,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Less: Accumulated Depreciation</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(18,974,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(16,638,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Property and Equipment, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">12,219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">15,299,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Depreciation expense
for the years ended December 31, 2016 and 2015 was approximately $3,347,000 and $3,090,000, respectively. Assets held under capitalized
lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation
of assets under capital leases is included in depreciation expense for 2016 and 2015. Accumulated depreciation on these assets
was approximately $2,320,000 and $1,065,000 as of December 31, 2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 7. INTANGIBLE ASSETS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The components of the intangibles assets at December 31, consisted
of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 59%; font-size: 10pt; text-align: left">Customer Relationships</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">6,115,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">6,555,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="width: 11%; font-size: 10pt; text-align: left">5 to 14 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Trade Names</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">970,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,480,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">15-20 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Technical Know-how</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">660,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">660,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">10 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Non-Compete</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">150,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">150,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">5 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Professional Certifications</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">25 to 2 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Intangible Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,910,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8,860,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Less: Accumulated Amortization</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(6,156,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,008,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD>
    <TD STYLE="font-size: 10pt">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Intangible Assets, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,754,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">3,852,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD>
    <TD STYLE="font-size: 10pt">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The expense for amortization
of the intangibles for the years ended December 31, 2016 and 2015 was approximately $1,279,000 and $1,262,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of December 31, 2016 the future amortization of intangibles
are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">For the year ending</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 65%; font-size: 10pt; text-align: center">December 31, 2017</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 25%; font-size: 10pt; text-align: right">689,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2018</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">December 30, 2019</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2020</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2021</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">130,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">Thereafter</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">278,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">Total</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,754,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 8. ASSETS HELD FOR SALE AND LIABILITIES DIRECTLY ASSOCIATED</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As discussed in Note
1, on January 27, 2017, the Company sold all of the outstanding shares of AMK Welding, Inc. (&ldquo;AMK&rdquo;) to Meyer Tool,
Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017 (&ldquo;the Stock Purchase Agreement&rdquo;) for a purchase
price of $4,500,000, subject to a working capital adjustment, plus additional quarterly payments, not to exceed $1,500,000, equal
to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. At December 31, 2016, the Company reclassified its assets
held for sale and the liabilities directly associated to these assets. The components of these assets and liabilities are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Components of Assets Held for Sale and Liabilities Directly Associated</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Assets Held for Sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 85%; font-size: 10pt">Cash</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">40,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Accounts Receivable, net of allowance for doubtful accounts</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">722,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Inventory, net of reserves</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">260,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Prepaid and other assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">96,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Property and equipment, net of accumulated depreciation</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,478,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Intangible Assets, net of accumulated amortization</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">819,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">635,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Assets Held for Sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">6,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Accounts payable and accrued expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">379,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Capital lease obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,680,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred revenues</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">96,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Liabilities directly associated to Assets Held for Sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,155,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Additionally, AMK&rsquo;s
operations are reported in the Company&rsquo;s Turbine Engine Components segment. AMK makes up the following amounts of this segment
for the year ended December 31, 2016:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Segment Data</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Turbine Engine Components</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">AMK</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Total</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">4,511,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">10,973,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">169,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(151,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,595,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,084,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,235,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The components of accounts payable at December 31, are detailed
as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Accounts Payable</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">13,843,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">9,837,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Accrued Expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,317,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Other Payables</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">49,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">16,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">12,046,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 10. SALE AND LEASEBACK TRANSACTION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 11, 2016, the
Company executed a Sale - Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor,
Connecticut (the &ldquo;South Windsor Property&rdquo;) for a purchase price of $1,700,000. The net proceeds from the sale of the
property were applied to the amounts owed to PNC Bank.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Simultaneous with
the closing of the sale of the South Windsor Property, the Company entered into a 15-year lease (the &ldquo;Lease&rdquo;)
with the purchaser for the property. Base annual rent is approximately $155,000 for the first year and increases
approximately 3% per year, each year thereafter. The Lease grants the Company an option to renew the Lease for an additional
period of five years. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated with the
operation of the facilities, including, without limitation, insurance, taxes and maintenance. The Lease also contains
representations, warranties, obligations, conditions and indemnification provisions in favor of the purchaser and grants the
purchaser remedies upon a breach of the Lease by the Company, including the right to terminate the Lease and hold the Company
liable for any deficiency in future rent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On October 24, 2006,
the Company consummated a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay
Shore, New York (the &ldquo;Bay Shore Property&rdquo;) for a purchase price of $6,200,000. The Company realized a gain on the sale
of $1,051,000 of which $300,000 was recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized
ratably over the remaining term of the twenty - year lease at approximately $38,000 per year. The gain is included in Other Income
in the accompanying Consolidated Statements of Operations. The unrecognized portion of the gain in the amount of $371,000 and $409,000
as of December 31, 2016 and 2015, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance
Sheets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Simultaneous with the
closing of the sale of the Bay Shore Property, the Company entered into a 20-year triple- net lease (the &ldquo;Lease&rdquo;) with
the purchaser for the property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year,
and thereafter increases 3% per year. The Lease grants the Company an option to renew the Lease for an additional period of five
years. The Company has on deposit with the purchaser $89,000 as security for the performance of its obligations under the Lease.
In addition, the Company has on deposit $150,000 with the landlord as security for the completion of certain repairs and upgrades
to the Bay Shore Property. This amount is included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the
accompanying Consolidated Balance Sheets. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated
with the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also contains
customary representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary
remedies upon a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for
any deficiency in future rent. See Note 13 Commitments and Contingencies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company accounted
for these transactions under the provisions of FASB ASC 840-40, &ldquo;Leases-Sale-Leaseback Transactions&rdquo;.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 27, 2017,
the Company entered into an agreement to sell the stock of AMK. Included in this agreement was the transfer of the capital lease
obligation on the South Windsor Property transferred to the purchaser of AMK. At December 31, 2016, the Company reclassified the
capital asset of $1,700,000 and lease obligation of $1,680,000 to Assets Held for Sale and Liabilities Held for Sale, respectively.
See Note 1 for additional discussion regarding the sale of AMK.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 11. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Notes payable and capital lease obligations consist of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Revolving credit note payable to PNC Bank N. A. (&ldquo;PNC&rdquo;)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">24,393,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">29,604,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Term loans, PNC</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,649,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">9,833,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Capital lease obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,215,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,025,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Related party notes payable, net of debt discount</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,086,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">350,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Note payable (private placement), net of debt discount</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Subtotal</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">36,970,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">44,812,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Less: Current portion of notes and capital obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(33,999,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(40,895,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Notes payable and capital lease obligations, net of current portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,971,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">3,917,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>PNC Bank N. A. (&ldquo;PNC&rdquo;)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company has a
credit facility with PNC (the &ldquo;Loan Facility&rdquo;) secured by substantially all of its assets. The Loan Facility has
been amended many times during its term. The Loan Facility was amended in June 2016 (the &ldquo;Twelfth Amendment&rdquo;) and
September 2016 (the &ldquo;Thirteenth Amendment&rdquo;). In connection with the Twelfth Amendment, the Company paid PNC a fee
of $100,000 and reimbursed it for the fees and expenses of its counsel. The Twelfth Amendment provides for a $33,000,000
revolving loan. In addition, in the Twelfth Amendment the four term loans (Term Loan A, Term Loan B, Term Loan C and Term
Loan D) then outstanding were consolidated into a single term loan with the initial principal amount of $7,387,854. Further,
in the Twelfth Amendment the Company acknowledged that there were then outstanding excess advances under the revolving loan
in the amount of $12,500,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under the terms of the
Loan Facility, as amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters
of one percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent
(4.50%) with respect to LIBOR Rate Loans. The amount outstanding under the revolving loan, exclusive of the excess advance, was
$24,393,000 and $29,604,000, as of December 31, 2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Loan Facility was
further amended pursuant to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be the lesser
of (i) 75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, an
increase from 85%, subject to the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper. In addition, in the
Thirteenth Amendment the lender waived any default resulting from the Company&rsquo;s obligation to comply with the minimum EBITDA
covenant for the period ended June 30, 2016, consented to the issuance of the Company&rsquo;s 12% Subordinated Convertible Notes
and the amendment to the Company&rsquo;s Articles of Incorporation to increase the authorized number of shares of Preferred Stock
and Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The repayment terms
of Term Loan A had been amended in April 2014, when the Company borrowed $2,676,000, representing an additional $1,328,000 to partially
fund the acquisition of Woodbine. Term Loan A, as amended in 2014, was to be repaid in monthly installments of $31,859 continuing
until November 2016. On October 1, 2014, the Company borrowed $3,500,000 under Term Loan B for the acquisition of AMK. Term Loan
B was to be repaid in sixty consecutive monthly principal installments of $58,333 continuing until November 2019.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Prior to the Twelfth
Amendment, Term Loans A and B bore interest at (a) the sum of the Alternate Base Rate plus one and three quarters of one percent
(1.75%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three percent (3.00%) with respect to LIBOR
Rate Loans.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 31, 2014,
the Company borrowed $2,500,000 under Term Loan C to refinance the Seller Note and Mortgage of $2,500,000 issued as part of the
acquisition of AMK. The maturity date of Term Loan C was the first business day of January 2021, and it was to be paid in seventy
two consecutive monthly principal installments, which commenced on the first business day of February 2015, and continued on the
first business day of each month thereafter. The first seventy-one of the installments were to be in the amount of $34,722 with
a seventy second and final payment of any unpaid principal and interest on the first business day of January 2021. Term Loan C
bore interest at (a) the sum of the Alternate Base Rate plus two percent (2.00%) with respect to Domestic Rate Loans and (b) the
sum of the LIBOR Rate plus three and one-quarter percent (3.25%) with respect to LIBOR Rate Loans.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 9, 2015, the
Company borrowed $3,500,000 under Term Loan D for the acquisition of Sterling. The repayment of Term Loan D consisted of twenty
consecutive monthly principal installments, the first nineteen in the amount of $62,847 which commenced on the first business day
of April 2015, and continued on the first business day of each month thereafter, with a twentieth and final payment of any unpaid
balance of principal and interest on the last business day of November 2016. Term Loan D bore interest at (a) the sum of the Alternate
Base Rate plus two and one quarter percent (2.25%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three
and one-half percent (3.50%) with respect to LIBOR Rate Loans.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The repayment terms
of the Term Loan provided for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first
fifty-nine (59) of which shall be in the amount of $123,133 commencing on the first business day of July, 2016, and continuing
on the first business day of each month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal
and interest payable on the last business day of June, 2021. Under the terms of the Loan Facility, as amended, the revolving loan
now bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters of one percent (1.75%) with respect to
Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent (4.50%) with respect to LIBOR Rate
Loan.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">At the closing of the
Twelfth Amendment the Company paid $1,500,000 to reduce the outstanding excess under the revolving loan from $12,500,000 to $11,000,000.
It also agreed that the excess advances will be paid down by $100,000 each week commencing the second week after the closing of
the Twelfth Amendment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">To the extent that the
Company disposes of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws
on the credit facility in the amount equal to the net proceeds of such sale.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The terms of the Loan
Facility require that among other things, the Company maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA.
In addition, the Company is limited in the amount of Capital Expenditures it can make. The Company is also limited to the amount
of dividends it can pay its shareholders as defined in the Loan Facility. As of December 31, 2016, the Company was not in compliance
with the Fixed Charge Coverage Ratio covenant. The failure to maintain the requisite Fixed Charge Coverage Ratio constitutes a
default under the Loan Facility and PNC at its option may give notice to the Company that all amounts under the Loan Facility are
immediately due and payable. Consequently, all amounts due under the Term Loans are also classified as current. As of December
31, 2016, the Company was not in compliance with the minimum EBITDA requirement. The Company has requested a waiver from PNC for
the failure to meet the minimum EBITDA covenant. Because the revolving loans contain a subjective acceleration clause which could
permit PNC to require repayment prior to maturity, all of the loans outstanding with PNC are classified with the current portion
of notes and capital lease obligations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of December 31, 2016,
our debt to PNC in the amount of $31,042,000 consisted of the revolving credit note due to PNC in the amount of $24,393,000 and
the term loans due to PNC in the amount of $ 6,649,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Each day, the Company&rsquo;s
cash collections are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing
base formula. The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan
Facility). PNC may use some elements of subjective business judgment in determining whether a material adverse change has occurred
in the Company's condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of
the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of December 31, 2016 the future minimum principal payments
for the term loans are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">For the year ending</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt; text-align: center">December 31, 2017</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2018</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2019</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2020</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2021</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">737,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">Thereafter</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">PNC Term Loans payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,649,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Less: Current portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(6,649,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">Long-term portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest expense related
to these credit facilities amounted to approximately $1,908,000 and $1,414,000 for the years ended December 31, 2016 and 2015,
respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Capital Leases Payable Equipment</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company is committed
under several capital leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at
the termination of each lease. Capital lease obligations totaled $4,215,000 and $5,025,000 as of December 31, 2016 and 2015, respectively,
with various interest rates ranging from approximately 4% to 14 %.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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    <DIV STYLE="page-break-before: always; margin-top: 6pt; margin-bottom: 6pt"><P STYLE="margin: 0pt; text-align: right; font-size: 8pt"></P></DIV>
    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">As of December 31, 2016, the aggregate
future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">For the year ending</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt; text-align: center">December 31, 2017</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,442,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2018</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,407,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2019</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,230,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2020</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">509,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">December 31, 2021</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">Thereafter</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">Total future minimum lease payments</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,608,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Less: imputed interest</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(393,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">Less: current portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,244,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Total Long Term Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,971,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Related Party Notes Payable</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On September 8, 2015,
the Company issued a promissory note (&ldquo;the Taglich Note A&rdquo;) to Michael Taglich in the principal amount of $350,000.
The Taglich Note A bore interest at the rate of 4% per annum. The Company's obligation under the Taglich Note A was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 8, 2016, the
Company issued a promissory note (&ldquo;the Taglich Note B&rdquo;) to Michael Taglich in the principal amount of $350,000. The
Taglich Note B bore interest at the rate of 7% per annum. The Company&rsquo;s obligation under the Taglich Note B was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 8, 2016, the
Company issued a promissory note (&ldquo;the Taglich Note C&rdquo;) to Robert Taglich in the principal amount of $350,000. The
Taglich Note C bore interest at the rate of 7% per annum. The Company&rsquo;s obligation under the Taglich Note C was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 6, 2016, the
Company issued a promissory note (&ldquo;the Taglich Note D&rdquo;) to Michael Taglich in the principal amount of $400,000. The
Taglich Note D bore interest at the rate of 7% per annum. The Company&rsquo;s obligation under the Taglich Note D was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 6, 2016, the
Company issued a promissory note (&ldquo;the Taglich Note E&rdquo;) to Robert Taglich in the principal amount of $300,000. The
Taglich Note E bore interest at the rate of 7% per annum. The Company&rsquo;s obligation under the Taglich Note E was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 25, 2016, the
Company issued 110,000 and 65,000 shares of Series A Preferred Stock to Michael Taglich and Robert Taglich, respectively, upon
surrender of Taglich Notes A through E, in the aggregate principal of $1,100,000 and $650,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 1, 2016, the
Company issued a promissory note (the &ldquo;Taglich Note F&rdquo;) to Michael Taglich, in the principal amount of $1,000,000.
The Taglich Note F bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note F was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 4, 2016, the
Company issued a promissory note (the &ldquo;Taglich Note G&rdquo;) to Michael Taglich, in the principal amount of $500,000. The
Taglich Note G bore interest at the rate of 7% per annum. The Company&rsquo;s obligation under the Taglich Note G was subordinated
to its indebtedness to PNC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 19, 2016,
the Company issued to Michael Taglich its 12% Subordinated Convertible Notes due December 31, 2017 (the &ldquo;12% Notes&rdquo;)
in the principal amount of $1,520,703, together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation
of Taglich Notes F &amp; G in the aggregate principal amount of $1,500,000, together with accrued interest thereon and on notes
previously exchanged for Series A Preferred Stock of $20,703. In addition, the Company issued to Robert Taglich a 12% Note in the
principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness
of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Also see below regarding related party purchases of the 12%
and 8% subordinated convertible notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Interest expense related to the Taglich Notes was $264,000
for the year ended December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>12% Subordinated Convertible Notes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 19, 2016,
the Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the &ldquo;Placement Agent&rdquo;),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $4,250,000 of the
Company&rsquo;s 12% Subordinated Convertible Notes due December 31, 2017 (the &ldquo;12% Notes&rdquo;) to accredited investors
(&ldquo;the Offering&rdquo;), together with five-year warrants to purchase 4,065 shares of common stock (the &ldquo;Warrants&rdquo;)
for each $100,000 principal amount of 12% Notes purchased, in a private placement exempt from the registration requirements of
the Securities Act of 1933, as amended (the Securities Act ) .</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The 12% Notes were convertible,
at the option of the holders, into shares of the Company&rsquo;s common stock at an initial conversion price of $4.92 per share,
subject to adjustment for certain events. The 12% Notes were automatically convertible into shares of the Company&rsquo;s Series
A Convertible Preferred Stock (&ldquo;Series A Preferred Stock&rdquo;) at a price of $10.00 per share, the stated value of the
Series A Preferred Stock, upon the filing of a certificate of amendment to the Company&rsquo;s Articles of Incorporation increasing
the number of shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon conversion
of the 12% Notes and for issuance in lieu of payment of cash dividends (the &ldquo;Certificate of Amendment&rdquo;) in accordance
with the provisions of the certificate of designation authorizing the issuance of the Series A Preferred Stock. The amendment was
subject to the approval of the Company&rsquo;s stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under the terms of the
Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 7% of the gross proceeds of the offering,
five year warrants to purchase 8% of the number of shares of the Company&rsquo;s common stock issuable upon conversion of the 12%
Notes at an exercise price of $6.15 per share, equal to 125% of the initial conversion price per share of the 12% Notes, and reimbursement
for its actual out-of-pocket expenses not to exceed in the aggregate $25,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In August 2016, the
Company issued and sold a total of $2,720,000 principal amount of the 12% Notes, together with Warrants to purchase an aggregate
of 110,556 shares of common stock, yielding net proceeds to the Company of approximately $2,320,000, pursuant to a Securities Purchase
Agreements with accredited investors. The Company also issued to Michael Taglich a 12% Note in the principal amount of $1,520,703,
together with Warrants to purchase 61,817 shares of common stock at an initial exercise price of $6.15, subject to anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business
combinations, upon surrender for cancellation of Taglich Notes F and G in the aggregate principal amount of $1,500,000, together
with accrued interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,703. In addition, the Company
issued to Robert Taglich a 12% Note in the principal amount of $4,373, together with Warrants to purchase 177 shares of common
stock, in consideration of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Warrants including
those issued to the placement agent are classified within stockholders equity, pursuant to ASC 480, Distinguishing Liabilities
from Equity and ASC 815-40, Derivatives and Hedging: Contracts in Own Equity. The 12% Notes contained a contingent put that results
in early settlement of the 12% Notes upon the filing of a certificate of amendment to the Company&rsquo;s Articles of Incorporation,
increasing the number of shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon
conversion of the 12% Notes. The embedded put feature is required to be separately measured at fair value with changes in value
recognized in the statement of operations, pursuant to ASC 815-15, Derivatives and Hedging: Embedded Derivatives, as the put feature
is not clearly and closely related to the convertible promissory note.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The proceeds received
upon issuing the 12% Notes and Warrants was allocated to each instrument on a relative fair value basis. The initial fair value
of the Warrants was determined using the Black Scholes Merton valuation model with the following assumptions: expected term of
5 years; risk free interest rate of 1.2%; and volatility of 90%. The allocated value of the 12% Notes was further reduced for the
initial fair value of the embedded put of approximately $755,000. The resulting discount to the 12% Notes, including the allocated
transactions costs, is amortized to interest expense using the effective interest method over the term of the Notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On November 30, 2016,
the Company&rsquo;s stockholders approved the amendment to the Company&rsquo;s Articles of Incorporation, and consequently the
Company issued a total of 438,770 shares of its Series A Preferred Stock to holders of its 12% Notes upon the automatic conversion
of the principal amount of, and accrued interest on, the 12% Notes at the rate of $10.00 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of December 31, 2016,
we had outstanding 1,202,548 shares of series A Preferred Stock, including 62,684 shares issued in lieu of payment of cash dividends
on December 15, 2016. We issued an additional 46,010 shares of Series A Preferred Stock on March 15, 2017 in lieu of payment of
cash dividends.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>8% Subordinated Convertible Notes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On November 23, 2016,
the Company issued sold an aggregate principal amount of $1,400,000 of its 8% Subordinated Convertible Notes due November 30, 2018
(the &ldquo;2018 Notes&rdquo;), together with warrants to purchase an aggregate of 124,444 shares of Common Stock for a total purchase
price of $1,400,000. The purchasers of the 2018 Notes and warrants included Michael Taglich and Robert Taglich, directors and stockholders
of the Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the 2018
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28,
2017, in cash, or at our option, in additional 2018 Notes. The outstanding principal amount plus accrued interest on the 2018 Notes
is convertible at the option of the holder into shares of Common Stock at an initial conversion price of $2.25, subject to certain
anti-dilution and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain
fundamental transactions such as mergers and other business combinations. The warrants issued to the purchasers of the 2018 Notes
are exercisable on or prior to November 30, 2021.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For acting as placement
agent of the 2018 Notes, we paid Taglich Brothers, Inc. $112,000 and issued to it five-year warrants to purchase 62,222 shares
of Common Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The warrants issued
to the purchasers of the 2018 Notes and Taglich Brothers, Inc. have an exercise price of $3.00 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 22, 2016,
the Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the &ldquo;Placement Agent&rdquo;),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $1,300,000 of the
2018 Notes to accredited investors (the &ldquo;Offering&rdquo;), together with five-year warrants to purchase 20% of the number
of shares of Common Stock issuable upon immediate conversion of the 2018 Notes purchased (the &ldquo;Warrants&rdquo;), in a private
placement exempt from the registration requirements of the Securities Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under the terms of the
Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 8% of the gross proceeds of the Offering
and five year warrants to purchase 10% of the number of shares of the Company&rsquo;s Common Stock (the &ldquo;Placement Agent
Warrant&rdquo;) issuable upon immediate conversion of the 2018 Notes at an exercise price of $3.00 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Subscription Agreements</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 22, 2016,
the Company entered into subscription agreements with ten accredited investors for the purchase of an aggregate of $ 1,175,000
principal amount of the 2018 Notes, together with Warrants to purchase a total of 89,359 shares of Common Stock, including 2018
Notes and Warrants to be issued to Michael Taglich and Robert Taglich, directors and principal stockholders of the Company and
principals of Taglich Brothers, Inc., who purchased an aggregate of $500,000 principal amount of the 2018 Notes and Warrants to
purchase a total of 38,024 shares of Common Stock in the offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 22, 2016,
the Company issued sold an aggregate principal amount of $1,175,000 of its 2018 Notes, together with Warrants to purchase an aggregate
of 89,359 shares of Common Stock for a total purchase price of $ 1,175,000 to ten accredited investors, including Michael Taglich
and Robert Taglich, directors and stockholders of the Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the
2018 Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing
February 28, 2017, in cash, or if the Company is prohibited by applicable law or PNC Bank, National Association, its
principal lender under the PNC Loan Agreement from paying interest in cash, or otherwise elects to do so, the Company may pay
interest at the rate of twelve percent (12%) per annum in the form of additional notes having the same terms and conditions
as the 2018 Notes. The outstanding principal amount plus accrued interest on the 2018 Notes is convertible at the option of
the holder into shares of Common Stock at an initial conversion price of $2.63, subject to certain anti-dilution and other
adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain fundamental
transactions such as mergers and other business combinations. The Warrants are exercisable on or prior to November 30,
2021.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For acting as placement
agent of the 2018 Notes, we paid Taglich Brothers, Inc. $94,000 and issued to it five-year warrants to purchase 44,677 shares of
Common Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Warrants issued
to the purchasers of the 2018 Notes and Taglich Brothers, Inc. have an exercise price of $3.00 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 12. STOCKHOLDERS' EQUITY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Preferred Stock Offering</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 25, 2016, the
Company, entered into a Placement Agency Agreement (the &ldquo;Agreement&rdquo;) with Craig-Hallum Capital Group LLC and Taglich
Brothers, Inc., as placement agents (the &ldquo;Placement Agents&rdquo;), pursuant to which the Placement Agents agreed to offer
on behalf of the Company, on a best efforts basis, up to $7,000,000 of the Company&rsquo;s securities (the &ldquo;Offering&rdquo;),
in a private placement exempt from the registration requirements of the Securities Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Pursuant to the Agreement
on May 25, 2016, and June 1, 2016, the Company completed a private placement of 700,000 shares of its Series A Convertible Stock
(the &ldquo;Series A Preferred Stock&rdquo;) from which it derived gross proceeds of $5,250,000, net of $1,750,000 of principal
amount of the Company&rsquo;s promissory notes exchanged by Michael Taglich and Robert Taglich for shares of Series A Preferred
Stock. The shares of Series A Preferred Stock have a stated value of $10.00 per share (&ldquo;Stated Value&rdquo;) and are initially
convertible into shares of Common Stock at a price of $4.92 per share (subject to adjustment upon the occurrence of certain events)
.. In connection with the placement the Company incurred approximately $606,000 of direct offering costs and $57,000 in legal expenses
and granted to the Placement Agents warrants to purchase 8% of the number of shares of the Company&rsquo;s common stock (113,822)
issuable upon conversion of the Series A Preferred Stock sold in the offering (the &ldquo;Placement Agent Warrants&rdquo;) .</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Placement Agent
Warrants are exercisable in whole or in part, at an initial exercise price per share of $6.15, and are exercisable for cash or
on a cashless basis for a period commencing on November 26, 2016 and expiring on May 26, 2021. The exercise price and number of
shares of common stock issuable upon the exercise of the Placement Agent Warrants are subject to adjustment for stock dividends,
splits, combinations and similar events.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Dividends on the Series
A Preferred Stock (the &ldquo;Preferred Shares&rdquo;) are payable on a cumulative basis at an annual rate for the first two years
after the date the Preferred Shares were issued (the &ldquo;Original Issue Date&rdquo;) of 12% of the Stated Value per share and
thereafter at the annual rate of 16% of the Stated Value per share. Dividends are payable on the fifteenth day of March, June,
September and December of each year, commencing on September 15, 2016. The Company may pay dividends in cash or in additional
Preferred Shares (&ldquo;PIK Shares&rdquo;). If during the first two years after the Original Issue Date the Company fails to
pay in respect of any dividend period a dividend at an annual rate of at least 8% of the Stated Value per share in cash, in addition
to paying a sufficient number of PIK Shares so that the sum of the cash dividends and PIK Shares paid equals 12% per annum the
Company will issue PIK Shares in an amount equal to the product of the proportion of the cash dividend not paid times 3% per annum.
Thereafter if the Company fails to pay in respect of any dividend period a dividend at an annual rate of at least 10% of the Stated
Value per share in cash, in addition to paying a sufficient number of PIK Shares so that the sum of the cash dividends and PIK
Shares paid equals 16% per annum, the Company will issue PIK Shares in an amount equal to the product of the proportion of the
cash dividend not paid times 3% per annum. If the Company pays any portion of the dividends payable during any dividend period
in PIK Shares, it will not be permitted to declare or pay any cash dividends on its common stock during that dividend period.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Accordingly, we computed
earned but undeclared preferred dividends at the stated rate of 12.0% through September 15, 2016, when the form of the dividend
was announced and declared by our Board of Directors. Since the Board of Directors declared dividends in the form of PIK Shares
for the dividend payment period ended September 15, 2016, the earned dividend was increased to 15% (from the 12% cash rate), as
per the terms of the Series A Preferred Stock. The Company recognized the PIK dividend at the estimated fair value of the shares
issued.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company recorded
the issuance of 60,380 PIK Shares during the year ended December 31, 2016 as a preferred dividend, with a fair value of $ 501,000.
Accordingly, accumulated deficit and Additional Paid In Capital were increased by that amount during the year ended December 31,
2016. The fair value was determined using the closing market price of the Company's common stock of on the date of issuance of
the PIK Shares, taking into consideration that the Series A Preferred Shares were convertible into the common stock. For earning
per share purposes, for the year ended December 31, 2016, the fair value of the PIK Shares issued as a dividend was less than the
amounts previously earned by $40,000. At December 31, 2016 and 2015, the amounts of cumulative perpetual dividends earned and not
declared on the Series A Preferred Stock were $54,000 and $0, based on the stated cash dividend rate of 12%, or $0.05 and $0 per
Series A Preferred share, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Under Nevada law and
the terms of the Series A Preferred Stock, dividends are payable only when, as and if authorized and declared by the Company&rsquo;s
board of directors. After payment of all liabilities and outstanding debt obligations, holders of Series A Preferred Stock are
entitled to receive $10.00 plus accrued and unpaid dividends prior to the payment of amounts available for distribution to holders
of the Company&rsquo;s common stock upon the liquidation and dissolution of the Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of Series A
Preferred Stock may elect at any time to convert their Preferred Shares into shares of common stock at the conversion rate of 2.0325
shares of common stock for each Preferred Share, equivalent to an initial conversion price of approximately $4.92 per share of
common stock. The conversion rate and the corresponding conversion price will be subject to certain anti-dilution and other adjustments,
including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions such
as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company may at its
option, at any time and from time to time after the market price of a share of common stock is in excess of $9.84 for 30 consecutive
trading days, cause all of the Preferred Shares to be converted into shares of common stock at the then-prevailing conversion rate,
subject to the certain conditions set forth in the certificate of designations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Commencing May 26, 2018,
the Company may redeem all of the Preferred Shares for a redemption price of $10.00, plus accrued and unpaid dividends.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Holders of Preferred
Shares will vote on an as-converted basis, together with holders of common stock, as a single class, on the election of directors
and all other matters presented to stockholders, except for matters as to which under applicable law and the certificate of designation
a class vote of the holders of the Series A Preferred Stock is required. The Company may not, without the affirmative vote of the
record holders of a majority of the then outstanding shares of the Series A Preferred Stock voting together as a single class (a)
alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Certificate
of Designation authorizing the Series A Preferred Stock, (b) amend its articles of incorporation or other charter documents in
any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares of Series A Preferred
Stock, unless such increase is necessary to pay PIK Dividends, (d) authorize a new series of preferred stock with dividend, liquidation
or redemption rights senior or pari passu to the Series A Preferred Stock or (e) enter into any agreement with respect to any of
the foregoing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Common Stock Issuances</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During the year ended
December 31, 2015, the Company granted 52,000 shares of restricted common stock pursuant to an agreement in connection with the
acquisition of Sterling. During the year ended December 31, 2016, 42,000 shares of that restricted stock has vested and is included
in shares issued and outstanding. In addition, the Company issued an aggregate of 24,905 shares of common stock upon the exercise
of options by certain of its directors.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Dividends</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 15, 2015
the Company paid a dividend equal to $0.15 per common share or $1,066,000 to all shareholders of record as of January 2, 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 24, 2015 the
Company paid a dividend equal to $ 0.15 per common share or $1,134,000 to all shareholders of record as of April 13, 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On August 12, 2015,
the Company paid a dividend equal to $0.15 per common share or $1,134,000 to all shareholders of record as of August 3, 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 1, 2015,
the Company paid a dividend equal to $0.15 per common share or $ 1,133,000 to all shareholders of record as of November 23, 2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Warrants Issued To Taglich Brothers</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As discussed above,
the Company issued warrants to Taglich Brothers, Inc. Such warrants contain cashless exercise provisions. As a result, the value
of the warrants has to be recognized as a liability. In addition, the Company would be required to revalue the derivative liability
at the end of each reporting period with the change in value reported on the consolidated statement of operations. The Company
did not account for the derivative liability in its consolidated financial statements as it was determined to not be material.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 13. EMPLOYEE BENEFITS PLANS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company employs both union and non-union employees and maintains
several benefit plans.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Union</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Substantially the entire
workforce at AIM is subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the &ldquo;Union&rdquo;).
The contract expires on December 31, 2018.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Medical benefits for
union employees are provided through a policy with ADP during 2016 and Insperity during 2015, the costs of which are substantially
borne by the Company. In addition, the Company is obligated to make contributions for union dues and a security fund (defined contribution
plan) for the benefit of each union employee. Contributions to the security fund amounted to $263,000 and $247,000 for the years
ended December 31, 2016 and 2015, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company adopted
ASU No.2011-09, &ldquo;Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's
Participation in a Multiemployer Plan&rdquo; (&ldquo;ASU 2011-09&rdquo;). ASU 2011-09 requires additional disclosures about an
employer's participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions
made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. The Union&rsquo;s retirement
plan is a defined contribution plan. As such, the Company is not responsible for the obligations of other companies in the Union&rsquo;s
retirement plan and no further disclosures are required.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Others</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">All other Company employees, are covered under a co-employment
agreement with ADP.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company has two
defined contribution plans under Section 401(k) of the Internal Revenue Code (the &ldquo;Plans&rdquo;). Pursuant to the Plans,
qualified employees may contribute a percentage of their pre-tax eligible compensation to the Plan. The Company does not match
any contributions that employees may make to the Plans.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 14. COMMITMENTS AND CONTINGENCIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Real Estate Leases</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company leases its
facilities under various operating lease agreements, which contain renewal options and escalation provisions. Rent expense was
$2,429,000 and $2,225,000 for the years ended December 31, 2016 and 2015, respectively. The Company is responsible for paying all
operating costs under the terms of the leases. As of December 31, 2016, the aggregate future minimum lease payments are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Plant Avenue</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Fifth Avenue</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center">Lamar Street</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Motor<BR> Parkway</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Porter<BR> Street</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Clinton<BR> Avenue</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: left">For the year ending</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center">Annual Rent</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center">Annual Rent</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Annual Rent</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" NOWRAP STYLE="font-size: 10pt; font-weight: bold; text-align: center">Annual<BR> Rent</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Annual<BR> Rent</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Annual<BR> Rent</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Total Rents</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt; width: 23%">December 31, 2017</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">543,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">746,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">360,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">106,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">115,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">77,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 7%; font-size: 10pt; text-align: right">1,947,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">December 31, 2018</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">559,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">769,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">300,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">110,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">115,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,873,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">December 31, 2019</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">576,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">792,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">113,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">48,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,529,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">December 31, 2020</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">593,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">817,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">116,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,526,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">December 31, 2021</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">611,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">842,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">103,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,556,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Thereafter</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,661,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,367,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,028,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total Rents</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">5,543,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">8,333,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">660,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">548,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">278,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">97,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">15,459,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The leases provide for
scheduled increases in base rent. Rent expense is charged to operations using the straight- line method over the term of the lease
which results in rent expense being charged to operations at inception of the lease in excess of required lease payments. This
excess is shown as deferred rent in the accompanying consolidated balance sheets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On April 11, 2016, the
Company executed a Sale-Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor,
Connecticut (the &ldquo;Property&rdquo;) for a purchase price of $1,700,000. The net proceeds from the sale of the property were
applied to the amounts owed to PNC Bank.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Simultaneous with the
closing of the sale of the Property, the Company entered into a 15- year lease (the &ldquo;Lease&rdquo;) with the purchaser for
the property. Base annual rent was approximately $155,000 for the first year and increases approximately 3% per year each year
thereafter. The Lease granted the Company an option to renew the Lease for an additional period of five years. Pursuant to the
terms of the Lease, the Company was required to pay all of the costs associated with the operation of the facilities, including,
without limitation, insurance, taxes and maintenance. The Lease also contained representations, warranties, obligations, conditions
and indemnification provisions in favor of the purchaser and grants the purchaser remedied upon a breach of the Lease by the Company,
including the right to terminate the Lease and hold the Company liable for any deficiency in future rent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 27, 2017,
the Company entered into an agreement to sell the stock of AMK. Included in this agreement, the capital lease obligation for the
building transferred to the purchaser of AMK. At December 31, 2016, the Company reclassified the capital asset and lease obligation
to Assets Held for Sale and Liabilities Held for Sale, respectively. See Note 1 Subsequent Events for additional discussion regarding
the sale of AMK. At December 31, 2016, the Company has excluded this lease commitment from the table above.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Loss Contingencies</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During 2016, a number
of actions were commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result
of an injury suffered on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts
included in accounts payable they are not specifically discussed herein.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Westbury Park Associates,
LLC commenced an action on or about January 11, 2017 against Air Industries Group in the NYS Supreme Court, County of Suffolk,
seeking the recovery of approximately $31,000 for past rent arrears, and for an unidentified sum representing all additional rent
due under a commercial lease through the end of its term, plus attorney&rsquo;s fees. The additional rent due through the end
of the term is approximately $105,000. The litigation is in the discovery stage and the Company believes there is a meritorious
defense to the claim or that the landlord can and will mitigate its future damages by finding a new tenant.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On January 18, 2017,
REP B-2, LLC filed a petition for a warrant of eviction and a money judgment of approximately $56,000 against Air Industries Group
arising from rent arrears on commercial space. On January 18, 2017, 360 Motor Parkway, LLC filed a petition for a warrant of eviction
and a money judgment of approximately $12,000 against Air Industries Group arising from rent arrears on commercial space. Each
proceeding has resulted in a stipulation of settlement providing monthly repayment schedules to bring those rent arrears current,
the last of which are due on May 1, 2017, at which time the proceedings may be dismissed.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">An employee of the Company
commenced an action against, among others, Rechler Equity B-2, LLC and Air Industries Group, in the Supreme Court State of New
York, Suffolk County, seeking compensation in an undetermined amount for injuries suffered while leaving the premises occupied
by Welding Metallurgy, Inc. Rechler Equity B-2, LLC, has served a Third Party Complaint in this action against Air Industries Group,
Inc., and Welding Metallurgy, Inc. The action remains in the early pleading stage. The Company believes it is not liable to the
employee and any amount it might have to pay would be covered by insurance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 15. INCOME TAXES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The provision for (benefit from) income taxes as of December
31, is set forth below:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Current</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Federal</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">$</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">$</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-indent: 10pt">State</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">49,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">53,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Prior year overaccruals</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-indent: 10pt">Federal</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(123,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-indent: 10pt">State</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total Expense (Benefit)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">49,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(70,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">Deferred Tax Benefit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,962,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(216,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Valuation Allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,025,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Provision for (Benefit from) Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,112,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(286,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following is a reconciliation of our
income tax rate computed using the federal statutory rate to our actual income tax rate as of December 31,</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">U. S. statutory income tax rate</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">34.00</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">-34.00</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">State taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1.50</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4.70</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Permanent differences, overaccruals and non-deductible items</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0.08</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3.00</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Rate change and provision to return true-up</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0.85</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">-40.20</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Expired stock options</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">-0.15</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">40.80</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred tax valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">-51.64</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Total</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">-15.36</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">-25.70</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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    <DIV STYLE="page-break-before: always; margin-top: 6pt; margin-bottom: 6pt"><P STYLE="margin: 0pt; text-align: right; font-size: 8pt"></P></DIV>
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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The components of net deferred tax assets at December 31, 2016
and 2015 are set forth below:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred tax assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Current:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net operating losses</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">4,754,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">462,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Bad debts</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">413,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">336,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Inventory - 263A adjustment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Accounts payable, accrued expenses and reserves</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">930,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">919,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total current deferred tax assets before valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,097,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,725,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(6,097,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total current deferred tax assets after valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,725,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Non-current:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Section 1231 loss carry forward</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Stock based compensation - options and restricted stock</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">164,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">79,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Capitalized engineering costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">431,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">432,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred rent</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">468,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">410,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Amortization - NTW Transaction</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,324,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">789,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Inventory reserves</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,157,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">680,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred gain on sale of real estate</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">121,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">126,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Other</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">257,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total non-current deferred tax assets before valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,829,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,777,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(928,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total non-current deferred tax assets after valuation allowance</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,901,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,773,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred tax liabilities:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Property and equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,595,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,091,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Amortization - NTW Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(33,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(13,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Amortization - AMK Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(18,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Amortization - Welding Transaction</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(273,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(313,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total non-current deferred tax liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,901,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,435,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net non current deferred tax asset</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">338,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company had a capital
loss carry forward from the sale of Sigma Metals, Inc., a former subsidiary of the Company, of $2,719,000 which expired in fiscal
2015.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During the year ended
December 31, 2016, the Company recorded a valuation allowance equal to its net deferred tax assets. The Company determined that
due to a recent history of net losses, that at this time, sufficient uncertainty exists regarding the future realization of these
deferred tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not that
these deferred tax benefits will be realized, the valuation allowances will be reduced or eliminated. With a full valuation allowance,
any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December
31, 2016 and 2015, the Company provided a valuation allowance on its deferred tax assets of $7,025,000 and $4,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">At December 31, 2016
and 2015, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.
The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company
recognizes interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2016 and 2015, the
Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In certain cases, the
Company's uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities.
The Company files federal and state income tax returns in jurisdictions with varying statutes of limitations. The 2013 through
2016 tax years generally remain subject to examination by federal and state tax authorities.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 16. STOCK OPTIONS AND WARRANTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Stock-Based Compensation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Stock Options</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 30, 2015, the
Board of Directors adopted the Company&rsquo;s 2015 Equity Incentive Plan (&ldquo;2015 Plan&rdquo;) which was approved by affirmative
vote of the Company&rsquo;s stockholders on June 25, 2015. The Plan authorized the grant of rights with respect to up to 350,000
shares.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In June 2016, the Board
of Directors adopted the Company&rsquo;s 2016 Equity Incentive Plan (&ldquo;2016 Plan&rdquo;) which authorized the grant of rights
with respect to up to 350,000 shares. The 2016 Plan was approved by affirmative vote of the Company&rsquo;s stockholders on November
30, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During the year ended
December 31, 2016, the Company granted options to purchase 100,000 shares of common stock to certain of its employees. The weighted
average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 0.73% to 2.04%; expected volatility factors of 31% to 59%; expected dividend yield of 0%; and estimated
option term of 5 years.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During both of the years
ended December 31, 2016 and 2015, the Board of Directors approved the issuance of 18,000 options, to non -employee members of the
Company&rsquo;s Board of Directors. These options vested quarterly as to 25% of the shares subject to the options, commencing June
2, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company recorded
stock based compensation expense of $167,000 and $100,000 in its consolidated statement of operations for the years ended December
31, 2016 and 2015, respectively, and such amounts were included as a component of general and administrative expense.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The fair values of stock
options granted were estimated using the Black-Sholes option- pricing model with the following assumptions for the years ended
December 31:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Risk-free interest rates</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">0.73% - 2.04</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">1.31% - 1.49</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Expected life (in years)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">5</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">5-6</FONT></TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Expected volatility</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">31%-59</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">25</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Dividend yield</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0.0</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5.9</TD><TD STYLE="font-size: 10pt; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Weighted-average grant date fair value per share</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1.88</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1.10</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The expected life is
the number of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or
forfeiture. Expected life is determined using the simplified method permitted by Staff Accounting Bulletin No. 107. In addition
to the inputs referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for
estimated forfeiture rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based
on the New York Stock Exchange ARCA Defense Index. The Company did not use the volatility rate for its common stock as the Company
determined that its common stock is thinly traded.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">A summary of the status
of the Company's stock options as of December 31, 2016 and 2015, and changes during the two years then ended are presented below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Options</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Wtd. Avg.<BR> Exercise Price</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt">Balance, December 31, 2014</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">528,539</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">9.01</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Granted during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">99,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10.20</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Exercised during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(46,473</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4.50</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Terminated/Expired during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(16,724</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">84.78</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Balance, December 31, 2015</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">564,342</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7.35</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Granted during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">128,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5.28</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Exercised during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(24,905</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2.95</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Terminated/Expired during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(31,095</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8.47</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Balance, December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">636,342</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">7.01</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Exercisable at December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">500,175</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">6.77</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following table summarizes information about stock options
at December 31, 2016:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Range of Exercise<BR> Prices</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Remaining<BR> Number<BR> Outstanding</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Wtd. Avg.<BR> Life</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Wtd. Avg.<BR> Exercise Price</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 22%; font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$0.00 - $5.00</FONT></TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 22%; font-size: 10pt; text-align: right">202,694</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 22%; font-size: 10pt; text-align: center">1.81 years</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 22%; font-size: 10pt; text-align: right">4.49</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$5.01 - $20.00</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">433,648</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">2.90 years</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8.19</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$0.00 - $20.00</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">636,342</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">2.55 years</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">7.01</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As of December 31, 2016,
there was $243,833 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over
the remaining weighted average vesting period of three years.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The aggregate intrinsic
value at December 31, 2016 was based on the Company's closing stock price of $3.15 was $-0. The aggregate intrinsic value was calculated
based on the positive difference between the closing market price of the Company&rsquo;s Common Stock and the exercise price of
the underlying options. The total number of in-the- money options exercisable as of December 31, 2016 was -0-.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The weighted average
fair value of options granted during the years ended December 31, 2016 and 2015 was $1.88 and $1.10 per share, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2016 and 2015 was $34,050 and $169,626, respectively.
The total fair value of shares vested during the years ended December 31, 2016 and 2015 was $63,830 and $33,845, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Warrants</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following tables summarize the Company's
outstanding warrants as of December 31, 2016 and changes during the two years then ended:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Warrants</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Wtd. Avg.<BR> Exercise Price</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt">Balance, December 31, 2014</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">164,585</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7.85</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Granted during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Exercised during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Terminated/Expired during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Balance, December 31, 2015</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">164,585</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7.85</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Granted during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">675,691</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1.07</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Exercised during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Terminated/Expired during the period</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Balance, December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">840,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">5.13</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Exercisable at December 31, 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">165,618</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">4.49</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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    <DIV STYLE="page-break-before: always; margin-top: 6pt; margin-bottom: 6pt"><P STYLE="margin: 0pt; text-align: right; font-size: 8pt"></P></DIV>
    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The fair values of warrants granted were
estimated using the Black-Sholes option-pricing model with the following assumption for the years ended December 31:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Risk-free interest rates</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">1.4%-2.04</TD>
    <TD STYLE="font-size: 10pt; text-align: center">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">n/a</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Expected life (in years)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">5</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">n/a</FONT></TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Expected volatility</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">33%-59</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">%</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">n/a</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Dividend yield</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">0</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">n/a</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Weighted-average grant date fair value per share</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">0.81-1.4</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">n/a</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following table summarizes information about warrants at
December 31, 2016:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Range of Exercise Prices</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Warrants</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: center">Wtd. Avg.<BR> Life</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Wtd. Avg.<BR> Exercise Price</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 22%; font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$0-$3.00</FONT></TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 22%; font-size: 10pt; text-align: center">320,703</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 22%; font-size: 10pt; text-align: center">4.90 years</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 22%; font-size: 10pt; text-align: right">3.00</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$3.01-$5.00</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">110,556</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">4.60 years</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">5.00</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$5.01 - $6.15</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">244,432</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">4.50 years</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">6.15</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$6.30 - $11.25</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">164,585</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">1.14 years</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">7.85</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">$3.00-$11.25</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">840,276</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">4.01 years</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">5.13</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 17. RELATED PARTY TRANSACTIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Taglich Brothers, Inc.
is a corporation co-founded by two of the directors of the Company. In addition, a third director of the Company is a vice president
of Taglich Brothers, Inc.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As discussed in Notes
11 and 12, Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received
cash and equity compensation for their services. In addition, as discussed in Note 9, the principals of Taglich Brothers, Inc.
have also invested in the Company through various debt and equity financings. Also see Note 1 under &ldquo;Subsequent Events&rdquo;
for additional related party transactions subsequent to December 31, 2016.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 18. SEGMENT REPORTING</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In accordance with FASB
ASC 280, Segment Reporting (&ldquo;ASC 280&rdquo;), the Company discloses financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about which separate financial information is available
and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company follows
ASC 280, which establishes standards for reporting information about operating segments in annual and interim financial statements,
and requires that companies report financial and descriptive information about their reportable segments based on a management
approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company currently
divides its operations into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures &amp; Electronics
which consists of WMI, WPI, MSI, Eur-Pac, ECC, and Compac beginning September 1, 2015 ; and Turbine Engine Components which consists
of AMK and Sterling, beginning March 2015. Along with our operating subsidiaries, the Company reports the results of its corporate
division as an independent segment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The accounting policies
of each of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates
performance based on revenue, gross profit contribution and assets employed. Corporate level operating costs are allocated to
segments. These costs include corporate costs such as legal, audit, tax and other professional fees including those related to
being a public company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Year Ended December 31,</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2015</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">COMPLEX MACHINING</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">37,124,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">42,356,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,382,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,412,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,432,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,825,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">45,073,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">48,353,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">AEROSTRUCTURES &amp; ELECTRONICS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">18,818,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">27,134,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,489,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,553,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,985,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">386,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,843,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,229,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">TURBINE ENGINE COMPONENTS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,973,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,952,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(151,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">316,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,084,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,329,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,235,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,076,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">CORPORATE</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(10,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">649,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">592,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">CONSOLIDATED</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">66,915,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">80,442,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,720,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,281,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax Income (Loss)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(13,511,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,118,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Provision for (Benefit from ) Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,112,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(286,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(15,623,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(832,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">88,250,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CONSOLIDATED FINANCIAL STATEMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD>
    <TD COLSPAN="3" STYLE="text-align: center"><FONT STYLE="font-size: 10pt"><B>Page</B></FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 93%"><FONT STYLE="font-size: 10pt"><B>Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016 (Unaudited)</B></FONT></TD>
    <TD STYLE="width: 1%; text-align: right">&nbsp;</TD>
    <TD STYLE="width: 5%; text-align: right">&nbsp;</TD>
    <TD STYLE="width: 1%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-39</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (Unaudited)</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-40</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 10pt">Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-41</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD><FONT STYLE="font-size: 10pt">Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2017 and 2016 (Unaudited)</FONT></TD>
    <TD STYLE="text-align: right">&nbsp;</TD>
    <TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">F-42</FONT></TD>
    <TD>&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Condensed Consolidated Balance Sheets</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">Unaudited</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">ASSETS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Current Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left; text-indent: 10pt">Cash and Cash Equivalents</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,043,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,304,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Accounts Receivable, Net of Allowance for Doubtful Accounts of $672,000 and $756,000, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,486,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">8,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-indent: 10pt">Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">38,132,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">39,851,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Prepaid Expenses and Other Current Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">659,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">557,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Prepaid Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">231,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">409,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Assets Held for Sale, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,050,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total Current Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">47,551,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">56,221,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Property and Equipment, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,580,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12,219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Capitalized Engineering Costs - Net of Accumulated Amortization of $5,038,000 and $4,957,000, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,791,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred Financing Costs, Net, Deposits</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,372,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,096,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Intangible Assets, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,450,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,754,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Goodwill</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">9,883,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">9,883,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL ASSETS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">73,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">LIABILITIES AND STOCKHOLDERS' EQUITY</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Current Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Notes Payable and Capitalized Lease Obligations - Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">26,496,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">32,913,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Notes Payable - Related Party - Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,846,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,086,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Accounts Payable and Accrued Expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,333,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">16,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Gain on Sale - Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">38,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">38,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Revenue</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">722,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">946,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Liabilities Directly Associated with Assets Held for Sale</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,155,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Income Taxes Payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Current Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">44,455,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">53,318,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Long Term Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Notes Payable and Capitalized Lease Obligations -</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Net of Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,644,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,971,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Gain on Sale - Net of Current Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">323,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">333,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Deferred Rent</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,294,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,288,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL LIABILITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">48,716,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">57,910,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Commitments and Contingencies</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Stockholders' Equity</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Preferred Stock - Par Value $.001 - Authorized 3,000,000 shares:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Shares Designated as Series A Convertible Preferred Stock, Par Value $.001, Authorized 2,000,000 shares, 1,247,654 shares and 1,202,548 shares Issued and Outstanding at March 31, 2017 and December 31, 2016, respectively, Aggregate liquidation preference $12,476,680 and $12,025,480, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Common Stock - Par Value $. 001 - Authorized 25,000,000 Shares, 7,650,165 and 7,626,945 Shares Issued and Outstanding as of March 31, 2017 and December 31, 2016, respectively</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Additional Paid-In Capital</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">57,038,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">55,862,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Accumulated Deficit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(32,135,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(30,980,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL STOCKHOLDERS' EQUITY</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">24,911,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">24,890,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">73,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">82,800,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See Notes to Condensed Consolidated Financial
Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Condensed Consolidated Statements of Operations for the Three Months Ended March 31,<BR>
(Unaudited)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months Ended March 31,</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">16,153,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">15,184,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Cost of Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">13,451,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">12,363,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,702,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,821,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Operating Expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,221,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,412,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Loss from Operations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(519,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,591,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Interest and Financing Costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(893,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(505,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gain on Sale of Subsidiary</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">451,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Other (Expense) Income, Net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(193,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Loss before Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,086,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Benefit from Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">656,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(1,430,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Loss per share - basic</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(0.15</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(0.19</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Loss per share - diluted</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(0.15</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(0.19</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Weighted average shares outstanding - basic</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,650,165</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,584,765</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Weighted average shares outstanding - diluted</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,650,165</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,584,765</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See Notes to Condensed Consolidated Financial
Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP<BR>
Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31,<BR>
(Unaudited)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">CASH FLOWS FROM OPERATING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Loss</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">(1,430,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Adjustments to reconcile net loss to net cash provided by (used in) operating activities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Depreciation of property and equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">728,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">904,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of intangible assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">304,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">320,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of capitalized engineering costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">81,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">105,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Bad debt recoveries</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(14,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Non-cash compensation expense/(forfeiture of unamortized stock compensation)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(73,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">27,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of deferred financing costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">55,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">170,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred gain on sale of real estate</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(10,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(10,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Gain on sale of subsidiary</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(451,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred income taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(691,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Amortization of convertible notes payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">176,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Changes in Assets and Liabilities</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">(Increase) Decrease in Operating Assets:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Accounts receivable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">578,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,850,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-indent: 20pt">Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,719,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(3,826,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Prepaid expenses and other current assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(102,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">139,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Prepaid taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">178,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deposits and other assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(276,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">35,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Increase (Decrease) in Operating Liabilities:</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Accounts payable and accrued expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(621,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">941,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred rent</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred revenue</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(224,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">352,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Income taxes payable</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET CASH PROVIDED BY OPERATING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">900,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">900,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-indent: 20pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">CASH FLOWS FROM INVESTING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Capitalized engineering costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(245,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(212,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Purchase of property and equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(89,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(355,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from sale of subsidiary, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,260,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,926,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(567,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">CASH FLOWS FROM FINANCING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Note payable - revolver, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,545,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">458,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Payments of note payable - term loans</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,069,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(563,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Capital lease obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(173,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(313,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from notes payable issuances - related party</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">850,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Proceeds from notes payable issuances</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,850,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">Deferred financing costs</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(75,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 20pt">NET CASH USED IN FINANCING ACTIVITIES</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(5,087,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(493,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">NET DECREASE IN CASH AND CASH EQUIVALENTS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(261,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(160,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,304,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">529,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">CASH AND CASH EQUIVALENTS AT END OF PERIOD</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,043,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">369,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Supplemental cash flow information</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Cash paid during the period for interest</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">643,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">505,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Cash paid during the period for income taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">13,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Supplemental disclosure of non-cash transactions</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left; text-indent: 10pt">Issuance of Convertible notes payable - related party</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">382,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See Notes to Condensed Consolidated Financial
Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUPNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 1.&nbsp;&nbsp;&nbsp;FORMATION AND BASIS OF PRESENTATION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Organization</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On August 30, 2013, Air Industries Group,
Inc. (&ldquo;Air Industries Delaware&rdquo;) changed its state of incorporation from Delaware to Nevada as a result of a merger
with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation (&ldquo;Air Industries Nevada&rdquo;
or &ldquo;AIRI&rdquo;) and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation was approved
by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is deemed to be
the successor.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The accompanying consolidated financial
statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. (&ldquo;AIM&rdquo;),
Welding Metallurgy, Inc. (&ldquo;WMI&rdquo; or &ldquo;Welding&rdquo;), Miller Stuart, Inc. (&ldquo;Miller Stuart&rdquo;), Nassau
Tool Works, Inc. (&ldquo;NTW&rdquo;), Woodbine Products, Inc. (&ldquo;Woodbine&rdquo; or &ldquo;WPI&rdquo;), Decimal Industries,
Inc. (&ldquo;Decimal&rdquo;), Eur-Pac Corporation (&ldquo;Eur-Pac&rdquo; or &ldquo;EPC&rdquo;), Electronic Connection Corporation
(&ldquo;ECC&rdquo;), AMK Welding, Inc. (&ldquo;AMK&rdquo;), until sold in January 2017, Air Realty Group, LLC (&ldquo;Air Realty&rdquo;),
The Sterling Engineering Corporation (&ldquo;Sterling&rdquo;), and Compac Development Corporation (&ldquo;Compac&rdquo;), (together,
the &ldquo;Company&rdquo;).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Going Concern</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company suffered net losses from operations
of $519,000 and $10,789,000 and a net loss of $1,154,000 and $15,623,000, respectively, for the three months ended March 31, 2017,
and the year ended December 31, 2016. The Company also had negative cash flows from operations for the year ended December 31,
2016. In addition, in 2015 the Company ceased paying dividends on its common stock and in 2016 it disposed of the real estate on
which one of its operating subsidiaries is located through a sale leaseback transaction, and in January 2017 sold of one of its
operating subsidiaries to raise funds for operations. During the year ended December 31, 2016, and subsequent thereto, the Company
has had to sell its debt and equity securities to secure funds to operate its business. Since September 2016 the Company has been
issuing additional shares of its Series A Convertible Preferred Stock in lieu of cash payment of accrued dividends on its outstanding
shares of Series A Convertible Preferred Stock and since February 2017 it has issued additional convertible notes in lieu of cash
payment of accrued interest on its outstanding convertible notes. Furthermore, as of March 31, 2017, the Company was not in compliance
with two financial covenants under the Company's loan facility with PNC Bank (the &ldquo;Loan Facility&rdquo;).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The continuation of the Company's business
is dependent upon future issuances of equity or other financing to fund ongoing operations. Management of the Company plans to
obtain additional financing during the second quarter and the remainder of 2017 through the issuance of common or preferred stock,
securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on
terms that result in dilution to the Company's existing shareholders. Although no assurances can be given, management of the Company
believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide
the necessary funding for the Company to continue as a going concern. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Basis of Presentation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim
financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December
31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Company&rsquo;s Annual Report on Form 10-K for the year ended December
31, 2016, as filed with the Securities and Exchange Commission.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Reclassifications</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Certain account balances in 2016 have been reclassified to
conform to the current period presentation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>AIR INDUSTRIES GROUP</B><BR>
<B>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</B><BR>
&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 2.&nbsp;&nbsp;&nbsp;SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Principal Business Activity</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company through its AIM subsidiary
is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace
industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter
aircraft. Welding is a specialty welding and products provider whose significant customers include the world's largest aircraft
manufacturers, subcontractors, and original equipment manufacturers and upon the merger of Miller-Stuart into Welding, is a manufacturer
of aerospace components specializing in electromechanical systems, harness and cable assemblies, electronic equipment and printed
circuit boards. Woodbine is a manufacturer of aerospace components whose customers include major aircraft component suppliers.
Decimal is a manufacturer of aerospace components specializing in welded and brazed chassis structures housing electronics in aircraft
whose customers include major aircraft component suppliers. Eur-Pac specializes in military packaging and supplies. Eur-Pac&rsquo;s
primary business is &ldquo;kitting&rdquo; of supplies for all branches of the United States Defense Department including ordnance
parts, hose assemblies, hydraulic, mechanical and electrical assemblies. Sterling manufactures components for aircraft and ground
turbine engines. Compac specializes in the manufacture of RFI/EMI (Radio Frequency Interference &ndash; Electro-Magnetic Interference)
shielded enclosures for electronic components. The Company&rsquo;s customers are primarily publicly traded companies in the aerospace
and other industries.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Inventory Valuation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company does not take physical inventories
at interim quarterly reporting periods. Approximately 85% of the inventory value at March 31, 2017 has been estimated using a gross
profit percentage based on sales of previous periods to the net sales of the current period, as management believes that the gross
profit percentage on these items are materially consistent from period to period. The remainder of the inventory value at March
31, 2017 is estimated based on the Company's standard cost perpetual inventory system, as management believes the perpetual system
computed value for these items provides a better estimate of value for that inventory. Adjustments to reconcile the annual physical
inventory to the Company&rsquo;s books are treated as changes in accounting estimates and are recorded in the fourth quarter. The
Company valued inventory at December 31, 2016 at the lower of cost on a first-in-first-out basis or market.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Raw Materials</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,358,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,031,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Work in Process</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">20,939,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">25,635,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Finished Goods</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14,454,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,751,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Inventory Reserve</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,619,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,566,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Total Inventory</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">38,132,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">39,851,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Credit and Concentration Risks</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">There were four customers that represented
60.5% and 58.4% of total sales for the three months ended March 31, 2017 and 2016, respectively. This is set forth in the table
below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Sales</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 31%; font-size: 10pt; text-align: center">1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">16.6</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">23.2</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">2</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">17.1</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">12.7</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">3</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">14.1</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">11.9</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">12.7</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">10.6</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">There were three customers that represented
41.8% of gross accounts receivable and one customer that represented 19.9% of gross accounts receivable at March 31, 2017 and December
31, 2016, respectively. This is set forth in the table below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 90%">
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Customer</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Percentage of Receivables</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD COLSPAN="2" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 31%; font-size: 10pt; text-align: center">1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">19.1</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 30%; font-size: 10pt; text-align: center">19.9</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">2</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">12.1</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: center">3</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center">10.6</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: center">4</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: center"><FONT STYLE="font-size: 10pt">*</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>


<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">*</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">Customer was less than 10% of Gross Accounts Receivable at March 31, 2017 and December 31, 2016.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">During the three months ended March 31,
2017 and 2016, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The
Company has not experienced any losses on these accounts.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company has several key sole-source
suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts
and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business
could be severely harmed.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Earnings Per Share</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Basic earnings per share is computed by
dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding
for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share calculations
for all periods when the effect of their inclusion is dilutive.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The following is a reconciliation of the denominators of basic
and diluted earnings per share computations:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months Ended</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt">Weighted average shares outstanding used to compute basic earnings per share</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,650,165</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,584,765</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Effect of dilutive stock options and warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,650,165</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,584,765</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The following table sets forth securities
which were excluded from the diluted per share calculation because the conversion price or the exercise price was greater than
the average market price of the common shares:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months Ended</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Convertible Preferred Stock</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">2,517,013</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Stock Options</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">513,342</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">252,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">653,540</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">56,800</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,683,895</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">308,800</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The following table sets forth securities
which were excluded from the diluted per share calculation for the three months ended March 31, 2017 even though the exercise price
was less than the average market price of the common shares and unvested restricted stock because the effect of including these
potential shares was anti-dilutive due to the net loss incurred during that period:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Stock Options</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">3,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">312,342</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Warrants</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">432,917</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">107,785</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Unvested Restricted Stock</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">27,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">435,917</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">447,127</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Stock-Based Compensation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company accounts for stock-based compensation
in accordance with FASB ASC 718, &ldquo;Compensation &ndash; Stock Compensation.&rdquo; Under the fair value recognition provision
of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates
the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation
amounted to $(73,000) and $27,000 for the three months ended March 31, 2017 and 2016, respectively, and was included in operating
expenses on the accompanying Condensed Consolidated Statements of Operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Goodwill</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Goodwill represents the excess of the acquisition
cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $9,883,000 at March 31,
2017 and December 31, 2016 relates to the acquisitions of Welding ($291,000), NTW ($162,000), Woodbine ($2,565,000), Eur-Pac ($1,656,000),
ECC ($109,000), Sterling ($4,540,000) and Compac ($560,000). Goodwill is not amortized, but is tested annually for impairment,
or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The Company has determined that there has been no impairment
of goodwill at March 31, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Debt Issuance Costs</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Effective January 1, 2016, the Company
adopted FASB ASU 2015-15 &ldquo;Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt
Issuance Costs Associated with Line-of-Credit Arrangements, Amendments to SEC Paragraphs Pursuant to Staff Announcement at June
18, 2015 EITF Meeting&rdquo;. The amendments to the SEC paragraphs in this update state that given the absence of authoritative
guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an
entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably
over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. The adoption of this amended guidance did not have a significant impact on the Company's consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Recently Issued Accounting Pronouncements</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In January 2016, the FASB issued ASU 2016-01,
&ldquo;Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)&rdquo; (&ldquo;ASU 2016-01&rdquo;).The
main objective of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements
with more decision-useful information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The Company does not expect the adoption of ASU 2016-01 to have a significant impact on its consolidated
financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In February 2016, the FASB issued ASU
2016-02, &ldquo;Leases (Topic 842)&rdquo; (&ldquo;ASU 2016-02&rdquo;). The main objective of ASU 2016-02 is to increase transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification
and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company does not expect the adoption of ASU 2016-02 to have a significant impact on its
consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In March 2016, the FASB issued ASU 2016-09,
&ldquo;Compensation&mdash;Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment&rdquo; (&ldquo;ASU 2016-09&rdquo;).
ASU 2016-09 is part of the FASB Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate,
and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or
improving the usefulness of the information provided to users of financial statements. ASU 2016-09 will affect all entities that
issue share-based payment awards to their employees. The areas for simplification involve several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016,
and interim periods within those annual periods. The Company adopted this ASU during the first quarter of 2017, and the adoption
did not materially impact its consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In April 2016, the FASB issued ASU 2016-10
&ldquo;Revenue from Contracts with Customers (Topic 606)&rdquo; (&ldquo;ASU 2016-10&rdquo;). The core principle of the guidance
in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
amendments in ASU 2016-10 affect the guidance in ASU 2014-09, &ldquo;Revenue from Contracts with Customers&rdquo;, which is not
yet effective. The effective date and transition requirements of ASU 2016-10 are the same as the effective date and transition
requirements of ASU 2014-09. They are effective prospectively for reporting periods beginning after December 15, 2017 and early
adoption is not permitted. The Company is currently assessing the impact of the adoption of these amendments on its consolidated
financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In May 2016, the FASB issued Accounting
Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in
certain arrow areas and add some practical expedients. These amendments are effective at the same date that Topic 606 is effective.
Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting
periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for nonpublic entities one year later.
The Company is currently assessing the impact of the adoption of the amendments to Topic 606 and these amendments on its consolidated
financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement
of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the beginning
and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted
cash or restricted cash equivalents are presented in more than one-line item within the statement of financial position, an entity
shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows.
Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal years beginning
after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently in
the process of evaluating the impact of the adoption of this standard on our financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In January 2017, the FASB issued ASU 2017-01
(&ldquo;ASU 2017-01&rdquo;), Business Combinations, which clarifies the definition of a business, particularly when evaluating
whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first part of the guidance
provides a screen to determine when a set is not a business; the second part of the guidance provides a framework to evaluate whether
both an input and a substantive process are present. The guidance will be effective after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that have not been reported
in issued financial statements. The Company is currently assessing the impact of this update on the presentation of these financial
statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In January 2017, FASB issued ASU No.
2017-04, Intangibles&mdash;Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step 2 of the
goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit
with its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities
having one or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting
units, (2) the amount of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU
No. 2017-04 is effective as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the
impact of the adoption of this standard on our financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company does not believe that any other
recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying
consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Subsequent Events</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Management has evaluated subsequent events through the date
of this filing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On May 2, and May 10, 2017, we borrowed
an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. The two loans totaled $1,500,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On May 12, 2017, we issued and sold to
seven accredited investors, including Michael Taglich and Robert Taglich, an aggregate of $3,089,186 principal amount of our Subordinated
Convertible Notes due May 12, 2018, together with warrants to purchase a total of 372,191 shares of common stock, for a total purchase
price of $2,999,198, resulting in gross proceeds of $1,495,870, net of the cancellation of $1,503,328 of indebtedness we owed to
Michael Taglich and Robert Taglich for working capital advances made on May 2 and 10, 2017 together with accrued interest.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On May 19, 2017 we issued and sold to ten
accredited investors, including a partnership in which Michael Taglich and Robert Taglich are partners, an aggregate of $1,069,438
principal amount of our Subordinated Convertible Notes due May 12, 2018, together with warrants to purchase a total of 128,848
shares of common stock, for a total purchase price of $1,038,286. The Subordinated Convertible Notes due May 12, 2018 sold on May
19 2017 and warrants are identical to those sold by the Company on May 12, 2017, except for the date of issuance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Our Subordinated Convertible Notes due
May 12, 2018 (the &ldquo;May 2018 Notes&rdquo;) and related warrants were issued for a purchase price equal to 97% of the principal
amount of the May 2018 Notes purchased. The principal amount of each May 2018 Note will be increased by 2% for each 30 days it
remains outstanding commencing August 1, 2017. Upon the occurrence of, and during the continuance of an Event of Default (as defined
in the May 2018 Notes), the May 2018 Notes will accrue late interest at the rate of 10% per annum. Payment of the principal and
accrued interest, if any, on the May 2018 Notes is junior and subordinate in right of payment to the Company&rsquo;s indebtedness
under the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The principal amount, together with accrued
interest, if any (together, the &ldquo;Conversion Amount&rdquo;), of the May 2018 Notes are convertible into shares of common stock
until November 12, 2017 at an initial conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock
splits and certain fundamental transactions, including recapitalizations, mergers and other business combination transactions (the
&ldquo;Fixed Conversion Price&rdquo;), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5) Weighted
Average Prices (as defined in the May 2018 Notes) of the common stock during the five consecutive trading day period ending on
the trading immediately preceding the day of a request by the holder for conversion of the May 2018 Notes. The Company has the
right to redeem all, or a portion of (on a pro rata basis), the May 2018 Notes upon written notice to the holders not less than
three trading days prior to the applicable redemption date. Subject to the subordination provisions of the May 2018 Notes, holders
of the May 2018 Notes have the right to request the redemption of their Notes at any time, and following an Event of Default or
in advance of a Change of Control (as defined in the May 2018 Notes).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The warrants are exercisable at an initial
exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a lesser number of shares based
upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution and other adjustments,
including stock splits, and in the event of certain fundamental transactions such as recapitalizations, mergers and other business
combination transactions. In addition, the exercise price of the warrants will be reset, (x) to the public offering price of the
shares of common stock sold in a public offering of the Company&rsquo;s common stock, if lower than the exercise price then in
effect, provided the Company receives gross process of at least $3,000,000 from the sale of the shares of common stock sold in
that offering, or (y) the Weighted Average Price (as defined in the 2018 Notes) of the common stock on the first date on which
none of the 2018 Notes are outstanding, if lower than the exercise price then in effect, whichever event first occurs.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company has paid or agreed to pay
a fee of $191,155 to Taglich Brothers, Inc. and another third party entity for acting as placement agents for with the sale of
the May 2018 Notes and warrants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 3.&nbsp;&nbsp;&nbsp;PROPERTY AND EQUIPMENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The components of property and equipment
at March 31, 2017 and December 31, 2016 consisted of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 55%; font-size: 10pt">Land</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">300,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">300,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Buildings and Improvements</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,672,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,650,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">31.5 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Machinery and Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14,062,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">14,032,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">5 - 8 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Capital Lease Machinery and Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,573,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,573,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">3 - 5 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Tools and Instruments</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,554,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,520,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">1.5 - 7 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Automotive Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">195,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">195,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">5 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Furniture and Fixtures</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">438,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">438,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">5 - 8 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Leasehold Improvements</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">969,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">966,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">Term of Lease</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Computers and Software</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">519,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">519,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right"><FONT STYLE="font-size: 10pt">4 - 6 years</FONT></TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Property and Equipment</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">31,282,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">31,193,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Less: Accumulated Depreciation</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(19,702,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(18,974,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Property and Equipment, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">11,580,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">12,219,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Depreciation expense for the three months
ended March 31, 2017 and 2016 was approximately $728,000 and $904,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Assets held under capitalized lease obligations
are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 2017 and 2016. Accumulated depreciation on these assets was approximately
$2,630,000 and $2,320,000 as of March 31, 2017 and December 31, 2016, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 4. INTANGIBLE ASSETS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The components of intangibles assets consisted of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 48%; font-size: 10pt; text-align: left">Customer Relationships</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 14%; font-size: 10pt; text-align: right">6,115,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 14%; font-size: 10pt; text-align: right">6,115,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 14%; font-size: 10pt; text-align: right">5 to 14 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Trade Names</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">970,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">970,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">15 to 20 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Technical Know-how</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">660,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">660,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">10 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Non-Compete</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">150,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">150,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">5 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Professional Certifications</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">.25 to 2 years</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Intangible Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,910,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">7,910,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD NOWRAP STYLE="font-size: 10pt; text-align: left">Less: Accumulated Amortization</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(6,460,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(6,156,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Intangible Assets, net</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,450,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">1,754,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Amortization expense for the three months
ended March 31, 2017 and 2016 was approximately $304,000 and $320,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 5.&nbsp;&nbsp;&nbsp;NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Notes payable and capital lease obligations consist of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">March 31,<BR> 2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">December 31,<BR> 2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Revolving credit note payable to PNC Bank N.A. (&ldquo;PNC&rdquo;)</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">18,847,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">24,393,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Term loans, PNC</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,580,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">6,649,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Capital lease obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">3,902,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,215,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Related party note payable, net of debt discount</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,846,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,086,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Notes Payable (private placement), net of debt discount</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,811,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">Subtotal</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">30,986,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">36,970,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Less: Current portion of notes and capital obligations</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(28,342,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(33,999,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,644,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,971,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>PNC Bank N.A. (&ldquo;PNC&rdquo;)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company has a Loan Facility with PNC
secured by substantially all of its assets. The Loan Facility has been amended many times during its term. The Loan Facility was
amended in June 2016 (the &ldquo;Twelfth Amendment&rdquo;) and September 2016 (the &ldquo;Thirteenth Amendment&rdquo;). In connection
with the Twelfth Amendment, the Company paid PNC a fee of $100,000 and reimbursed it for the fees and expenses of its counsel.
The Twelfth Amendment provides for a $33,000,000 revolving loan. In addition, in the Twelfth Amendment the four term loans (Term
Loan A, Term Loan B, Term Loan C and Term Loan D) then outstanding were consolidated into a single term loan with the initial principal
amount of $7,387,854. Further, in the Twelfth Amendment the Company acknowledged that there were then outstanding excess advances
under the revolving loan in the amount of $12,500,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Under the terms of the Loan Facility, as
amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three- quarters of one percent
(1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent (4.50%) with
respect to LIBOR Rate Loans. The amount outstanding under the revolving loan, exclusive of the excess advance, was $18,847,000
and $24,393,000, as of March 31, 2017 and December 31, 2016, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Loan Facility was further amended pursuant
to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be the lesser of (i) 75% of the eligible
inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, an increase from 85%, subject
to the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper. In addition, in the Thirteenth Amendment the
lender waived any default resulting from the Company&rsquo;s obligation to comply with the minimum EBITDA covenant for the period
ended June 30, 2016, consented to the issuance of the Company&rsquo;s 12% Subordinated Convertible Notes and the amendment to the
Company&rsquo;s Articles of Incorporation to increase the authorized number of shares of Preferred Stock and Series A Preferred
Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The repayment terms of the Term Loan provided
for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first fifty-nine (59) of which
shall be in the amount of $123,133 commencing on the first business day of July, 2016, and continuing on the first business day
of each month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal and interest payable on the
last business day of June, 2021.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">At the closing of the Twelfth Amendment,
the Company paid $1,500,000 to reduce the outstanding excess under the revolving loan from $12,500,000 to $11,000,000. It also
agreed that the excess advances will be paid down by $100,000 each week commencing the second week after the closing of the Twelfth
Amendment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">To the extent that the Company disposes
of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws on the credit facility
in the amount equal to the net proceeds of such sale.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The terms of the Loan Facility
require that among other things, the Company maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA.
In addition, the Company is limited in the amount of capital expenditures it can make. The Company also is limited as to the
amount of dividends it can pay its shareholders, as defined in the Loan Facility. As of March 31, 2017, the Company was not
in compliance with the Fixed Charge Coverage Ratio covenant or minimum EBITDA covenant. The failure to maintain the requisite
Fixed Charge Coverage Ratio and minimum EBITDA constitutes a default under the Loan Facility and PNC at its option may give
notice to the Company that all amounts under the Loan Facility are immediately due and payable. Consequently, all amounts due
under the term loan are also classified as current. The Company has requested a waiver from PNC for the failure to meet the
specified Fixed Charge Coverage Ratio and minimum EBITDA covenant. Because the revolving loans contain a subjective
acceleration clause which could permit PNC to require repayment prior to maturity, all of the loans outstanding with PNC are
classified with the current portion of notes and capital lease obligations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">As of March 31, 2017, our debt to PNC in
the amount of $23,427,000 consisted of the revolving credit loan in the amount of $18,847,000 and the term loan in the amount of
$4,580,000. As of December 31, 2016, our debt to PNC in the amount of $31,042,000 consisted of the revolving credit note due to
PNC in the amount of $24,393,000 and the term loan due to PNC in the amount of $6,649,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Each day, the Company&rsquo;s cash collections
are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing base formula.
The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan Facility). PNC
may use some elements of subjective business judgment in determining whether a material adverse change has occurred in the Company's
condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">As of March 31, 2017, the scheduled future
minimum principal payments for the term loan are as follows, however as discussed above, the balance of the term loan has been
classified as current:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 80%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">For the twelve months ending</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt">March 31, 2018</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">March 31, 2019</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">March 31, 2020</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,478,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">March 31, 2021</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">146,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">March 31, 2022</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,580,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Thereafter</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(4,580,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">Long-term portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Interest expense related to these credit
facilities amounted to approximately $720,000 and $435,000 for the three months ended March 31, 2017 and 2016, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Capital Leases Payable &ndash; Equipment</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company is committed under several
capital leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at the termination
of each lease. Capital lease obligations totaled $3,902,000 and $4,215,000 as of March 31, 2017 and December 31, 2016, respectively,
with various interest rates ranging from approximately 4% to 14%.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">As of March 31, 2017, the aggregate future
minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 80%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; font-weight: bold; text-align: left">For the twelve months ending</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Amount</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt">March 31, 2018</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">1,442,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">March 31, 2019</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,359,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">March 31, 2020</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">March 31, 2021</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">282,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">March 31, 2022</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Thereafter</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">Total future minimum lease payments</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,243,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Less: imputed interest</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(337,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: right">Less: current portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,262,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: right">Total Long Term Portion</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">2,644,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Related Party Notes Payable</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On March 17, 2017, the Company borrowed
$200,000 and $300,000 from each of Michael Taglich and Robert Taglich, respectively, directors and principal stockholders of our
company, and issued promissory notes in the principal amounts of $200,000 and $300,000 to Michael Taglich and Robert Taglich, respectively,
to evidence our obligation to repay that indebtedness. The notes bear interest at the rate of 7% per annum and are payable on September
17, 2017. Michael and Robert Taglich have the option to convert the unpaid principal amount and accrued interest on the promissory
notes into shares of common stock or other securities of the company which the Company may offer and sell in any public or private
financing (each a &ldquo;Financing&rdquo;), on the same terms and conditions as are offered to purchasers in such Financing, or,
if more favorable to us, on such other terms as may be required under the rules of the NYSE MKT, which option they must exercise
by notice to the Company within three business days following the completion of such Financing. Upon completion of any Financing,
upon notice to Michael and Robert Taglich, the Company has the right to convert the unpaid principal amount of those promissory
notes and accrued interest thereon into shares of common stock or other of our securities sold in the Financing on the same terms
and conditions as are offered to purchasers in the Financing, or if more favorable to the Company, on such other terms as may be
required under the rules of the NYSE MKT, which right the Company must exercise within three business days following the completion
of such Financing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Related Party Notes Payable &ndash; Subsequent Events</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On May 2, and May 10, 2017, the Company
borrowed an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. This indebtedness, together with accrued interest,
were converted into May 2018 Notes on May 12, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Private Placements of 8% Subordinated Convertible Notes</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">From November 23, 2016 through March 21,
2017, the Company received gross proceeds of $4,775,000 from the sale of an equal principal amount of our 8% Subordinated Convertible
Notes (the 8% Notes&rdquo;), together with warrants to purchase a total of 383,032 shares of our common stock, in private placement
transactions with accredited investors (the &ldquo;8% Note Offerings&rdquo;). In connection with the offering of the 8% Notes,
the Company issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc., placement agent for the 8%
Note Offerings, in lieu of payment of cash compensation for sales commissions, together with warrants to purchase a total of 180,977
shares of our common stock. Of the $5,147,000 principal amount of 8% Notes issued in connection with the offerings of the 8% Notes,
$2,781,000 principal amount is due November 30, 2018 (the &ldquo;2018 Notes&rdquo;) and $2,366,000 principal amount is due January
31, 2019 (the &ldquo;2019 Notes&rdquo;). Payment of the principal and accrued interest on the 8% Notes are junior and subordinate
in right of payment to our indebtedness under the Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Interest on the 2018 Notes is payable on
the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in cash, or
at our option, in additional 2018 Notes, provided that if accrued interest payable on $1,269,000 principal amount of the 2018 Notes
issued in December 2016 is paid in additional 2018 Notes, interest for that quarterly interest payment shall be calculated at the
rate of 12% per annum. Upon the occurrence and continuation of an event of default, interest shall accrue at the rate of 12% per
annum.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On February 28, 2017, the Company issued
an additional $61,596 principal amount of 2018 Notes in payment of accrued interest. As of March 1, 2017, the Company had $5,262,596
principal amount of 8% Notes outstanding, consisting of $2,842,596 principal amount of 2018 Notes and $2,420,000 principal amount
of 2019 Notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The outstanding principal amount plus accrued
interest on the 8% Notes is convertible at the option of the holder into shares of common stock conversion prices ranging from
$2.25 to $4.45 per share, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">An event of default under the 8%
Notes will occur (i) if the Company fails to make any payment under the 8% Notes within ten (10) days after the date first
due, or (ii) if the Company files a petition in bankruptcy or under any similar insolvency law, makes an assignment for the
benefit of its creditors, or if any voluntary petition in bankruptcy or under any similar insolvency law is filed against the
Company and such petition is not dismissed within sixty (60) days after the filing thereof. Upon the occurrence and
continuation of an event of default, holders of a majority of the outstanding principal amount of the 8% Notes then
outstanding, upon notice to the Company and the holders of the Senior Indebtedness (as defined in the 8% Notes), may demand
immediate payment of the unpaid principal amount of the 8% Notes, together with accrued interest thereon and all other
amounts payable under the 8% Notes, subject to the subordination provisions of the 8% Notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The exercise price of the warrants issued
in connection with the 8% Note Offerings ranges from $3.00 to $4.53 per share, subject to certain anti-dilution and other adjustments,
including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions such
as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon
prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November 30, 2021
and 243,307 warrants may be exercised until January 31, 2022.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 6.&nbsp;&nbsp;&nbsp;STOCKHOLDERS' EQUITY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Issuance of Series A Preferred Stock and Related Financings</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On May 25, 2016, and June 1, 2016, the
Company completed a private placement of 700,000 shares of our Series A Preferred Stock for $10.00 per share and received gross
cash proceeds of $5,250,000, net of $1,750,000 principal amount of our promissory notes exchanged by Michael Taglich and Robert
Taglich, two of our principal stockholders, for shares of Series A Preferred Stock. The Company had issued the promissory notes
to Michael Taglich and Robert Taglich for amounts borrowed from September 2015 through May 2016. The September 2015 loan bore interest
at the rate of 4% per annum and was to be paid on September 7, 2016. The other loans bore interest at the rate of 7% per annum
and were to be repaid on June 30, 2016, or, if earlier, upon the sale of the Company&rsquo;s equity from which it derived proceeds
of $1,800,000 or $2,000,000 depending upon the promissory notes issued.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Preferred Stock</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The shares of Series A Preferred Stock
have a stated value of $10.00 per share and are initially convertible into shares of common stock at a price of $4.92 per share
(subject to adjustment upon the occurrence of certain events). The dividend rate on the Series A Preferred Stock is 12% per annum,
payable quarterly. The dividend rate increases to 15% per annum if we issue PIK Shares in lieu of payment of cash dividends payable
until June 15, 2018. The number of outstanding shares of Series A Preferred Stock as of June 15, 2018 would increase from 700,000
shares to approximately 1,500,000 shares if we elected to pay all dividends due on the Series A Preferred Stock by issuing PIK
Shares. The dividend rate on the Series A Preferred Stock increases to 16% per annum after June 2018, 19% per annum to the extent
dividends are paid in PIK Shares.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Dividends payable in respect of the Series
A Preferred Stock will reduce the amount of net income, if any, or increase the amount of net loss attributable to holders of common
stock. While the issuance of PIK Shares in payment of all or a portion of the dividends payable in respect of any dividend period
preserves our cash, the increase in the rate of dividend which must be paid when we choose to issue PIK Shares in lieu of cash
dividends further reduces the amount of net income, if any, or increases the amount of net loss attributable to holders of common
stock. In addition, the issuance of PIK Shares will dilute the interests of our common stockholders. Although holders of Series
A Preferred Stock may convert their shares into common stock they are unlikely to convert if the Company is unable to pay cash
dividends and the price of the common stock does not increase significantly above $4.92 per share, the conversion price, for a
sustained period. The Company has the right to redeem the Series A Preferred Stock after May 26, 2018 for a redemption price of
$10.00, plus accrued and unpaid dividends; however, the Company may not have sufficient cash available to effect such redemption.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In connection with the placement we incurred
approximately $606,000 of direct offering costs and $57,000 in legal expenses and granted to the placement agents warrants to purchase
8% of the number of shares of our common stock (113,820 shares) issuable upon conversion of the Series A Preferred Stock sold in
the offering. The warrants are exercisable in whole or in part, at an initial exercise price per share of $6.15, and are exercisable
for cash or on a cashless basis commencing on November 26, 2016 and expiring on May 26, 2021. The exercise price and number of
shares of common stock issuable under the warrants are subject to adjustments for stock dividends, splits, combinations and similar
events.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Of the proceeds generated by the sale of
our shares of Series A Preferred Stock, $1,500,000 was paid to PNC to reduce the amount outstanding under our Loan Facility.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In August 2016, the Company
completed the private placement of $2,720,000 principal amount of our 12% Subordinated Convertible Notes due December 31,
2017 (the &ldquo;12% Notes&rdquo;), together with warrants to purchase an aggregate of 110,658 shares of common stock, for a
total purchase price of $2,720,000, from which we derived net proceeds of approximately $2,319,800, which was used to pay
down the Company&rsquo;s indebtedness under the Loan Facility and for working capital. The Company also issued to Michael
Taglich a 12% Note in the principal amount of $1,520,713, together with warrants to purchase 61,817 shares of common stock,
upon surrender for cancellation of promissory notes in the aggregate principal amount of $1,500,000, together with accrued
interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,713. The Company had issued the
promissory notes to Michael Taglich for amounts borrowed in August 2016. The promissory notes bore interest at the rate of 7%
per annum and were to be repaid on December 31, 2016, or, if earlier, upon the sale of our equity securities from which we
derived proceeds of $2,000,000. In addition, the Company issued to Robert Taglich a 12% Note in the principal amount of
$4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness of interest of
$4,373 accrued on notes previously exchanged for Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The 12% Notes provided for the automatic
conversion of the principal and accrued interest of the 12% Notes into shares of Series A Preferred Stock at a price of $10.00
per share, the stated value of the Series A Preferred Stock, upon the filing of an amendment to the Company&rsquo;s Articles of
Incorporation increasing the number of shares of preferred stock we are authorized to issue from 1,000,000 shares to 3,000,000
shares, including 2,000,000 shares of Series A Preferred Stock (the &ldquo;Charter Amendment&rdquo;). The Company issued 438,770
shares of Series A Preferred Stock to the holders of the 12% Notes on November 30, 2016, the date the Company&rsquo;s stockholders
approved the Charter Amendment and the Company filed the certificate of amendment effecting the Charter Amendment with the Office
of the Secretary of State of Nevada. As a result of the automatic conversion of the 12% Notes into shares of Series A Preferred
Stock, no 12% Notes are outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">As compensation for its services as placement
agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400 and issued to Taglich Brothers,
Inc. five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15, subject to certain anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business
combinations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">As of December 31, 2016, the Company had
outstanding 1,202,548 shares of Series A Preferred Stock, including 62,684 shares issued in lieu of payment of cash dividends on
December 15, 2016. We issued an additional 45,106 shares of Series A Preferred Stock on March 15, 2017 in lieu of payment of cash
dividends.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 7.&nbsp;&nbsp;&nbsp;INCOME TAXES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company recorded no income tax for
the three months ended March 31, 2017 because the estimated annual effective tax rate was zero. In determining the estimated annual
effective income tax rate, the Company analyzes various factors, including projections of our annual earnings and taxing jurisdictions
in which the earnings will be generated, the impact of state and local income taxes, their ability to use tax credits and net operating
loss carry forwards, and available tax planning alternatives. As of March 31, 2017 and December 31, 2016, the Company provided
a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred
tax assets will not be realized.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The benefit from income taxes for the three months ended March
31, 2016 is set forth below:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Current</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Federal</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">$</TD>
    <TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt">State</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">22,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Prior Year Under Accrual</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Federal</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">13,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Total Current Expense</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">35,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Deferred Tax (Benefit)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(691,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net (Benefit from) Provision for Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">(656,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 8.&nbsp;&nbsp;&nbsp;SALE OF AMK</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On January 27, 2017, the Company
sold all of the outstanding shares of AMK to Meyer Tool, Inc. pursuant to a Stock Purchase Agreement dated January 27, 2017
for a purchase price of $4,500,000, net of a working capital adjustment of $(240,000), plus additional quarterly payments,
not to exceed $ 1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. The Company recorded a
$451,000 gain on the sale of AMK.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 9.&nbsp;&nbsp;&nbsp;LOSS CONTINGENCIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">During 2016, a number of actions were commenced
against the Company by vendors, landlords and former landlords, including a third party claim as a result of an injury suffered
on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts included in accounts
payable they are not specifically discussed herein.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Westbury Park Associates, LLC commenced
an action on or about January 11, 2017 against Air Industries Group in the NYS Supreme Court, County of Suffolk, seeking the recovery
of approximately $31,000 for past rent arrears, and for an unidentified sum representing all additional rent due under a commercial
lease through the end of its term, plus attorney&rsquo;s fees. The additional rent due through the end of the term is approximately
$105,000. The litigation is in the discovery stage and the Company believes there is a meritorious defense to the claim or that
the landlord can and will mitigate its future damages by finding a new tenant.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">On January 18, 2017, REP B-2, LLC filed
a petition for a warrant of eviction and a money judgment of approximately $56,000 against Air Industries Group arising from rent
arrears on commercial space. On January 18, 2017, 360 Motor Parkway, LLC filed a petition for a warrant of eviction and a money
judgment of approximately $12,000 against Air Industries Group arising from rent arrears on commercial space. Each proceeding has
resulted in a stipulation of settlement providing monthly repayment schedules to bring those rent arrears current, the last of
which are due on May 1, 2017, at which time the proceedings may be dismissed.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">An employee of the Company commenced an
action against, among others, Rechler Equity B-2, LLC and Air Industries Group, in the Supreme Court State of New York, Suffolk
County, seeking compensation in an undetermined amount for injuries suffered while leaving the premises occupied by Welding Metallurgy,
Inc. Rechler Equity B-2, LLC, has served a Third Party Complaint in this action against Air Industries Group, Inc. and Welding
Metallurgy, Inc. The action remains in the early pleading stage. The Company believes it is not liable to the employee and any
amount it might have to pay would be covered by insurance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Note 10.&nbsp;&nbsp;&nbsp;SEGMENT REPORTING</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">In accordance with FASB ASC 280, &ldquo;Segment
Reporting&rdquo; (&ldquo;ASC 280&rdquo;), the Company discloses financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company follows ASC 280, which establishes
standards for reporting information about operating segments in annual and interim financial statements, and requires that companies
report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes
standards for related disclosures about products and services, geographic areas and major customers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The Company currently divides its operations
into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures and Electronics which consists of
WMI, WPI, Miller Stuart (until merged into WMI in May 2017), Eur-Pac, ECC and Compac; and Turbine Engine Components which consists
of Sterling and for the period January 1, 2016, to January 27, 2017, AMK.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">The accounting policies of each segment
are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based on
revenue, gross profit contribution and assets employed.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">Financial information about the Company&rsquo;s
operating segments for the three months ended March 31, 2017 and 2016 are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="7" STYLE="font-size: 10pt; font-weight: bold; text-align: center">Three Months Ended March 31,</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2017</TD><TD STYLE="font-size: 10pt; font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; font-weight: bold; text-align: center">2016</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-size: 10pt; text-align: center">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD COLSPAN="3" STYLE="font-size: 10pt; text-align: center">(Unaudited)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">COMPLEX MACHINING</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 70%; font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">9,891,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">7,467,000</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,901,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,858,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,085,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(400,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">41,940,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">51,076,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">AEROSTRUCTURES &amp; ELECTRONICS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">4,320,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">5,160,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">26,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">948,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,279,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(772,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,669,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">19,263,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">TURBINE ENGINE COMPONENTS</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,942,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,557,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(225,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(827,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(914,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">11,233,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">17,247,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">CORPORATE</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(133,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">785,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">534,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">CONSOLIDATED</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net Sales</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">16,153,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">15,184,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Gross Profit</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,702,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,821,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Pre Tax (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(2,086,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Benefit from Income Taxes</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">&mdash;&nbsp;&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">656,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Net (Loss) Income</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,154,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">(1,430,000</TD><TD STYLE="font-size: 10pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt">Assets</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">73,627,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">$</TD><TD STYLE="font-size: 10pt; text-align: right">88,120,000</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><IMG SRC="image_002.jpg" ALT="" STYLE="height: 100px; width: 303px">&thinsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 18pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>1,293,938</B></P>

<P STYLE="font: 18pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Shares of Common Stock</B></P>

<P STYLE="font: 18pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PROSPECTUS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">______ __, 2017</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PART II</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>INFORMATION NOT REQUIRED IN PROSPECTUS
</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>ITEM 13.&nbsp;&nbsp;&nbsp;OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following table
sets forth the estimated costs and expenses to be incurred by the Registrant in connection with the issuance and distribution of
the securities registered under this Registration Statement. All amounts are estimates except the Securities and Exchange Commission
registration fee.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="width: 85%; font-size: 10pt; text-align: left">SEC registration fee</TD><TD STYLE="width: 2%; font-size: 10pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-size: 10pt; text-align: left">$</TD><TD STYLE="width: 11%; font-size: 10pt; text-align: right">212.95</TD><TD STYLE="width: 1%; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Legal fees and expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">10,000.00</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Accounting fees and expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,500.00</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">NYSE MKT listing fees</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">1,500.00</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Transfer agent fees and expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,000.00</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; text-align: left">Printing expenses </TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right">2,000.00</TD><TD STYLE="font-size: 10pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,238,255)">
    <TD STYLE="font-size: 10pt; text-align: left">Miscellaneous expenses</TD><TD STYLE="font-size: 10pt">&nbsp;</TD>
    <TD STYLE="font-size: 10pt; text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="font-size: 10pt; text-align: right; border-bottom: Black 1pt solid">5,000.00</TD><TD STYLE="font-size: 10pt; text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-size: 10pt; padding-bottom: 2.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Total</TD><TD STYLE="font-size: 10pt; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: right">1,787.05</TD><TD STYLE="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>ITEM 14.&nbsp;&nbsp;&nbsp;INDEMNIFICATION OF DIRECTORS AND
OFFICERS.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.138 of the
NRS provides that a director or officer will not be individually liable unless it is proven that (i) the director&rsquo;s or officer&rsquo;s
acts or omissions constituted a breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud
or a knowing violation of the law.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Article 9 of our Articles of Incorporation (&ldquo;Limitation
on Liability&rdquo;) provides as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&ldquo;Unless otherwise
provided by law, a director or officer is not individually liable to the Corporation or its stockholders or creditors for any damages
as a result of any act or failure to act in his individual capacity as a director or officer unless it is proven that his act or
failure to act constituted a breach of his fiduciary duties as a director or officer and his breach of those duties involved intentional
misconduct, fraud, or a knowing violation of law. If the NRS is amended to further eliminate or limit or authorize corporate action
to further eliminate or limit the liability of directors or officers, the liability of directors and officers of the Corporation
shall be eliminated or limited to the fullest extent permitted by the NRS as so amended from time to time. Neither any amendment
nor repeal of this Article, nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article,
shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director or officer of the
Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.7502 of the
Nevada Revised Statutes (&ldquo;NRS&rdquo;) permits a company to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action,
suit or proceeding if the officer or director (i) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner
the officer or director reasonably believed to be in or not opposed to the best interests of the corporation and, if a criminal
action or proceeding, had no reasonable cause to believe the conduct of the officer or director was unlawful.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.751 of NRS
permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending a civil or criminal
action, suit or proceeding as they are incurred and in advance of final disposition thereof, upon receipt of an undertaking by
or on behalf of the officer or director to repay the amount advanced if it is ultimately determined by a court of competent jurisdiction
that such officer or director is not entitled to be indemnified by the company. Section 78.751 of NRS further permits the company
to grant its directors and officers additional rights of indemnification under its articles of incorporation or bylaws or otherwise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Section 78.752 of
NRS provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of any
person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the
company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise,
for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer,
employee or agent, or arising out of his status as such, whether or not the company has the authority to indemnify him
against such liability and expenses.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Article 10 of our Articles of Incorporation (&ldquo;Indemnification&rdquo;)
provides as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&ldquo;Every person
who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she, or a person with whom he or she is a legal representative,
is or was a director or officer of the Corporation, or who is serving at the request of the Corporation as a director or officer
of another corporation, or is a representative in a partnership, joint venture, trust or other enterprise, shall be indemnified
and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys&rsquo; fees, judgments, fines, and amounts paid or to be paid in a settlement)
reasonably incurred or suffered by him or her in connection therewith. The right of indemnification shall be a contract right which
may be enforced in any manner desired by such person. The expenses of officers and directors incurred in defending a civil suit
or proceeding must be paid by the Corporation as incurred and in advance of the final disposition of the action, suit, or proceeding,
under receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by
a court of competent jurisdiction that he or she is not entitled to be indemnified by the Corporation. Such right of indemnification
shall not be exclusive of any other right such directors, officers or representatives may have or hereafter acquire, and, without
limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw,
agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this article.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Without limiting the
application of the foregoing, the Board of Directors may adopt bylaws from time to time with respect to indemnification, to provide
at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the Corporation to purchase
or maintain insurance on behalf of any person who is or was a director or officer of the corporation or who is serving at the request
of the Corporation as an officer, director or representative of any other entity or other enterprise against any liability asserted
against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have
the power to indemnify such person.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Any repeal or modification
of the above provisions of this Article 10, approved by the stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the liability of a director or officer of the Corporation existing as of the time of such
repeal or modification. In the event of any conflict between the above indemnification provisions, and any other Article of the
Articles, the terms and provisions of this Article shall control.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The Company maintains
a director and officer insurance policy on behalf of any person who is or was a director or officer of the Company. Under such
insurance policy, the directors and officers of the Company are insured, within the limits and subject to the limitations of the
policy, against certain expenses in connection with the defense of certain claims, actions, suits or proceedings, and certain liabilities
which might be imposed as a result of such claims, actions, suits or proceedings, which may be brought against them by reason of
being or having been such directors or officers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Insofar as indemnification
by us for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling the Company
pursuant to provisions of our articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the
SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification by such director, officer or controlling person of us in the successful defense of any action,
suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered,
we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>ITEM 15.&nbsp;&nbsp;&nbsp;RECENT SALES OF UNREGISTERED SECURITIES.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">During the past three
years, the registrant has sold the following securities which were not registered under the Securities Act of 1933, as amended.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In connection with a
Capital Market Advisory Agreement dated January 1, 2014 pursuant to which Taglich Brothers provides us, on a nonexclusive basis,
business advisory services, we issued to Taglich Brothers warrants to purchase 10,000 shares of Common Stock at an exercise price
of $8.72 per share. The warrants are exercisable at any time prior to May 1, 2021. The issuance of the warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the &ldquo;Securities Act&rdquo;), under Section 4(2)
of the Securities Act. The warrants were endorsed with a legend restricting their transfer except in accordance with the registration
requirements of the Securities Act or an exemption therefrom.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In June 2014 we issued
to Taglich Brothers, placement agent in our public offering of 1,170,000 shares of our common stock completed on June 3, 2014,
warrants to purchase 46,800 shares of common stock. The warrants may be exercised for cash or on a cashless basis at a per share
exercise price equal to $11.25, commencing June 2, 2015 and expiring May 28, 2019. The issuance of the warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the &ldquo;Securities Act&rdquo;), under Section 4(2)
of the Securities Act. The warrants were endorsed with a legend restricting their transfer except in accordance with the registration
requirements of the Securities Act or an exemption therefrom.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On June 4, 2014, we
issued 20,000 shares of common stock to Richard Rand and Peter Rand, the shareholders of Eur-Pac Corporation, in connection with
the acquisition of Eur-Pac Corporation. The issuance and sale of the shares was exempt from the registration requirements of the
Securities Act of 1933, as amended (the &ldquo;Securities Act&rdquo;), under Section 4 (a)(2) of the Securities Act. The certificates
evidencing the shares were endorsed with a legend restricting their transfer except in accordance with the registration requirements
of the Securities Act or an exemption therefrom.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 1, 2015, we
issued 425,005 shares of common stock to the stockholders of The Sterling Engineering Corporation in connection with the acquisition
of Sterling in a merger transaction. The common stock was valued at $9.89 per share, which was the closing share price on February
27, 2015. We also granted 52,000 shares of restricted common stock to two of the principals of Sterling in connection with employment
and non-compete agreements entered into with these two individuals. The issuance of these shares was exempt from the registration
requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The certificates evidencing the shares were endorsed
with a legend restricting their transfer except in accordance with the registration requirements of the Securities Act or an exemption
therefrom.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 26, 2016, we
issued and sold a total of 452,250 shares of Series A Preferred Stock to accredited investors pursuant to a Securities Purchase
Agreement dated May 26, 2016 for a purchase price of $10.00 per share. The Company also issued 110,000 shares of Series A Preferred
Stock to Michael N. Taglich and 65,000 shares of Series A Preferred Stock to Robert F. Taglich upon surrender of promissory notes
payable to each of them in the aggregate principal amount of $1,100,000 and $650,000, respectively. Michael N. Taglich and Robert
F. Taglich are directors of the Company and principals of Taglich Brothers We paid the Craig-Hallum Capital Group LLC and Taglich
Brothers, placement agents for the offering of the Series A Preferred Stock, a sales commission of $439,075 and in addition paid
Craig-Hallum Capital Group LLC $113,370 in reimbursement of expenses incurred, including legal fees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 26, 2016, we
issued five-year warrants to purchase 50,996 shares of common stock at an initial exercise price of $6.15 per share to each of
Craig-Hallum Capital Group LLC and Taglich Brothers, placement agents for the offering of the Series A Preferred Stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The issuance and sale
of the shares of Series A Preferred Stock were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the shares of Series A Preferred Stock
issued in the Offering are endorsed with a customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On June 1, 2016, we
issued and sold an additional 72,750 shares of Series A Convertible Preferred Stock to accredited investors, for a purchase price
of $10.00 per share, pursuant to a Securities Purchase Agreement dated May 25, 2016. We paid the placement agents $50,925 in sales
commissions in connection with the sales of the shares.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On June 1, 2016, we
issued to each of Craig-Hallum Capital Group LLC and Taglich Brothers, placement agents for the offering of the Series A Preferred
Stock, five-year warrants to purchase 5,915 shares of common stock at an initial exercise price of $6.15 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The issuance and sale
of the shares of Series A Preferred Stock and the issuance of the warrants were exempt from registration under Section 4(a)(2)
of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the
shares of Series A Preferred Stock and the warrants were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In August 2016, we issued
two promissory notes to Michael N. Taglich in principal amounts of $500,000 and $1,000,000, respectively. The notes bore interest
at the rate of 7% per annum. The principal and interest were payable on December 31, 2016, or earlier upon our receipt of proceeds
from the sale of our equity securities in the aggregate amount of $2,000,000. Michael N. Taglich, a director of our company, is
an accredited investor. The issuance and sale of the notes were exempt from registration under Section 4(a)(2) of the Securities
Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The notes were endorsed with a customary Securities
Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In August and September
2016, we issued and sold $4,245,086 aggregate principal amount of our 12% Notes, together with five-year warrants to purchase a
total of 69,025 shares of common stock, to 32 accredited investors for a total purchase price of $4,245,086. We also issued to
Michael N. Taglich a 12% Note in the principal amount of $1,520,703, together with warrants to purchase 61,817 shares of common
stock, upon surrender for cancellation of promissory notes in the aggregate principal amount of $1,500,000, together with accrued
interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,703. In addition, we issued to Robert F.
Taglich a 12% Note in the principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration
of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock. The outstanding principal
amount plus accrued interest on the 12% Notes were convertible at the option of the holder into shares of common stock at an initial
conversion price of $4.92, and were automatically convertible into shares of Series A Preferred Stock at a price equal to $10.00
per share of Series A Preferred Stock upon the filing of a certificate of amendment to our Articles of Incorporation increasing
the number of authorized shares of our Series A Preferred Stock from 900,000 to 2,000,000. The warrants are exercisable until July
31, 2021 at an exercise price of $5.00 per share. We paid Taglich Brothers, placement agent for the offering, a sales commission
of $295,400. In addition, we issued to Taglich Brothers five-year placement agent warrants to purchase a total of 69,025 shares
of common stock at an exercise price of $6.15 per share. The issuance and sale of the 12% Notes and the warrants were exempt from
registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The 12% Notes and
the warrants were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On September 15, 2016,
we issued 32,297 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on the 700,000 shares of Series
A Preferred Stock sold in our private placement of Series A Preferred Stock completed in June 2016 for the dividend period ended
September 15, 2016. The issuance of the shares was exempt from registration under Section 4(a)(2) of the Securities Act and Rule
506 of Regulation D promulgated thereunder. The certificates evidencing the shares were endorsed with the customary Securities
Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On November 23, 2016,
we issued and sold to Michael N. Taglich, Robert F. Taglich and another accredited investor our 8% Subordinated Convertible Notes
due November 30, 2018 (the &ldquo;2018 Notes&rdquo;) in the principal amounts of $1,000,000, $100,000, and $300,000, respectively,
together with five-year warrants to purchase a total of 124,444 shares of Common Stock, for a purchase price of $1,000,000, $100,000
and $300,000, respectively. The 2018 Notes have a conversion price of $2.25 per share and the warrants have an exercise price of
$3.00 per share, each of which is subject to certain anti-dilution and other adjustments, including stock splits, and in the event
of certain fundamental transactions such as mergers and other business combinations. The warrants may be exercised until November
30, 2021 and on a cashless basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in November 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $112,000. We also issued to Taglich Brothers
a five-year warrant to purchase 62,222 shares of Common Stock. The warrants may be exercised until November 30, 2021, have an
exercise price of $3.00, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser
number of shares depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The issuance and sale
of the 2018 Notes and warrants issued to the purchasers of the 2018 Notes and the placement agent in the November 2016 private
placement of the 2018 Notes were exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation
D promulgated thereunder. The 2018 Notes and the warrants were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On November 30, 2016,
we issued a total of 438,770 shares of Series A Convertible Preferred Stock to holders of our 12% Notes upon the automatic conversion
of the principal amount of, and accrued interest on, the 12% Notes at the rate of $10.00 per share. The issuance of the shares
was exempt from registration under Section 3(a)(9) of the Securities Act. The certificates evidencing the shares are endorsed with
the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 15, 2016,
we issued 31,478 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on our outstanding shares
of series A Preferred Stock for the dividend period ended December 15, 2016. The issuance of the shares was exempt from registration
under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the
shares were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On December 22, 2016,
we issued and sold an aggregate principal amount of $1,175,000 of 2018 Notes, together with warrants to purchase an aggregate of
89,359 shares of Common Stock for a total purchase price of $1,175,000 to ten accredited investors, including Michael N. Taglich
and Robert F. Taglich, directors and principal stockholders of our company. Interest on the 2018 Notes is payable on the outstanding
principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in cash, or if we are prohibited
by applicable law or PNC Bank, National Association, our principal lender under our Loan Facility, from paying interest in cash,
or we otherwise elect to do so, we may pay interest at the rate of twelve percent (12%) per annum in the form of additional notes
having the same terms and conditions as the 2018 Notes. The outstanding principal amount plus accrued interest on the 2018 Notes
are convertible at the option of the holder into shares of Common Stock at a conversion price of $2.63 per share. The warrants
are exercisable until November 30, 2021, have an exercise price of $3.00 per share and may be exercised on a cashless basis for
a lesser number of shares depending upon prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in December 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $94,000. We also issued to Taglich Brothers five-year
placement agent warrants to purchase 44,677 shares of Common Stock at an exercise price of $3.00 per share and having the same
terms as the warrants issued to purchasers of the 2018 Notes in the December 2016 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The 2018 Notes, as well
as the warrants issued to the purchasers of the 2018 Notes and the placement agent in the December 2016 private placement of the
2018 Notes, were issued pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder, and were endorsed with the customary Securities Act legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 7, 2017
and February 17, 2017, we issued sold an aggregate principal amount of $1,000,000 of our 8% Subordinated Convertible Notes due
January 31, 2019 (the &ldquo;2019 Notes&rdquo;), together with warrants to purchase an aggregate of 76,929 shares of Common Stock
for a total purchase price of $1,000,000 to nine accredited investors, including Robert F. Taglich, a director and principal stockholder
of our Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on 2019 Notes
is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017, in
cash, or if we are prohibited by applicable law or PNC Bank, National Association, our principal lender under our Loan Facility
from paying interest in cash, or we otherwise elect to do so, we may pay interest at the rate of twelve percent (12%) per annum
in the form of additional notes having the same terms and conditions as the 2019 Notes. The outstanding principal amount plus
accrued interest on the 2019 Notes are convertible at the option of the holder into shares of Common Stock at an initial conversion
price of $3.25, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as mergers and other business combinations, except that the initial conversion price of the Notes issued to
Robert F. Taglich is $3.71. The warrants are exercisable until January 31, 2022, have an exercise price of $4.45 per share, subject
to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such
as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon
prevailing market prices at the time of exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in February 2017 of the 2019 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2019 Notes in the principal amount of $80,000 (of which a 2019 Note in the principal
amount of $20,000 has a conversion price of $3.71 per share and a 2019 Note in the principal amount of $60,000 has a conversion
price of $4.45 per share). We also issued to Taglich Brothers five-year placement agent warrants to purchase 29,816 shares of Common
Stock at an exercise price of $4.45 per share having the same terms as the warrants issued to purchasers of the 2019 Notes in the
February 2019 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The 2019 Notes, as well
as the warrants issued to the purchasers of the 2019 Notes and the placement agent in the February 2017 private placement of the
2019 Notes, were issued pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder, and are endorsed with the customary Securities Act legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On February 28, 2017,
we issued 2018 Notes in the aggregate principal amount of $61,264 in lieu of cash payment of accrued interest for the period then
ended. The issuance of the shares was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation
D promulgated thereunder. The certificates evidencing the shares were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 8, 2017, we
issued 25,000 shares of common stock to Eaton &amp; Van Winkle LLP, our attorneys, in satisfaction of indebtedness having a value
of $111,750 based upon the closing market price of our common stock on February 21, 2017, $4.47, the trading date immediately preceding
the date we agreed to issue the shares in payment of said indebtedness. The shares were issued pursuant to an exemption from registration
afforded by Section 4(a)(2) of the Securities Act, and were endorsed with the customary Securities Act legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 8, 2017, March
15, 2017 and March 21, 2017, we issued and sold an aggregate principal amount of $1,200,000 of our 2019 Notes, together with warrants
to purchase an aggregate of 92,300 shares of Common Stock for a total purchase price of $1,200,000 to 23 accredited investors,
including Robert F. Taglich, a director and principal stockholder of our company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if we are prohibited by applicable law or PNC Bank, National Association, our principal lender under our Loan Facility,
from paying interest in cash, or we otherwise elect to do so, we may pay interest at the rate of twelve percent (12%) per annum
in the form of additional notes having the same terms and conditions as the 2019 Notes. The outstanding principal amount plus accrued
interest on the 2019 Notes are convertible at the option of the holder into shares of Common Stock at an initial conversion price
of $3.25, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as mergers and other business combinations, except that the initial conversion price of the Notes issued to Robert
F. Taglich is $3.30. The warrants issued to the purchasers of the 2019 Notes have an exercise price of $3.30 per share, subject
to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such
as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon
prevailing market prices at the time of exercise. The warrants may be exercised until January 31, 2022.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">As compensation for
its services as placement agent for the private placement in March 2017 of the 2019 Notes, we issued to Taglich Brothers, in lieu
of cash payment of sales commissions, 2019 Notes in the principal amount of $96,000 (of which a 2019 Note in the principal amount
of $44,400 has a conversion price of $3.30 per share, a 2019 Note in the principal amount of $43,600 has a conversion price of
$3.78 per share and a 2019 Note in the principal amount of $8,000 has a conversion price of $3.25 per share) and five-year warrants
to purchase a total of 7,386 shares of Common Stock (of which warrants to purchase 3,416 shares have an exercise price of $3.30
per share, warrants to purchase 3,354 shares have an exercise price of $3.78 and warrants to purchase 616 shares have an exercise
price of $4.00). We also issued to Taglich Brothers placement agent warrants to purchase a total of 36,877 shares of Common Stock,
of which warrants to purchase 17,030 shares have an exercise price of $3.30 per share, warrants to purchase 16,770 shares have
an exercise price of $3.78 and warrants to purchase 3,077 shares have an exercise price of $4.00, and having the same terms as
the warrants issued to purchasers of the 2019 Notes in the March 2019 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The 2019 Notes, as well
as the warrants issued to the purchasers of the 2019 Notes and the placement agent in the March 2017 private placement of the 2019
Notes, were issued pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder, and are endorsed with the customary Securities Act legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 15, 2017, we
issued 46,010 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on our outstanding shares of
Series A Preferred Stock for the dividend period ended March 15, 2017. The issuance of the shares was exempt from registration
under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the
shares were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, and issued our promissory
notes in the principal amounts of $200,000 and $300,000 to Michael N. Taglich and Robert F. Taglich, respectively, to evidence
our obligation to repay that indebtedness. The notes bear interest at the rate of 7% per annum and are payable on March 17, 2017.
The notes have been amended to provide for the automatic conversion of the indebtedness evidenced thereby into shares of common
stock at a conversion price of $1.50 per share following the stockholder vote upon the Restructuring Transactions at our 2017
Annual Meeting of Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">Michael N. Taglich and
Robert F. Taglich, directors of our company, are accredited investors. The issuance and sale of the notes were exempt from registration
under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The notes
were endorsed with a customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 12, 2017, we
issued and sold to seven accredited investors, including Michael N. Taglich and Robert F. Taglich, an aggregate of $3,089,186
principal amount of our May 2018 Notes, together with warrants to purchase a total of 372,191 shares of our common stock, for
a total purchase price of $2,999,198, resulting in gross proceeds of $1,495,870, net of the cancellation of $1,503,328 of indebtedness
owed to Michael N. Taglich and Robert F. Taglich for working capital advances made on May 2 and 10, 2017. On May 19, 2017 we issued
and sold to ten accredited investors, including a partnership in which Michael N. Taglich and Robert F. Taglich are partners,
an aggregate of $1,069,438 principal amount of May 2018 Notes, together with warrants to purchase a total of 128,848 shares of
common stock, for a total purchase price of $1,038,286. The principal amount, together with accrued interest, if any (together,
the &ldquo;Conversion Amount&rdquo;), of the May 2018 Notes, when issued, were convertible into shares of our common stock until
November 12, 2017 at an initial conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock
splits and certain fundamental transactions, including recapitalizations, mergers and other business combination transactions
(the &ldquo;Fixed Conversion Price&rdquo;), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5)
Weighted Average Prices (as defined in the May 2018 Notes) of the common stock during the five consecutive trading day period
ending on the trading immediately preceding the day of a request by the holder for conversion of the May 2018 Note. In connection
with the Public Offering, we agreed to amend the terms of the outstanding May 2018 Notes to reduce the conversion price to $1.50
per share. The warrants, when issued, were exercisable at an initial exercise price of $2.49 per share until May 12, 2022, and
may be exercised on a cashless basis for a lesser number of shares based upon prevailing market prices when exercised. The exercise
price of the warrants is subject to anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as recapitalizations, mergers and other business combination transactions. In accordance with terms of the warrants,
the exercise price was reset to $1.50 per share, the public offering price of the shares of common stock sold in the Public Offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">We paid Roth Capital
Partners LLC $15,000 and have agreed to pay Taglich Brothers $176,155 as sales commissions in connection with the May 2018 Notes
financing. The issuance and sale of the May 2018 Notes and warrants were exempt from registration under Section 4(a)(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The May 2018 Notes and warrants were endorsed
with a customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On May 31, 2017, we
issued 2018 Notes and 2019 Notes in the aggregate principal amount of $68,539 and $28,285, respectively, in lieu of cash payment
of accrued interest for the period then ended. The issuance of the shares was exempt from registration under Section 4(a)(2) of
the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the shares were endorsed with
the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On June 15, 2017, we
issued 46,787 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on our outstanding shares of
Series A Preferred Stock for the dividend period ended June 15, 2017. The issuance of the shares was exempt from registration under
Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the shares
were endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">On July 12, 2017, we
issued a total of 1,240,605 shares of common stock upon conversion of $1,780,908 aggregate principal amount of May 2018 Notes at
a conversion price of $1.50 per share. The issuance of the shares was exempt from registration under Section 3(a)(9) of the Securities
Act. The certificates evidencing the shares are endorsed with the customary Securities Act restrictive legend.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">The following exhibits
are included as part of this Form S-1. References to &ldquo;the Company&rdquo; in this Exhibit List mean Air Industries Group,
a Nevada corporation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">1.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Underwriting Agreement.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">2.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Agreement and Plan of Merger dated July 29, 2013 between Air Industries Group, Inc. and Air Industries Group (incorporated herein by reference to Exhibit 2.1 to the Company&rsquo;s Current Report on Form 8-K filed August 30, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">2.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Articles of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 28, 2013 (incorporated herein by reference to Exhibit 3.2 to the Company&rsquo;s Current Report on Form 8-K filed August 30, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">2.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Certificate of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 29, 2013 (incorporated herein by reference to Exhibit 3.3 to the Company&rsquo;s Current Report on Form 8-K filed August 30, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">3.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Articles of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company&rsquo;s Current Report on Form 8-K filed August 30, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">3.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Certificate of Designation authorizing the issuance of the Series A Preferred Stock (incorporated herein by reference to exhibit 3.1 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">3.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Certificate of Amendment to Certificate of Designation increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference to Exhibit 3.3 to the Company&rsquo;s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2016 filed on May 1, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">3.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Certificate of Amendment to Certificate of Designation providing for the automatic conversion of the outstanding shares of Series A Preferred Stock upon completion of Public Offering, subject to stockholder approval in accordance with the applicable rule of the NYSE MKT, and eliminating liquidation preference and preferential dividend payable to holders of the Series A Stock filed with the Secretary of state of Nevada on July 12, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company&rsquo;s Current Report on Form 8-K filed July 13, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">3.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Amended and Restated By-Laws of the Registrant (incorporated herein by reference to Exhibit 3.4 to the Company&rsquo;s Quarterly Report on Form 10-Q/A for the period ended March 31, 2017 filed on June 2, 2017).</FONT></TD></TR>
</TABLE>

<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>

<P STYLE="margin-top: 0; margin-bottom: 0"></P>

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<P STYLE="margin-top: 0; margin-bottom: 0">&nbsp;</P>
<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of specimen common stock certificate (incorporated herein by reference to exhibit 4.1 to the registrant&rsquo;s Registration Statement on Form S-3 (Registration No. 333-191748) filed on August 26, 2014 and declared effective on August 26, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Placement Agent&rsquo;s Warrant Agreement (incorporated herein by reference to Exhibit 4.1 to the Registrant&rsquo;s Current Report on Form 8-K filed May 29, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Warrant issued to Taglich Brothers in connection with Capital Market Advisory Agreement dated as of January 1, 2014 (incorporated herein by reference to Exhibit 4.3 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.1 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Warrant issued to Taglich Brothers in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.2 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.3 to the Company&rsquo;s Current Report on Form 8-K filed on June 3, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Warrant issued to Taglich Brothers in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.4 to the Company&rsquo;s Current Report on Form 8-K filed on June 3, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Warrant issued to purchasers of 12% Notes in connection with 12% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company&rsquo;s Current Report on Form 8-K filed on August 22, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Warrant issued to Taglich Brothers in connection with 12% Note Offering (incorporated herein by reference to Exhibit 10.9 to the Company&rsquo;s Quarterly Report On Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on December 23, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.11</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Warrant issued to purchasers of the 2018 Notes in connection with 8% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company&rsquo;s Current Report on Form 8-K filed on December 23, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.12</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Warrant issued to Taglich Brothers in connection with the 2019 Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.13</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of 8% Subordinated Convertible Note due January 31, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Warrant issued to purchasers of 2019 Notes in connection with the 8% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Placement Agent Warrant issued to Taglich Brothers in connection with the 2019 Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">4.16</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of warrant issued to purchasers of the Company&rsquo;s Subordinated Convertible Notes due May 12, 2018 (incorporated herein by reference to Exhibit 4.1 to the Company&rsquo;s Current Report on Form 8-K filed on May 15, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">5.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Opinion of Eaton &amp; Van Winkle LLP.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">Agreements Relating to PNC Loan Facility</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Amended and Restated Revolving Credit, Term Loan and Security Agreement (the &ldquo;PNC Loan Agreement&rdquo;) dated June 27, 2013 by and among PNC Bank, National Association, as Lender and Agent, and Air Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc. and Air Industries Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed June 27, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Guarantor&rsquo;s Ratification by Air Industries Group, Inc. under PNC Agreement (incorporated herein by reference to Exhibit 10.4 to the Company&rsquo;s Current Report on Form 8-K filed June 27, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">First Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.22 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2013 (the &ldquo;2013 Form 10-K&rdquo;).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Second Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.23 to the Company&rsquo;s 2013 Form 10-K).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Amended and Restated Revolving Credit Note issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.24 to the Company&rsquo;s 2013 Form 10-K).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Second Amendment to Term Note in the principal amount of $1,947,603.50 issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.25 to the Company&rsquo;s 2013 Form 10-K).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Third Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed April 2, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Sixth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the Company&rsquo;s Current Report on Form 8-K filed October 2, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.5 to the Company&rsquo;s Current Report on Form 8-K filed October 2, 2014).</FONT></TD></TR>
</TABLE>
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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Eighth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed March 10, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.11</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed March 10, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.12</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Tenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed November 23, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.13</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Fifth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed November 23, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Eleventh Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed February 12, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Sixth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed February 12, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.16</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Twelfth Amendment to PNC Loan Agreement (incorporated herein by reference to exhibit 10.4 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.17</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Term Loan in the principal amount of $7,388,000 (incorporated herein by reference to Exhibit 10.5 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.18</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Thirteenth Amendment to PNC Loan Agreement (incorporated herein by reference to exhibit 10.4 to the Company&rsquo;s Current Report on Form 8-K filed on September 21, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.19</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Fourteenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed January 30, 2017.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.20</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Fifteenth Amendment to PNC Loan Agreement (incorporated herein by reference to Amendment No. 1 to the Company&rsquo;s Registration Statement on Form S-1 (Registration No. 333-217582) filed on June 19, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">Agreements Relating to Acquisitions</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.21</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Stock Purchase Agreement dated as of April 1, 2014 by and among WMI and the shareholders of Woodbine Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed April 2, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.22</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Stock Purchase Agreement dated as of June 4, 2014, by and among the Registrant and the shareholders of Eur-Pac Corporation (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed June 4, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Stock Purchase Agreement dated as of October 1, 2014, between the Company and Dynamic Materials Corporation (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed (October 2, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.24</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory Note of Registrant payable to AMK Welding, Inc. in the principal amount of $2,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed October 2, 2014).</FONT></TD></TR>
</TABLE>
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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.25</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Mortgage and Security Agreement in favor of Dynamic Materials Corporation (incorporated herein by reference to Exhibit 10.3 to the Company&rsquo;s Current Report on Form 8-K filed October 2, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.26</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Agreement and Plan of Merger dated as of February 27, 2015, by and among the Registrant, SEC Acquisition Corp., The Sterling Engineering Corporation (&ldquo;Old Sterling&rdquo;) and the shareholders of Old Sterling (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed March 5, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.27</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Open End Mortgage Deed and Security Agreement with respect to South Windsor, Connecticut premises (incorporated herein by reference to Exhibit 10.3 to the Company&rsquo;s Current Report on Form 8-K filed March 10, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.28</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Collateral Assignment of Rents, Leases and Profits with respect to South Windsor, Connecticut premises (incorporated herein by reference to Exhibit 10.4 to the Company&rsquo;s Current Report on Form 8-K filed March 10, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.29</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Open End Mortgage Deed and Security Agreement with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.5 to the Company&rsquo;s Current Report on Form 8-K filed March 10, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.30</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Collateral Assignment of Rents, Leases and Profits with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.6 to the Company&rsquo;s Current Report on Form 8-K filed March 10, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.31</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Asset Purchase Agreement dated as of August 31, 2013 between the Company, on the one hand, and Compaq Development Corporation, Peter C. Rao and Vito Valenti, the shareholders of Compaq Development Corporation, on the other hand (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed September 1, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.32</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Stock Purchase Agreement dated as of January 27, 2017, between Air Industries Group, AMK Welding, Inc., Air Industries Group Poland, LLC and Meyer Tool, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed January 30, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">Agreements Relating to Real Property</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.33</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Contract of Sale, dated as of November 7, 2005, by and between KPK Realty Corp. and Gales Industries Incorporated for the purchase of the property known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore, NY (incorporated herein by reference to Exhibit 10.6 of the Company&rsquo;s Current Report on Form 8-K filed December 6, 2005).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.34</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Real Estate Purchase and Sale Contract dated as of December 7, 2015 for the sale of 283 Sullivan Avenue, South Windsor, CT (&ldquo;South Windsor Contract&rdquo;) (filed with the Company&rsquo;s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.35</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">First Amendment to South Windsor Contract dated as of January 26, 2016 (filed with the Company&rsquo;s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.36</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Second Amendment to South Windsor Contract dated as of February 24, 2016 (filed with the Company&rsquo;s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
</TABLE>
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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.37</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Third Amendment to South Windsor Contract dated as of April 7, 2016 (incorporated herein by reference to Exhibit 10.50 to the Company&rsquo;s Current Report on Form 8-K filed on April 13, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.38</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Lease dated April 11, 2016 for the premises located at 283 Sullivan Avenue, South Windsor, CT (incorporated herein by reference to Exhibit 10.50 to the Company&rsquo;s Current Report on Form 8-K filed on April 13, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.39</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Real Estate Purchase and Sale Agreement, dated as of December 7, 2015 (incorporated herein by reference to Exhibit 10.46 to the Company&rsquo;s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.40</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">First Amendment to Real Estate Purchase and Sale Agreement dated as of January 26, 2016 (incorporated herein by reference to Exhibit 10.47 to the Company&rsquo;s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.41</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Second Amendment to Real Estate Purchase and Sale Agreement dated as of February 24, 2016 (incorporated herein by reference to Exhibit 10.48 to the Company&rsquo;s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.42</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Third Amendment to Real Estate Purchase and Sale Agreement dated as of April 6, 2016 (incorporated herein by reference to Exhibit 10.49 to the Company&rsquo;s Current Report on Form 8-K filed on April, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.43</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Lease dated April 11, 2016 for the premises located at 283 Sullivan Avenue, South Windsor, CT (incorporated herein by reference to Exhibit 10.50 to the Company&rsquo;s Current Report on Form 8-K filed on April 14, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Agreements With Officers, Directors and Related Persons</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.44</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Capital Market Advisory Agreement dated as of January 1, 2014 between the Registrant and Taglich Brothers (incorporated herein by reference to Exhibit 10.35 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.45</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Offer Letter to Daniel R. Godin (incorporated herein by reference to Exhibit 10.42 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.46</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory Note dated as of September 8, 2015 payable to Michael N. Taglich in the principal amount of $350,000 (incorporated herein by reference to Exhibit 10.45 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 4, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.47</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note dated April 8, 2016 in the principal amount of $350,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.51 to the Company&rsquo;s Current Report on Form 8-K filed on April 13, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.48</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note dated April 8, 2016 in the principal amount of $350,000 payable to Robert F. Taglich (incorporated herein by reference to Exhibit 10.52 to the Company&rsquo;s Current Report on Form 8-K filed on April 13, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.49</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note in the principal amount of $350,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on May 10, 2016).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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    <DIV STYLE="page-break-before: always; margin-top: 6pt; margin-bottom: 6pt"><P STYLE="margin: 0pt; text-align: right; font-size: 8pt"></P></DIV>
    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.50</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note in the principal amount of $350,000 payable to Robert F. Taglich (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed on May 10, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.51</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note in the principal amount of $500,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on August 5, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.52</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note in the principal amount of $1,000,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 3.1 to the Company&rsquo;s Current Report on Form 8-K filed on August 5, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.53</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Promissory note in the principal amount of $1,000,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.52 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.54</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Amended promissory note in the principal amount of $200,000
payable to Michael N. Taglich.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.55</FONT></TD>
    <TD></TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="margin: 0pt 0">Amended promissory note in the principal amount of $300,000 payable
to Robert F. Taglich.</P>


</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.56</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="margin: 0pt 0">Form of lock-up agreement with directors, officers and principal
stockholders (see Exhibit A to Exhibit 1.1).</P>


</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">Agreements Relating to Issuance of Securities</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.57</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Subscription Agreement, dated as of May 28, 2014 (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed May 29, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.58</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agent Agreement, dated as of May 28, 2014, between the Company and Taglich Brothers (incorporated herein by reference to Exhibit 10.2 to the Registrant&rsquo;s Current Report on Form 8-K filed May 29, 2014).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.59</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agency Agreement dated May 25, 2016 between the Company, Craig-Hallum Capital Group LLC and Taglich Brothers (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.60</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Securities Purchase Agreement dated as of May 25, 2016 by and among Air Industries Group and the purchasers named therein (incorporated herein by reference to Exhibit A included in Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.61</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Registration Rights Agreement (incorporated herein by reference to Exhibit B included in Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on June 1, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.62</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agency Agreement dated August 19, 2016 between the Company and Taglich Brothers (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on August 22, 2016).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.63</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Securities Purchase Agreement by and among the Company and the purchasers named therein (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed on August 22, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.64</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">The Company&rsquo;s 12% Subordinated Convertible Note due December 31, 2017(incorporated herein by reference to Exhibit 10.3 to the Company&rsquo;s Current Report on Form 8-K filed on August 22, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.65</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Joinder Agreement among the purchasers of the Notes and the Company (incorporated herein by reference to Exhibit 10.4 to the Company&rsquo;s Current Report on Form 8-K filed on August 22, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.66</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Amendment to Registration Rights Agreement (incorporated herein by reference to Exhibit 10.6 to the Company&rsquo;s Current Report on Form 8-K filed on August 22, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.67</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">The Company&rsquo;s 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on December 23, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.68</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agency Agreement with Taglich Brothers for the offering of the 2018 Notes (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed on December 23, 2016).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.69</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Subscription Agreement for the 2019 Notes (incorporated herein by reference to Exhibit 10.3 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.70</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agency Agreement with Taglich Brothers for the offering of the 2019 Notes issued in February 2017 (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.71</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Subscription Agreement for the 2019 Notes (incorporated herein by reference to Exhibit 10.3 to the Company&rsquo;s Current Report on Form 8-K filed on February 16, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.72</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Placement Agency Agreement with Taglich Brothers for the offering of the 2019 Notes issued in March 2017 (incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed on March 22, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.73</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Securities Purchase Agreement dated May 12, 2017 by and among the Company and the Buyers of the Company&rsquo;s Subordinated Convertible Notes due May 10, 2017 and Warrants (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Current Report on Form 8-K filed on May 15, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.74</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Form of Subordinated Convertible Note due May 12, 2017(incorporated herein by reference to Exhibit 10.2 to the Company&rsquo;s Current Report on Form 8-K filed on May 15, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">10.75</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="margin: 0pt 0">Form of lock-up agreement with Selling Stockholders.</P>


</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">Equity Incentive Plans</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

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    <DIV STYLE="page-break-before: always; margin-top: 6pt; margin-bottom: 6pt"><P STYLE="margin: 0pt; text-align: right; font-size: 8pt"></P></DIV>
    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; border-collapse: collapse; font-size: 10pt">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 10%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Exhibit No. </B></FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 88%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.76</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Registration Statement on Form S-8 (Registration No. 333-191560) filed on October 4, 2013).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">10.77</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">2015 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company&rsquo;s Registration Statement on Form S-8 (Registration No. 333-206341) filed on August 13, 2015).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">10.78</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">10.79</P></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">2016 Equity Incentive Plan (incorporated herein by reference
        to Exhibit 10.9 to the Company&rsquo;s Quarterly Report On Form 10-Q for the quarterly period ended September 30, 2016 filed on
        November 14, 2016).</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">2017 Equity Incentive Plan.</P></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">14.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company&rsquo;s Registration Statement on Form SB-2 (Registration No. 333-144561) filed July 13, 2009 and declared effective July 27, 2009).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">21.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Subsidiaries (incorporated herein by reference to Exhibit 21.1 to the Company&rsquo;s Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">23.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Consent of Eaton &amp; Van Winkle LLP (included in Exhibit 5.1)</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">23.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Consent of Rotenberg Meril Solomon Bertiger &amp; Guttilla, P.C.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom">&nbsp;</TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt">24.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt">Power of Attorney (included in signature page)</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>ITEM 17. UNDERTAKINGS. </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The undersigned registrant hereby undertakes:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(1) That, for the purpose
of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(2) To remove from registration
by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(3) For determining
liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser
and will be considered to offer or sell such securities to such purchaser:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(i) Any preliminary
prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(ii) Any free writing
prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned
registrant;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(iii) The portion of
any other free writing prospectus relating to the offering containing material information about the undersigned registrant or
its securities provided by or on behalf of the undersigned registrant; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(iv) Any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(4) The undersigned registrant hereby
undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant&rsquo;s annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan&rsquo;s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(5) Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">In the event that a
claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(6) For purposes of
determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared
effective.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">For the purpose of determining
any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">(7) Each prospectus
filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first
use.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 20pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>SIGNATURES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 27pt">Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in&nbsp;Hauppauge,&nbsp;New York,&nbsp;on this&nbsp;26th day of July, 2017.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 27pt">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 10pt"><B>AIR INDUSTRIES GROUP</B></FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 51%">&nbsp;</TD>
    <TD STYLE="width: 3%">&nbsp;</TD>
    <TD STYLE="width: 46%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">By:</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;/s/ Peter D. Rettaliata</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Peter D. Rettaliata</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Acting President and Chief Executive Officer (Principal Executive Officer)</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">By:</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">&nbsp;/s/ Michael Recca</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Michael Recca</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Chief Financial Officer (Principal Financial and Accounting Officer)</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>POWER OF ATTORNEY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>KNOW ALL PERSONS BY THESE PRESENTS:</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">That the undersigned
officers and directors of Air Industries Group., a Delaware corporation, do hereby constitute and appoint Peter D. Rettaliata and
Michael Recca, and each of them, his true and lawful attorney-in-fact and agent with full power and authority to do any and all
acts and things and to execute any and all instruments which said attorney and agent, determine may be necessary or advisable or
required to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules or regulations or requirements
of the Securities and Exchange Commission in connection with this Registration Statement. Without limiting the generality of the
foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers
and directors in the capacities indicated below to this Registration Statement, and to any and all instruments or documents filed
as part of or in conjunction with this Registration Statement or amendments or supplements thereof, including post-effective amendments,
to this Registration Statement or any registration statement relating to this offering to be effective upon filing pursuant to
Rule&nbsp;462(b) under the Securities Act of 1933, and each of the undersigned hereby ratifies and confirms that said attorney
and agent, shall do or cause to be done by virtue thereof. This Power of Attorney may be signed in several counterparts.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">IN WITNESS WHEREOF,
each of the undersigned has executed this Power of Attorney. In accordance with the requirements of the Securities Act of 1933,
as amended, this registration statement was signed by the following persons on July 26, 2017 in the capacities indicated.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font-size: 10pt">
<TR>
    <TD STYLE="width: 35%"><FONT STYLE="font-size: 10pt"><U>Signature</U></FONT></TD>
    <TD STYLE="width: 6%">&nbsp;</TD>
    <TD STYLE="width: 59%; text-align: center"><FONT STYLE="font-size: 10pt"><U>Capacity</U></FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ Peter D. Rettaliata</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">Peter D. Rettaliata&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Acting President, CEO&nbsp;&nbsp;and a Director</FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><U>/s/ Michael Recca</U></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Michael Recca</P></TD>
    <TD></TD>
    <TD STYLE="text-align: left; vertical-align: bottom">
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Chief Financial Officer &nbsp;</P></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ Michael N. Taglich</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">Michael N. Taglich</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Chairman of the Board</FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ Seymour G. Siegel</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">Seymour G. Siegel&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ Robert F. Taglich</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">&nbsp;Robert F. Taglich</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ David&nbsp;&nbsp;J. Buonanno</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">David&nbsp;&nbsp;J. Buonanno</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ Robert Schroeder</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">Robert Schroeder&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt"><U>/s/ Michael Brand</U></FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR>
    <TD><FONT STYLE="font-size: 10pt">Michael Brand</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD></TR>
</TABLE>































































































































<P STYLE="margin: 0">&nbsp;</P>

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{"company-data": {"conformed-name": "AIR INDUSTRIES GROUP", "cik": "0001009891", "assigned-sic": "3728", "irs-number": "204458244", "state-of-incorporation": "NV", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-219490", "film-number": "17983792"}, "business-address": {"street1": "360 MOTOR PARKWAY, SUITE 100", "city": "HAUPPAUGE", "state": "NY", "zip": "11788", "phone": "631-881-4920"}, "mail-address": {"street1": "360 MOTOR PARKWAY, SUITE 100", "city": "HAUPPAUGE", "state": "NY", "zip": "11788"}, "former-company": [{"former-conformed-name": "AIR INDUSTRIES GROUP, INC.", "date-changed": "20070702"}, {"former-conformed-name": "Gales Industries Inc", "date-changed": "20060410"}, {"former-conformed-name": "Ashlin Development Corp", "date-changed": "20050127"}]}
As filed with the Securities and Exchange
Commission on July 26, 2017
Registration No. 333-_____
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
AIR INDUSTRIES GROUP
(Exact name of registrant as specified in its charter)
Nevada
80-0948413
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
3728
(Primary Standard Industrial Classification Code Number)
360 Motor Parkway, Suite
100 Hauppauge, New York
11788 (631) 881-4920
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Peter D. Rettaliata
Acting President and Chief Executive Officer
Air Industries Group
360 Motor Parkway, Suite 100
Hauppauge, New York 11788
(631) 881-4920
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Vincent J. McGill, Esq.
Eaton & Van Winkle LLP
3 Park Avenue, 16th Floor
New York, New York 10016
(212) 561-3604
E-mail: vmcgill@evw.com
Approximate date of commencement of proposed sale to the
public:
From time to time after the effective date of this registration statement.
If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933.
☒
If this form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
o
If this form is a post-effective amendment
filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
o
If this Form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2
of the Exchange Act (check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company) Smaller reporting company ☒
Emerging
growth company
☒
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
o
CALCULATION OF REGISTRATION FEE
Title of Each Class Of
Securities To Be Registered
Amount To
Be
Registered
Proposed
Maximum
Offering Price
Per Security
Proposed
Maximum
Aggregate
Offering Price
Amount of
Registration
Fee
Common stock, $0.001 par value
1,293,938(1)
$1.42(2)
$1,837,392
$212.95
(1)
Represents shares issued and issuable upon conversion of Subordinated Convertible Notes due May 12, 2018.
(2)
Based upon the average of the high and low prices of a share of Common Stock on the NYSE MKT on July 20, 2017, pursuant to
Rule 457(c).
The Registrant hereby
amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to Section 8(a) of the Securities Act, may determine.
The information in this
preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement related
to these securities filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not
an offer to sell or a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated
July 26, 2017
PROSPECTUS
1,293,938 Shares
Common Stock
This prospectus relates to the offering
by the selling stockholders of Air Industries Group named in this prospectus (the "Selling Stockholders") of 1,293,938
shares of our common stock, par value $0.001 per share ("the "Shares"), acquired or to be acquired upon conversion
of our Subordinated Convertible Notes due May 12, 2018. We will not receive any proceeds from the sale of the Shares by the Selling
Stockholders.
Our common stock is
listed on the NYSE MKT under the symbol "AIRI". On July 25, 2017, the closing price of our common stock on the
NYSE MKT was $1.42 per share.
The Selling Stockholders
have advised us that they will sell the Shares from time to time in the open market, on the NYSE MKT, in privately negotiated transactions
or a combination of these methods, at market prices prevailing at the time of sale or at prices related to the prevailing market
prices or at negotiated prices.
The Selling Stockholders
may sell the Shares to or through underwriters, brokers or dealers or directly to purchasers. Underwriters, brokers or dealers
may receive discounts, commissions or concessions from the Selling Stockholders. Additional information relating to the distribution
of the Shares by the Selling Stockholders can be found in this prospectus under the heading "Plan of Distribution."
If underwriters or dealers are involved in the sale of the Shares, their names, and any applicable purchase price, fee, commission
or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in a supplement
to this prospectus. We will pay the expenses of registering the Shares, other than any underwriting discounts or commissions or
agent's commissions.
We are an "emerging
growth company," as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, may elect to comply
with certain reduced public company reporting requirements in future reports after the completion of this offering.
Investing in our securities involves
a high degree of risk. Before making any investment in our securities, you should read and carefully consider the risks described
in this prospectus under "
Risk Factors"
beginning on page 3 of this prospectus.
You should rely
only on the information contained in this prospectus or any prospectus supplement or amendment thereto. We have not authorized
anyone to provide you with different information.
Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus is dated ______ __, 2017
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
ii
We are an Emerging Growth Company
ii
Prospectus Summary
1
Risk Factors
3
Use of Proceeds
10
Price Range of Our Common Stock
11
Dividend Policy
11
Business
12
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
Directors and Executive Officers
35
Executive Compensation
40
Security Ownership of Certain Beneficial Owners and Management
42
Certain Relationships and Related Party Transaction
45
Selling Stockholders
49
Plan of Distribution
51
Description of Securities
53
Shares Available For Future Sales
60
Legal Matters
61
Experts
61
Where You Can More Information About Us
61
Incorporation By Reference
61
Index to Financial Statements
62
This prospectus and any Freewriting
prospectus that we file with the Securities and Commission ("SEC") contain information you should consider when making
your investment decision. We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information, you should not rely on it.
The securities are not being offered in any jurisdiction
where the offer is not permitted.
You should not assume that the information
in this prospectus is accurate as of any date other than the date on the front of this prospectus.
In this prospectus, we refer to information
regarding potential markets for our products and other industry data. We believe that all such information has been obtained from
reliable sources that are customarily relied upon by companies in our industry; however, we have not independently verified
any such information.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains
"forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, which in some cases,
you can identify by terms such as "may," "will," "should," "could," "would,"
"expects," "plans," "anticipates," "believes," "estimates," "projects,"
"predicts," "potential" and similar expressions intended to identify forward-looking statements, relate
to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. These statements include statements regarding our operations,
cash flows, financial position and economic performance including, in particular, future sales, product demand, competition and
the effect of economic conditions. These statements reflect our current views with respect to future events and are based on assumptions
and subject to risks and uncertainties.
Although we
believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating
margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, and general economic conditions, these statements and other
projections contained in this prospectus expressing opinions about future outcomes and non-historical information, are
subject a number of risks and uncertainties, many of which are beyond our control, and reflect future business decisions that
are subject to change and, therefore, there is no assurance that the outcomes expressed in these statements will be achieved.
Some of the assumptions, future results and levels of performance expressed or implied in the forward-looking statements we
have made or may make in the future inevitably will not materialize, and unanticipated events may occur which will affect our
results. Investors are cautioned that forward-looking statements are not guarantees of future performance and actual results
or developments may differ materially from the expectations expressed in forward-looking statements contained herein. Given
these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks
and uncertainties in greater detail under the heading "Risk Factors" on page 3  of this prospectus, as well as in
our consolidated financial statements, related notes, and the other financial information appearing in this prospectus. You
should read this prospectus completely and with the understanding that our actual future results may be materially different
from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements. We
undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future
events or otherwise, except as may be required under the securities laws of the United States. You are advised, however, to
consult any additional disclosures we make in our reports filed with the Securities and Exchange Commission.
WE ARE AN EMERGING GROWTH COMPANY
We qualify as an "emerging
growth company" as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company
may take advantage of reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions
include (i) a requirement to have only two years of audited financial statements and only two years of related Management's
Discussion and Analysis of Financial Condition and Results of Operations disclosure and (ii) an exemption from the auditor attestation
requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.
We may take advantage
of these provisions until the end of the fiscal year ending after the fifth anniversary of our initial public offering, December
31, 2018, or such earlier time that we are no longer an emerging growth company and if we do, the information that we provide stockholders
may be different than you might get from other public companies in which you hold equity. We would cease to be an emerging growth
company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of common
stock held by non-affiliates, or issue more than $1.0 billion of nonconvertible debt over a three year period.
The JOBS Act permits
an "emerging growth company" like us to take advantage of an extended transition period to comply with new or revised
accounting standards applicable to public companies, and we have elected to comply with certain reduced public company reporting
requirements.
ii
PROSPECTUS SUMMARY
The following is a summary of what we
believe to be important aspects of our business and the offering of our securities under this prospectus. We urge you to read this
entire prospectus. Investing in our securities involves risks. Therefore, carefully consider the risk factors set forth under the
section titled "Risk Factors" in this prospectus and in our most recent annual and quarterly filings with the Securities
and Exchange Commission (the "SEC"), if any, as well as other information in this prospectus, before purchasing our
securities. Each of the risk factors could adversely affect our business, operating results, and financial condition, as well as
adversely affect the value of an investment in our securities.
As used in this prospectus,
unless otherwise stated or the context requires otherwise, the "Company" and terms such as "we," "us"
"our," and "AIRI" refer to Air Industries Group, a Nevada corporation, and prior to August 30, 2013, Air
Industries Group, Inc., a Delaware corporation, and our directly and indirectly wholly-owned subsidiaries: Air Industries Machining,
Corp., a New York corporation ("AIM"), Welding Metallurgy, Inc., a New York corporation ("Welding Metallurgy,"
or "WMI"), Nassau Tool Works, Inc., a New York corporation ("NTW"), Miller Stuart, Inc., a New York corporation
("Miller Stuart" or "MS"), until it merged into WMI effective May 16, 2017, Decimal Industries Inc., a
New York corporation ("Decimal"), Woodbine Products, Inc., a New York corporation ("Woodbine" or "WP"),
Eur-Pac Corporation, a Connecticut corporation ("Eur-Pac" or "EPC"), Electronic Connection Corporation,
a Connecticut corporation ("ECC"), The Sterling Engineering Corporation, a Connecticut corporation ("Sterling"),
Compac Development Corporation, a New York corporation ("Compac"), and Air Realty Group, LLC, a Connecticut limited
liability company ("Air Realty").
Company Overview
We are an aerospace
and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear,
arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal
fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile
military and commercial aircraft, including Sikorsky's UH-60 Black Hawk and CH-47 Chinook helicopters, Lockheed Martin's
F-35 Joint Strike Fighter, Northrop Grumman's E2 Hawkeye, Boeing's 777, Airbus' 380 commercial airliners and
the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the
USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.
We became a public
company in 2005 when our net sales were approximately $30 million. At that time we had been manufacturing components and subassemblies
for the defense and commercial aerospace industry for over 45 years and had established long term relationships with leading defense
and aerospace manufacturers. Since becoming a public company, we have completed a series of acquisitions of defense related businesses.
These acquisitions have enabled us to broaden the range of products and services we offer. At the time we became a public company,
we were primarily a machining shop. As a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding
and tube bending; the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment
and printed circuit boards; the machining of turbine engine components; and the assembly of packages or "kits" containing
supplies for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical
and electrical assemblies.
Recently Completed Public Offering and Related Restructuring
Transactions
On July 12, 2017, we
sold 5,175,000 shares of common stock at a price of $1.50 per share (the "July 2017 Public Offering Price") for gross
proceeds of $7,762,500 in a firm commitment underwritten public offering (the "Public Offering").
In connection with
the Public Offering, approximately $1,860,908 aggregate principal amount of our Subordinated Convertible Notes due May 12, 2018
(the "May 2018 Notes") were converted into an aggregate of 1,240,605 shares of our common stock (the "Shares")
at the July 2017 Public Offering Price. We agreed to register the Shares for resale in in order to induce the Selling Stockholders
to agree to the convert their May 2018 Notes in connection with the Public Offering.
In addition, the following
restructuring transactions contemplated by the Public Offering are to be effected at a conversion price of $1.50 per share, the
public offering price of the shares sold in the Public Offering (the "Restructuring Transactions"), following a stockholder
vote thereon at our 2017 Annual Meeting of Stockholders, which we expect to hold in September 2017:
·
Holders of an additional $1,834,214 aggregate principal amount of May 2018 Notes have agreed to
convert their 2018 Notes into an additional 1,222,809 shares of common stock.
1
·
Holders of our outstanding 1,294,441 shares of Series A Convertible Preferred Stock (the "Series
A Preferred Stock"), which had a conversion price at the time of initial issuance in May 2016 of $4.92 per share, will be
automatically converted into 8,629,606 shares of common stock.
·
Michael N. Taglich and Robert F. Taglich, directors and principal stockholders of our company,
who hold our 7% promissory notes in the aggregate principal amount of $500,000 (the "Taglich Notes") evidencing our
obligation to repay amounts advanced as working capital in March 2017, have agreed to convert the indebtedness related to those
notes into approximately 344,667 shares of common stock.
Corporate Information
We were incorporated
in Nevada on July 9, 2013 and are successor by merger on August 30, 2013 to our former corporate parent, Air Industries Group,
Inc., a Delaware corporation incorporated in November 2005 in connection with the acquisition of AIM.
Our principal offices
are located at 360 Motor Parkway, Suite 100, Hauppauge New York 11788 and our telephone number is (631) 881-4920. Our principal
website is
http://www.airindustriesgroup.com
. The information contained on our website does not form any part of this prospectus.
We have included our website address as a factual reference and do not intend it to be an active link to our website.
The Offering
Securities Offered by Selling Stockholders
1,293,938
shares of common stock.
Common Stock Outstanding
14,065,770 shares.
(1)
Use of Proceeds
We will not receive any proceeds from
the sale of the Shares by the Selling Stockholders
.
Risk Factors
Investing in our securities involves a significant
degree of risk. You should read the "Risk Factors"
section beginning on page 3  and other information included in this prospectus for
a discussion of factors you should carefully consider before investing
in our securities.
Plan of Distribution
This offering is not being underwritten. The
Selling Stockholders will sell their shares of common stock at prevailing
market prices or privately negotiated prices. The Selling
Stockholders themselves directly, or through their agents,
or through their brokers or dealers, may sell their shares from time to time, in (i) privately negotiated
transactions, (ii)  in one or more transactions, including block transactions in accordance with the applicable rules of the
NYSE MKT or (iii) otherwise in accordance with the section of this prospectus entitled "Plan of Distribution." To
the extent required, the specific shares to be sold, the names of the Selling Stockholders, the respective purchase prices and
public offering prices, the names of any agent, broker or dealer and any applicable commission or discounts with respect to a particular
offer will be described in a supplement to this prospectus. In addition, any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. For additional information on
the methods of sale, you should refer to the section of this prospectus entitled "Plan of Distribution," beginning
on page 51.
NYSE MKT Symbol
Our common stock is listed under the
symbol "AIRI."
__
(1)
Excludes as of July 15, 2017 (i) a total of approximately
    10,187,082 shares issuable upon consummation of the Restructuring Transactions, (ii) 1,950,148 shares issuable upon
    conversion of our 8% subordinated convertible notes (the "8% Notes"), (iii) 1,469,530 shares of common stock
    issuable upon exercise of outstanding warrants, (iv) 516,342 shares of common stock issuable upon exercise of stock options
    granted pursuant to our existing equity incentive plans and (v) shares of common stock, or  securities convertible,
    exercisable     or     exchangeable for shares of common stock, issued subsequent to July 15, 2017.
2
RISK FACTORS
Investing in our securities involves
a high degree of risk. Before making an investment decision, you should carefully review and consider the risks and uncertainties
described below, in addition to the other information presented in this prospectus, in light of your particular investment objectives
and financial circumstances. The risks so described are not the only risks we face. Additional risks not presently known to us
or that we currently deem immaterial may also impair our business operations. Our business, financial condition, results of operations,
or prospects could be materially adversely affected by any of these risks. The trading price of our securities could decline due
to any of these risks, and you may lose all or part of your investment.
The risks below can be characterized into three groups:
1)
Risks related to our business, including risks specific to the defense and aerospace industry:
2)
Risks arising from our indebtedness; and
3)
Risks related to our common stock and this offering.
Risks Related to Our Business
We incurred a substantial net loss in 2016 and may not be
able to continue to operate as a going concern.
We suffered net losses
from operations of $10,789,000 and $519,000 and net losses of $15,623,000 and $1,154,000 for the year ended December 31, 2016 and
the three months ended March 31, 2017, respectively. We also had negative cash flows from operations for the year ended December
31, 2016. In 2015 we ceased paying dividends on our common stock and in 2016 we disposed of the real estate on which one of our
operating subsidiaries is located through a sale leaseback transaction. In January 2017, we sold one of our operating subsidiaries.
During the year ended December 31, 2016 and subsequent thereto, we sold in excess of $20,000,000 in debt and equity securities
to secure funds to operate our business. Since September 2016 we have been issuing additional shares of our Series A Convertible
Preferred Stock in lieu of cash payment of accrued dividends on our outstanding shares of Series A Convertible Preferred Stock
and since February 2017 we have issued additional convertible notes in lieu of cash payment of accrued interest on our outstanding
convertible notes. Furthermore, as of December 31, 2016 and March 31, 2017, we were not in compliance with two financial covenants
under our Amended and Restated Revolving Credit, Term Loan and Security Agreement with PNC Bank (the "Loan Facility").
The report of our independent registered public accountants on our financial statements for the year ended December 31, 2016 states
that these factors raise uncertainty about our ability to continue as a going concern.
Although we received
net proceeds of approximately $6,819,125 from the sale of 5,175,000 shares of our common stock in a firm commitment underwritten
public offering on July 12, 2017, of which approximately $2,355,624 was added to our working capital, unless we are able to generate
positive cash flows from operations, we will continue to depend upon further issuances of debt, equity or other financings to fund
ongoing operations. We may continue to incur additional operating losses and we cannot assure you that we will continue as a going
concern.
We have identified deficiencies and material weaknesses in
our internal controls and we may not be successful in remediating these deficiencies and weakness in the near future.
In connection with
our review of our disclosure controls and internal controls over financial reporting for the fiscal year ended December 31, 2016
and the quarter ended March 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and internal controls over financial reporting were not effective as of such dates. In particular, certain portions of our inventory
control system have not been integrated into the system used by the balance of our company which could result in a failure to
properly account for the costs associated with work in process, slow moving inventory and the value of inventory on hand, and
the enterprise reporting system used to track employee hours. Accordingly, costs to be included in work in process, may not be
sufficiently automated to ensure compliance at all times. In addition, our Chief Executive Officer and Chief Financial Officer
concluded that our quarterly closing process was deficient at our subsidiaries and that our consolidating process and period end
reporting and disclosure procedures were materially weak. They also concluded that our system for administering and disclosing
stock compensation was deficient and that we lacked the accounting personnel necessary to account for complex accounting matters
and unusual and nonstandard transactions. We intend to remediate these conditions. In the event we do not remediate these deficiencies
and material weaknesses in our internal controls, our operations may be adversely affected and the market price of our common
stock could decline. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, we may not
be able to maintain our listing on the NYSE MKT.
3
A reduction in government spending on defense could materially
adversely impact our revenues, results of operations and financial condition.
A large percentage of
our revenue is derived from products for US military aviation. There are risks associated with programs that are subject to appropriation
by Congress, which could be potential targets for reductions in funding. Reductions in United States Government spending on defense
or future changes in the mix of defense products required by United States Government agencies could limit demand for our products,
and may have a materially adverse effect on our operating results and financial condition. Our operations for the year ended December
31, 2016 were negatively impacted by reductions in government procurement orders and such reductions may continue. Since March
1, 2013, as a result of the continuing budget impasse, automatic government spending cuts termed the Sequester were implemented,
and consequently, our revenues, particularly those of our Complex Machining segment, were and continue to be impacted by a slowing
of orders in anticipation of a reduction or shift in the mix of defense spending. There can be no assurance that our financial
condition and results of operations will not be materially adversely impacted by future reductions in defense spending or a change
in the mix of products purchased by defense departments in the United States or other countries, or the perception on the part
of our customers that such changes are about to occur.
We depend on revenues from a few significant relationships.
Any loss, cancellation, reduction, or interruption in these relationships could harm our business.
We expect that our customer
concentration will not change significantly in the near future. We derive most of our revenues from a small number of customers.
Four customers represented approximately 56.4% and 59.3% of total sales for the years ended December 31, 2016 and 2015, respectively.
These four customers represented approximately 60.5% and 58.4% of total sales for the three months ended March 31, 2017 and 2016,
respectively. The markets in which we sell our products are dominated by a relatively small number of customers which have contracts
with United States governmental agencies, thereby limiting the number of potential customers. Our success depends on our ability
to develop and manage relationships with significant customers. We cannot be sure that we will be able to retain our largest customers
or that we will be able to attract additional customers, or that our customers will continue to buy our products in the same amounts
as in prior years. The loss of one or more of our largest customers, any reduction or interruption in sales to these customers,
our inability to successfully develop relationships with additional customers or future price concessions that we may have to make,
could significantly harm our business.
We depend on revenues from components for a few aircraft
platforms and the cancellation or reduction of either production or use of these aircraft platforms could harm our business.
Our Complex Machining
segment derives most of its revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter,
the Northrop Grumman E-2 Hawkeye naval aircraft, the McDonnell Douglas (Boeing) C-17 Globemaster, the F-16 Falcon and the F-18
Hornet. Boeing closed its C-17 production line in 2015. A reduction in demand for our products as a result of either a reduction
in the production of new aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market demand) would
have a material adverse effect on our operating results and financial condition.
Intense competition in our markets may lead to a reduction
in our revenues and market share.
The defense and aerospace
component manufacturing market is highly competitive and we expect that competition will increase and perhaps intensify as the
overall market remains static or declines. Many competitors have significantly greater technical, manufacturing, financial and
marketing resources than we do. We expect that more companies will enter the defense and aerospace component manufacturing market.
We may not be able to compete successfully against either current or future competitors. Increased competition could result in
reduced revenue, lower margins or loss of market share, any of which could significantly harm our business, our operating results
and financial condition.
We may lose sales if our suppliers fail to meet our needs
or shipments of raw materials are not timely made.
Although we
procure most of our parts and components from multiple sources or believe that these components are readily available from
numerous sources, certain components are available only from a sole or limited number or sources. While we believe that
substitute components or assemblies could be obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of our products and could have a materially
adverse effect on our operating results and financial condition. Recently, we have had difficulties in securing timely
shipments of raw materials from certain vendors due to our liquidity problems. Our results of operations for 2016 were
negatively impacted by disruptions in receipt of materials and such disruptions may continue. Any delays in the shipment of
raw materials could significantly harm our business, our operating results and our financial condition.
4
There are risks associated with the bidding processes in
which we compete.
We obtain many contracts
through a competitive bidding process. We must devote substantial time and resources to prepare bids and proposals and may not
have contracts awarded to us. Even if we win contracts, there can be no assurance that the prices that we have bid will be sufficient
to allow us to generate a profit from any particular contract. There are significant costs involved with producing a small number
of initial units of any new product and it may not be possible to recoup such costs on later production runs.
Due to fixed contract pricing, increasing contract costs
expose us to reduced profitability and the potential loss of future business.
The cost estimation
process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor,
the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of
any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover
any claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material
effect on our consolidated financial position or results of operations.
The prices of raw materials we use are volatile.
The prices of raw materials
used in our manufacturing processes are volatile. If the prices of raw materials rise we may not be able to pass along such increases
to our customers and this could have an adverse impact on our consolidated financial position and results of operations. Significant
increases in the prices of raw materials could adversely impact our customers' demand for certain products which could lead
to a reduction in our revenues and have a material adverse impact on our revenues and on our consolidated financial position and
results of operations.
Some of the products we produce have long lead times.
Some of the products
we produce, particularly those of our Complex Machining segment, require months to produce and we sometimes produce products in
excess of the number ordered intending to sell the excess as spares when orders arise. As a result, portions of our inventory turn
slowly and tie up our working capital. Our inventory represented approximately 52% of our assets as of March 31, 2017. Any requirement
to write down the value of our inventory due to obsolescence or a drop in the price of materials could have a material adverse
effect on our consolidated financial position or results of operations.
We do not own the intellectual property rights to products
we produce.
Nearly all the parts
and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any, related
to the product. Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would
be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.
There are risks associated with new programs
.
New programs typically
carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or changing specifications,
timing delays and the accuracy of cost estimates associated with such programs. In addition, any new program may experience delays
for a variety of reasons after significant expenditures are made. If we were unable to perform under new programs to the customers'
satisfaction or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays
or other problems, then our business, financial condition and results of operations could be materially adversely affected. This
could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings in excess
of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.
5
To perform on new programs
we may be required to incur up-front costs which may not have been separately negotiated. Additionally, we may have made assumptions
related to the costs of any program which may be material and which may be incorrect, resulting in costs that are not recoverable.
Such charges and the loss of up-front costs could have a material impact on our liquidity.
Our future success also depends on our ability to address
potential market opportunities and to manage expenses to match our ability to finance operations.
The need to control
our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be adversely affected.
Attracting and retaining a new executive officer and other
key personnel is an essential element of our future success.
Our future success depends
to a significant extent upon our ability to attract a new chief executive officer and other executive talent, as well as the continued
service of our existing executive officers and other key management and technical personnel. Experienced management and technical,
marketing and support personnel in the defense and aerospace industries are in demand and competition for their talents is intense.
Our failure to attract a new chief executive officer and other executive talent, or retain our existing executive officers and
key personnel, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to strict governmental regulations relating
to the environment, which could result in fines and remediation expense in the event of non-compliance.
We are required to comply
with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals,
including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous
substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In
addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released
on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required
to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical
harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use
of such substances. Our operations require the use of chemicals and other materials for painting and cleaning that are classified
under applicable laws as hazardous chemicals and substances. If we are found not to be in compliance with any of these rules, regulations
or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any of which could
result in substantial costs that would adversely impact our business operations and financial condition.
We may be subject to fines and disqualification for non-compliance
with Federal Aviation Administration regulations.
We are subject to regulation
by the Federal Aviation Administration under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes
standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be
subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure
to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which
could have a material adverse effect on our operations. We have never been subject to such fines or disqualification.
Terrorist acts and acts of war may seriously harm our business,
results of operations and financial condition.
United States and global
responses to the Middle East conflict, terrorism, perceived nuclear, biological and chemical threats and other global crises increase
uncertainties with respect to U.S. and other business and financial markets. Several factors associated, directly or indirectly,
with the Middle East conflict, terrorism, perceived nuclear, biological and chemical threats, and other global crises and responses
thereto, may adversely affect the mix of products purchased by defense departments in the United States or other countries to
platforms not serviced by us. A shift in defense budgets to product lines we do not produce could have a material adverse effect
on our business, financial condition and results of operations.
6
Risks Related to Our Indebtedness
Our indebtedness may have a material adverse effect on
our operations.
We have substantial
indebtedness under our Loan Facility. As of June 30, 2017, we had approximately $23,203,866 of indebtedness outstanding under the
Loan Facility, including $2,194,071 of excess advances. All of our indebtedness under the Loan Facility is secured by substantially
all of our assets.
We also have outstanding
$5,359,420 principal amount of 8% Notes. To the extent we are not able to pay accrued interest on the 8% Notes in cash due to restrictions
set forth in the Loan Facility or otherwise, we may issue additional 8% Notes in payment of such accrued interest in lieu of cash
("PIK Notes"). We issued PIK Notes in lieu of cash payment of accrued interest on the 8% Notes on February 28, 2017
and May 31, 2017. Although we intend to pay the accrued interest on the 8% Notes for the period ended August 15, 2017 in cash,
there can be no assurance that we will be able to do so. If we are unable to pay the outstanding principal and accrued interest
on the 8% Notes when due, our operations may be materially and adversely affected.
In addition, we
have outstanding approximately $1,834,214 aggregate principal amount of May 2018 Notes, which will be converted at a
conversion price of $1.50 per share, the public offering price of our shares of common stock in the Public Offering (as
compared to $2.49 per shares at the time the May 2018 Notes were sold in May 2017), into approximately 1,222,809 shares of
common stock following the stockholder vote on the Restructuring Transactions at our 2017 Annual Meeting of Stockholders,
which we expect to hold in September 2017. The principal amount of the May 2018 Notes is subject to increase by 2% per month
for each 30 days they remain outstanding commencing on August 1, 2017. We also have outstanding subordinated notes in the
aggregate principal amount of $500,000 payable to Michael N. Taglich and Robert F. Taglich bearing interest at the rate of 7%
per annum with an amended maturity date of March 17, 2018, which will be converted at a conversion price of $1.50 per share
into approximately 334,667 shares of common stock following the stockholder vote on, and as part of, the Restructuring
Transactions at our 2017 Annual Meeting of Stockholders.
Our leverage may adversely
affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may
make our results of operations more susceptible to adverse economic conditions.
Our indebtedness may limit our ability to pay dividends.
The terms of our Loan
Facility require that we maintain certain financial covenants. Unless we are in compliance with our Loan Facility in the future,
we would need to seek covenant changes under our Loan Facility to pay dividends. There can be no assurance our lenders would agree
to covenant changes acceptable to us or at all. In addition, we may in the future incur indebtedness or otherwise become subject
to agreements whose terms restrict our ability to pay dividends.
Risks Related to our common stock and this offering
The ownership of our common stock is highly concentrated,
and your interests may conflict with the interests of our existing stockholders.
Two of our directors,
Michael N. Taglich and Robert F. Taglich, and their affiliates beneficially own approximately 22.78% of our outstanding common
stock, and following the consummation of the Restructuring Transactions, they will beneficially own approximately 25.50% of our
outstanding shares of common stock. Accordingly, these directors have significant influence over the outcome of corporate actions
requiring stockholder approval. Accordingly, these directors have significant influence over the outcome of corporate actions
requiring stockholder approval. The interests of these directors may be different from the interests of other stockholders on
these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our
common stock.
7
A large number of shares may be sold in the market as a result
of the Public Offering and the resale of the Shares offered by this prospectus, which may depress the market price of our common
stock.
All of the shares of
our common stock sold in the Public Offering and the Shares offered by this prospectus will be freely tradable without restriction
or further registration under the Securities Act. In addition, we will issue a total of approximately 10,187,082 shares of common
stock upon consummation of the Restructuring Transactions, all of which will be eligible for sale in accordance with Rule 144 and
a significant number of the approximately 8,629,606 shares issuable upon the automatic conversion of the Series A Preferred Stock
held by non-affiliates having been held for over the one-year holding period required by Rule 144, will eligible for sale without
restriction. As a result, a substantial number of shares of our common stock may be sold in the public market, which may cause
the market price of our common stock to decline.
We can provide no assurance that our common stock will continue
to meet NYSE MKT listing requirements. If we fail to comply with the continuing listing standards of the NYSE MKT, our common stock
could be delisted.
As a result of the delayed
filing of our Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 Form 10-K") and our Quarterly
Report on Form 10-Q for the period ended March 31, 2017 ("Q1 2017 Form 10-Q"), we received official notices of noncompliance
with NYSE MKT continued listing standards. We resolved the continued listing deficiencies and regained compliance with NYSE MKT
continued listing standards upon filing our 2016 Form 10-K and Q1 2017 Form 10-Q. However, we may fail to timely file a periodic
report or other required SEC filing in the future and as a result may fail to be in compliance in the future. If we fail to satisfy
the continued listing requirements of the NYSE MKT, the NYSE MKT may take steps to delist our common stock.
In addition, the
NYSE MKT has advised that the consummation of the Restructuring Transactions is subject to stockholder approval in accordance
with the applicable rules of the NYSE MKT. Our Board of Directors has decided that if stockholders fail to approve the
Restructuring Transactions at the 2017 Annual Meeting of Stockholders, we nevertheless will consummate the Restructuring
Transactions, in which event the NYSE MKT is likely to delist our common stock.
The delisting of our
common stock would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase
common stock when you wish to do so.
There is only a limited public market for our common stock.
Our common stock is
listed on the NYSE MKT. However, trading volume has been limited and a more active public market for our common stock may not develop
or be sustained over time. The lack of a robust market may impair a stockholder's ability to sell shares of our common stock.
In the absence of a more active trading market, any attempt to sell a substantial number of our shares could result in a decrease
in the price of our stock. Specifically, you may not be able to resell your shares of common stock at or above the price you paid
for such shares or at all.
Moreover, sales of our
common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our common
stock. As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly at all, and
the price per share of our common stock may fluctuate significantly.
Our future revenues are inherently unpredictable; our operating
results are likely to fluctuate from period to period and if we fail to meet the expectations of securities analysts or investors,
our stock price could decline significantly.
Our quarterly and
annual operating results are likely to fluctuate significantly due to a variety of factors, some of which are outside our
control. Accordingly, we believe that period-to-period comparisons of our results of operations are not meaningful and should
not be relied upon as indications of performance. Some of the factors that could cause quarterly or annual operating results
to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense
recognition for contracts, the United States Government contracting and budget cycles, introduction of new government
regulations and standards, contract closeouts, variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic conditions and economic conditions specific to the
defense market. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses
are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our
business.
Fluctuations in quarterly
results, competition or announcements of extraordinary events such as acquisitions or litigation may cause earnings to fall below
the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly
decline. These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of
our common stock, as well as our overall operating results. Consequently, our share price may experience significant volatility
and may not necessarily reflect the value of our expected performance.
8
We are currently unable to pay cash dividends on our common
stock
Our ability to pay cash
dividends on our common stock is limited by the terms of our Loan Facility (and the terms of any future indebtedness or other agreements),
under applicable law, and our status as a holding company.
We may need to raise additional capital in the future. Additional
capital may not be available to us on reasonable terms, if at all, when or as we require. If we issue additional shares of our
common stock or other securities that may be convertible into, or exercisable or exchangeable for, our common stock, our existing
stockholders would experience further dilution and could trigger anti-dilution provisions in outstanding warrants.
Assuming we meet our
current operating budget, we do not expect to need capital in the foreseeable future. However, we may need to raise additional
capital in the future. Future financings may involve the issuance of debt, equity and/or securities convertible into or exercisable
or exchangeable for our equity securities. These financings may not be available to us on reasonable terms or at all when and as
we require funding. If we are able to consummate such financings, the trading price of our common stock could be adversely affected
and/or the terms of such financings may adversely affect the interests of our existing stockholders. Any failure to obtain additional
working capital when required would have a material adverse effect on our business and financial condition and may result in a
decline in our stock price. Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are
convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest
of our existing stockholders.
Future financings or acquisitions may adversely affect the
market price of our common stock.
Future sales or issuances
of our common stock, including the issuance of shares of our common stock upon the consummation of the Restructuring Transactions,
upon conversion of the 8% Notes, upon exercise of our outstanding warrants or as part of future financings or acquisitions, would
be substantially dilutive to the outstanding shares of common stock. Any dilution or potential dilution may cause our stockholders
to sell their shares, which would contribute to a downward movement in the price of common stock.
Future issuances of additional 8% Notes in lieu of cash interest
payments on our 8% Notes will dilute existing holders of our common stock and may adversely affect the market price of our common
stock.
We are obligated to
pay accrued interest quarterly to holders of our 8% Notes. To date, we have issued additional 8% Notes in lieu of cash payments
of accrued interest ("PIK Notes"). Although we intend to pay the accrued interest on the 8% Notes for the period ended
August 15, 2017 in cash, there can be no assurance that we will be able to do so. If for any future interest periods we are unable
to pay accrued interest on the 8% Notes in cash due to restrictions in our Loan Facility or liquidity constraints, we may issue
additional PIK Notes to holders of our 8% Notes. The conversion of PIK Notes into common stock will dilute the interests of our
common stockholders and may adversely affect the market price of our common stock.
We are an "emerging growth company" and we cannot
be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive
to investors.
The JOBS Act permits
"emerging growth companies" like us to rely on some of the reduced disclosure requirements that are already available
to companies having a public float of less than $75 million, for as long as we qualify as an emerging growth company. During that
period, we are permitted to omit the auditor's attestation on internal control over financial reporting that would otherwise
be required by the Sarbanes-Oxley Act. Companies with a public float of $75 million or more must otherwise procure such an attestation
beginning with their second annual report after their initial public offering. For as long as we qualify as an emerging growth
company, we also are excluded from the requirement to submit "say-on-pay", "say-on-pay frequency" and "say-on-parachute"
votes to our stockholders and may avail ourselves of reduced executive compensation disclosure compared to larger companies. In
addition, as described in the following risk factor, as an emerging growth company we can take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public companies.
Until such time as we
cease to qualify as an emerging growth company, investors may find our common stock less attractive because we may rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and our stock price may be more volatile.
As an "emerging growth company" we may take advantage
of an extended transition period to comply with new or revised accounting standards applicable to public companies.
Section 107 of
the JOBS Act also provides that, as an emerging growth company, we can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We can therefore
delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have
elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be
comparable to those of companies that comply with such new or revised accounting standards. Please refer to
"Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical
Accounting Policies and Estimates" for further discussion of the extended transition period for complying with new or
revised accounting standards.
9
At such time as we cease to qualify as an "emerging
growth company" under the JOBS Act, the costs and demands placed upon management will increase.
We will continue to
be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual
gross revenues of $1,000,000,000 (as indexed for inflation), (ii) December 31, 2018 (the last day of the fiscal year following
the fifth anniversary of the date of the first sale of common stock under a registration statement under the Securities Act,) (iii)
the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv)
the date on which we are deemed to be a 'large accelerated filer' as defined by the SEC, which would generally occur
upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and
demands placed upon management to increase, as we would have to comply with additional disclosure and accounting requirements,
particularly if our public float should exceed $75 million.
We incur significant costs as a result of operating as a
public company, and our management is required to devote substantial time to compliance requirements, including establishing and
maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable to comply with
these requirements.
As a public company,
we will incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented
by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies,
including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial
amount of time to these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly.
The Sarbanes-Oxley Act
requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and
procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting
to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404
of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant
management efforts. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be
material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we
cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose confidence in the
reliability of our financial statements and we could be subject to sanctions or investigations by the SEC or other applicable regulatory
authorities.
USE OF PROCEEDS
We will not receive
any proceeds from the sale of the Shares offered by the Selling Stockholders under this prospectus.
We have agreed to bear
the expenses (other than any underwriting discounts or commissions or agent's commissions) in connection with the registration
of the Shares being offered hereby by the Selling Stockholders.
10
PRICE RANGE OF OUR COMMON STOCK
Our common stock is
listed on the NYSE MKT under the symbol "AIRI." The prices set forth below reflect the quarterly high and low closing
prices of a share of our common stock for the periods indicated as reported by Yahoo Finance.
2015:
High
Low
Quarter Ended March 31, 2015
$
10.52
$
9.70
Quarter Ended June 30, 2015
$
10.74
$
9.91
Quarter Ended September 30, 2015
$
10.13
$
8.06
Quarter Ended December 31, 2015
$
9.17
$
6.98
2016:
Quarter Ended March 31, 2016
$
8.23
$
5.90
Quarter Ended June 30, 2016
$
6.08
$
4.20
Quarter Ended September 30, 2016
$
4.89
$
3.95
Quarter Ended December 31, 2016
$
4.39
$
2.25
2017:
Quarter Ended March 31, 2017
$
4.60
$
2.75
Quarter Ended June 30, 2017
$
3.60
$
1.79
Quarter Ended September 30, 2017 (through July 25)
$
1.75
$
1.35
On July 25, 2017, the closing price of our
common stock was $1.42.
Holders
On July 24, 2017, there were
approximately 197 stockholders of record of our common stock. The number of record holders does not include persons who held
our Common Stock in nominee or "street name" accounts through brokers.
DIVIDEND POLICY
The declaration and
payment of dividends on our common stock is subject to the discretion of our Board of Directors and depends on a number of factors,
including future earnings, capital requirements, restrictions under our Loan Facility, financial conditions and future prospects
and other factors the Board of Directors may deem relevant.
11
BUSINESS
We are an aerospace
and defense company. We manufacture and design structural parts and assemblies that focus on flight safety, including landing gear,
arresting gear, engine mounts, flight controls, throttle quadrants, jet engines and other components. We also provide sheet metal
fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile
military and commercial aircraft including Sikorsky's UH-60 Black Hawk and CH-47 Chinook helicopters, Lockheed Martin's
F-35 Joint Strike Fighter, Northrop Grumman's E2 Hawkeye, Boeing's 777, Airbus' 380 commercial airliners and
the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine sector makes components for jet engines that are used on the
USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground turbine applications.
We became a public company
in 2005 when our net sales were approximately $30 million. At that time we had been manufacturing components and subassemblies
for the defense and commercial aerospace industry for over 45 years and had established long term relationships with leading defense
and aerospace manufacturers. Since becoming public we have completed a series of acquisitions of defense related businesses. These
acquisitions have enabled us to broaden the range of products and services we offer. At the time we became a public company, we
were primarily a machining shop. As a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding
and tube bending; the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment
and printed circuit boards; the machining of turbine engine components; and the assembly of packages or "kits" containing
supplies for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical
and electrical assemblies.
We currently divide
our operations into three operating segments: Complex Machining; Aerostructures & Electronics; and Turbine Engine Components.
As our businesses continue to develop and evolve, we may deem it appropriate to reallocate our companies into different operating
segments and, once we achieve sufficient integration among our businesses, report as a unified company.
Complex Machining is
comprised of Air Industries Machining ("AIM") and Nassau Tool Works ("NTW"). Since the lease for the premises
occupied by NTW expires in October 2018, we are relocating and consolidating the operations of NTW into the facilities of AIM in
Bay Shore, New York, approximately six miles from the premises presently occupied by NTW on Long Island.
Aerostructures &
Electronics is comprised of Welding Metallurgy ("WMI"), Woodbine Products ("WPI"), Eur-Pac, Electronic
Connections ("ECC") and Compac Development ("Compac"). We previously relocated the operations of Miller
Stuart, and Compac Development from their locations on Long Island to Welding Metallurgy's facility in Hauppauge, Long Island
NY, and merged Miller Stuart into WMI. We are continuing to fully integrate these operations, and the operations of Woodbine Products,
and Decimal Industries into the operations of Welding Metallurgy. Turbine Engine Components is comprised of The Sterling Engineering
Corporation and, until its sale in January 2017, included AMK Welding.
Our Market
We operate primarily
in the military and, to a lesser degree, commercial aviation industries. Defense revenues represent a preponderance of our sales.
Our principal customers include Sikorsky Aircraft, Goodrich Landing Gear Systems, Northrop Grumman, the United States Department
of Defense, GKN Aerospace, Lockheed, Boeing, Raytheon, Piper Aircraft, M7 Aerospace, Vought Aerospace, Ametek/Hughes-Treitler and
Airbus.
Our products are incorporated
into many aircraft platforms, the majority of which remain in production, and of which there are a substantial number of operating
aircraft in the fleets maintained by the military and commercial airlines. We believe that we are the largest supplier of flight
critical parts to Sikorsky's Black Hawk helicopter. We have made, or currently make, or have been awarded, products for the
CH-47 Chinook helicopter, Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2 Hawkeye, Boeing's
777, Airbus' 380 commercial airliners, and the US Navy F-18 and USAF F-16 fighter aircraft. Our Turbine Engine Components
segment makes components for jet engines that are used on the USAF F-15, the Airbus A-330 and A-380, and the Boeing 777, in addition
to a number of non-military ground turbine applications.
Many of our products
are "flight critical," essential to aircraft performance and safety on takeoff, during flight and when landing. These
products require advanced certifications as a condition to being a supplier. For many of our products we are the sole or one of
a limited number of sources of supply. Many of the parts we supply are subject to wear and tear or fatigue and are routinely replaced
on aircraft on a time of service or flight cycle basis.
12
Replacement demand for these products will
continue, albeit at perhaps a lower rate, so long as an aircraft remains in service, which is usually many years after production
has stopped.
The National Defense
Authorization Act, which was approved in December 2016, provides for an increase in defense spending. President Donald Trump's
preliminary budget proposal provides for a further increase in military spending of approximately 10%. Despite these positive developments,
there can be no assurance that any such increase in military spending will increase demand for the products we supply or otherwise
benefit us.
Sales and Marketing
Our approach to sales
and marketing can be best understood through the concept of customer alignment. The aerospace industry is dominated by a small
number of large prime contractors and equipment manufacturers. These customers rely heavily upon subcontractors to supply quality
parts meeting specifications on a timely and cost effective basis. These customers and other customers we supply routinely rate
their suppliers based on a variety of performance factors. One of our principal goals is to be highly rated and thus relied upon
by all of our customers.
The large prime contractors
are increasingly seeking subcontractors who can supply and are qualified to integrate the fabrication of larger, more complex and
more complete subassemblies. We seek to position ourselves within the supply chain of these contractors and manufacturers to be
selected for subcontracted projects. Successful positioning requires that we qualify to be a preferred supplier by achieving and
maintaining independent third party quality approval certifications, specific customer quality system approvals and top supplier
ratings through strong performance on existing contracts. We believe that the various capabilities we have acquired through our
acquisition program increase the likelihood we will qualify for and be awarded larger, more complex projects. As an example of
our successful efforts to move up the supplier chain, our Aerostructures & Electronics segment has grown from being a supplier
of welding services to being a supplier of welding subassemblies and is now a product integrator, providing customers with complete
structural assemblies.
As part of our effort
to become a product integrator and increase our value to our customers, we have recruited personnel to design products and to fabricate
complete, fully-assembled products. In our marketing efforts we let customers know that we now have employees with the talent and
experience to manage the manufacture of sections of aircraft structures to be delivered to the final assembly phase of the aircraft
manufacturing cycle, and customers have now engaged us for these services.
As we acquired new businesses,
we often gained new or enhanced technical capabilities. When we sought to exploit these new capabilities by introducing to our
existing customers newly acquired products and capabilities we previously lacked. Businesses we acquired often introduced us to
customers we had not previously supplied and we marketed to these customers the products and services they need which we historically
provided. This marketing effort has enabled us to grow some of the businesses we acquired and increased our value to our customers.
For example, the acquisition of the business of Nassau Tool Works in 2012 expanded our capabilities in the "turning"
of metal components. This enhanced capability was important in our Complex Machining segment winning a large multi-year commercial
aerospace contract to supply Thrust Struts to a unit of UTAS for use in the Pratt & Whitney Geared Turbo Fan jet engine.
Initial contracts are
usually obtained through competitive bidding against other qualified subcontractors, while follow-on contracts are usually retained
by successfully performing initial contracts. The long term business of each of our current operating segments generally benefits
from barriers to entry resulting from investments, certifications, familiarization with the needs and systems of customers, and
manufacturing techniques developed during the initial manufacturing phase. We endeavor to develop each of our relationships to
one of a "partnership" where we participate in the resolution of pre-production design and build issues, and initial
contracts are obtained as single source awards and follow-on pricing is determined through negotiations. Despite these efforts
a minority of our sales are based on negotiated prices.
Our Backlog
Our backlog is best understood by looking at our operating segments
independently.
Within our Complex
Machining and Turbine Engine Components segments, the production cycle of products can extend from several months to a year or
longer. This gives rise to significant backlogs as customers must order product with sufficient lead time to ensure timely delivery.
In contrast, the production cycle for a significant majority of the products produced in our Aerostructures & Electronics
segment is much shorter, a matter of several weeks or a few months. This shorter cycle allows customers to delay orders resulting
in a much smaller backlog.
13
We have a number of
long-term multi-year General Purchase Agreements or GPA's with several of our customers. These agreements specify part numbers,
specifications and prices of the covered products for a specified period, but do not authorize immediate production and shipment.
Shipments are authorized periodically by the customer to fit their production schedule. We recently received a renewal of our multi-year
contract with Sikorsky, MY9, for the years 2018 to 2023. This contract is for $47 million worth of product during this period.
This is the third multi-year contract award we have received from Sikorsky.
Our "firm
backlog" includes only fully authorized orders received for products to be delivered within the forward 18-month
period. As of June 30, 2017, our 18-month "firm funded backlog" was approximately $120 million.
Competition
Winning a new contract
is highly competitive. For the most part we manufacture to customer designs and specifications, and compete against companies that
have similar manufacturing capabilities in a global marketplace. Consequently, the ability to obtain contracts requires providing
quality products at competitive prices. To accomplish this requires that we strive for continuous improvement in our capabilities
to assure our competitiveness and provide value to our customers. Our marketing strategy involves developing long-term ongoing
working relationships with customers. These relationships enable us to develop entry barriers to would-be competitors by establishing
and maintaining advanced quality approvals, certifications and tooling investments that are difficult and expensive to duplicate.
Despite these barriers to entry, many of our competitors are well-established subcontractors engaged in the supply of aircraft
parts and components to prime military contractors and commercial aviation manufacturers. Among our competitors are: Monitor Aerospace,
a division of Stellex Aerospace; Hydromil, a division of Triumph Aerospace Group; Heroux Aerospace and Ellanef Manufacturing, a
division of Magellan Corporation.
Many of our competitors
are larger enterprises or divisions of significantly larger companies having greater financial, physical and technical resources,
and the capabilities to timelier respond under much larger contracts.
Raw Materials and Replacement Parts
The manufacturing process
for certain products, particularly those for which we serve as product integrator, requires significant purchases of raw materials,
hardware and subcontracted details. As a result, much of our success in profitably meeting customer demand for these products requires
efficient and effective subcontract management. Price and availability of many raw materials utilized in the aerospace industry
are subject to volatile global markets. Most suppliers of raw materials are unwilling to commit to long-term contracts at fixed
prices. This is a substantial risk as our strategy often involves long term fixed price commitments to our customers. Recently,
we have had difficulties in securing timely shipments of raw materials from certain vendors due to our liquidity problems.
Employees
As of May 31, 2017,
we employed approximately 366 people. Of these, approximately 42 were in administration, 29 were in sales and procurement, and
295 were in manufacturing.
Air Industries Machining,
one of the components of our Complex Machining segment, is a party to a collective bargaining agreement (the "Agreement")
with the United Service Workers, IUJAT, Local 355 (the "Union") with which we believe we maintain good relations. The
Agreement, dated January 1, 2016, expires December 31, 2018 and covers all of AIM's production personnel, of which there
are approximately 104 people. AIM is required to make a monthly contribution to each of the Union's United Welfare Fund and
the United Services Worker's Security Fund. This is the only pension benefit required by the Agreement and the Company is
not obligated for any future defined benefit to retirees. The Agreement contains a "no-strike" clause, whereby, during
the term of the Agreement, the Union will not strike and AIM will not lockout its employees.
All of our employees are covered under a
co-employment agreement with ADP.
Regulations
Environmental Regulation; Employee Safety
We are subject to
regulations administered by the United States Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting in cooperation with federal and state
authorities. Among other things, these regulatory bodies impose restrictions that require us to control air, soil and water
pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require
notification or reporting of the storage, use and release of certain hazardous chemicals and substances. The extensive
regulatory framework imposes compliance burdens and financial and operating risks on us. Governmental authorities have the
power to enforce compliance with these regulations and to obtain injunctions or impose civil and criminal fines in the case
of violations.
14
The Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA") imposes strict, joint and several liability on the present
and former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation
and Recovery Act of 1976 ("RCRA") regulates the generation, transportation, treatment, storage and disposal of hazardous
waste. New York and Connecticut, the states where all of our production facilities are located, also have stringent laws and regulations
governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards
that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence
of hazardous chemicals and to train employees in the use of such substances.
Federal Aviation Administration
We are subject to regulation
by the Federal Aviation Administration ("FAA") under the provisions of the Federal Aviation Act of 1958, as amended.
The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by
the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations.
Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts,
which could have a material adverse effect on our operations. We have never been subject to such fines or disqualifications.
Government Contract Compliance
Our government contracts
and those of many of our customers are subject to the procurement rules and regulations of the United States government, including
the Federal Acquisition Regulations. Many of the contract terms are dictated by these rules and regulations. During and after the
fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed to the
project. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquiries
and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or
limitations on our ability to continue to bid for government contracts and fulfill existing contracts.
We believe that we are
in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses
and permits required for the operation of our business.
Properties
Our executive offices
are located at 360 Motor Parkway, Suite 100, Hauppauge, New York 11788. We occupy our executive offices under a lease with approximately
five years remaining in the term which ends January 2022. The annual rent was $103,000 for the lease year which began in January
2016, and increases by approximately 3% per annum each year thereafter until the seventh year of the lease.
The operations of a
portion of our Complex Machining segment are conducted on a 5.4-acre corporate campus in Bay Shore, New York. We occupy three buildings
on the campus, consisting of 76,000 square feet. On October 24, 2006, we entered into a "sale/leaseback" transaction
whereby we sold the buildings and real property located at the corporate campus and entered into a 20-year triple-net lease for
the property. Base annual rent for 2016 was approximately $723,000 and increases by 3% each subsequent year. The lease grants us
an option to renew the lease for an additional five years. Under the terms of the lease, we are required to pay all of the costs
associated with the operation of the facilities, including, without limitation, insurance, taxes and maintenance.
The remaining portion
of the operations of our Complex Machining segment are conducted in a 60,000 square foot facility in West Babylon, New York. The
space is occupied under a lease which provides for an annual base rent of approximately $360,000 through October 30, 2018. We
are in the process of relocating the operations of NTW conducted at this location to AIM's facilities in Bay Shore, New
York.
15
The operations of our
Aerostructures & Electronics segment are principally conducted in an 81,035 square foot facility located in Hauppauge, New
York. This space is occupied under a sublease which had an annual base rent of approximately $527,000 for 2016 and increases by
an agreed upon amount each anniversary of the commencement of the lease through December 31, 2026.
The balance of our Aerostructures
& Electronics segment are located in a 16,000 square foot facility in Waterbury, Connecticut. The space is occupied under a
lease which has an annual base rent of approximately $115,000 and expires May 31, 2019; and a 9,200 square foot space in Bay Shore,
New York, which is occupied under a lease which has an annual base rent of approximately $75,000 and expires April 30, 2018.
The operations of our
Turbine Engine Components segment are conducted in a 74,923 square foot facility on a 24 acre parcel in Barkhamsted, Connecticut.
Legal Proceedings
From time to time we
may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of
any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material
adverse effect on our business, financial condition or operating results. We, however, have had claims brought against us by a
small number of vendors due to our liquidity constraints. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial stockholder of our common stock, is an adverse party or has a material interest adverse
to our interest.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion
of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements
for the years ended December 31, 2016 and 2015 and our unaudited condensed consolidated financial statements for the quarters ended
March 31, 2017 and 2016 and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in this prospectus
that could cause actual results to differ materially from those anticipated in these forward-looking statements.
Business Overview
We are an aerospace
company operating primarily in the defense industry, though the proportion of our business represented by the commercial and industrial
sector is increasing. We manufacture and design structural parts and assemblies that focus on flight safety, including landing
gear, arresting gear, engine mounts, flight controls, throttle quadrants, and other components. We also provide sheet metal fabrication
of aerostructures, tube bending, welding and kitting services. Our Turbine Engine Components segment makes components and provides
services for jet engines and ground-power turbines. Our products are currently deployed on a wide range of high profile military
and commercial aircraft.
We became a public company
in 2005 when our net sales were approximately $30 million. We have manufactured components and subassemblies for the defense and
commercial aerospace industry for over 50 years and have established long-term relationships with leading defense and aerospace
manufacturers. Since becoming public, we have completed a series of acquisitions of defense related businesses. These acquisitions
have enabled us to broaden the range of products and services we offer. At the time we became a public company, we were primarily
a machining shop. As a result of acquisitions, we now have capabilities and expertise in metal fabrication, welding and tube bending;
the production of electromechanical systems, harness and cable assemblies; the fabrication of electronic equipment and printed
circuit boards; the machining of turbine engine components; and the assembly of packages or "kits" containing supplies
for all branches of the United States Defense Department, including ordnance parts, hose assemblies, hydraulic, mechanical and
electrical assemblies.
Since January 1, 2015, we have made the following
acquisitions and dispositions:
·
In March 2015, we acquired Sterling Engineering Corporation
("Sterling") for approximately $10.1 million. Founded in 1941, Sterling provides complex machining services and its
business is concentrated with aircraft jet engine and ground turbine manufacturers;
·
In September 2015, we acquired Compac Development Corporation ("Compac") for
                                                                                                                   approximately $1.5 million. Founded in 1976, Compac specializes in the manufacture of RFI/EMI (Radio Frequency Interference
                                                                                                                   – Electromagnetic Interference) shielded enclosures for electronic components;
·
In January 2017 we sold AMK Welding, Inc., for $4.5 million, net of a working capital
                                                                                                                   adjustment of ($240,000) plus additional payments based on net revenue not to exceed $1.5 million. We acquired AMK Welding
                                                                                                                   in
                                                                                                                   October, 2014.
The aerospace market
is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business.
Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through
a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors
seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive
not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete
assemblies for our customers.
17
Our ability to operate
profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts
on a timely basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally
requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period
of time. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors,
the prices we can obtain from our subcontractors.
While our revenues are
largely determined by the number of contracts we are awarded, the volume of product delivered and the price of product under each
contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials
and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace
industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive.
The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product,
the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice.
Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the
result of shifts in the mix of products sold.
A very large percentage
of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements parts for aircraft
already in the fleet of the armed services or for the production of new aircraft. Reductions to the Defense Department budget and
decreased usage of aircraft have reduced the demand for both new production and replacement spares. This reduced our sales, particularly
in our Complex Machining segment.
The Defense budget proposed
for Fiscal Year 2017, beginning on October 1, 2016, approved in December 2016, increases military spending and presumably procurement.
Recently President Trump has proposed an additional increase of approximately $50 billion for fiscal year 2018, beginning on October
1, 2017. There is no assurance that defense spending will, in fact, increase in the near future or that the increase will increase
demand for the product lines we produce.
Public Offering
On July 12, 2017,
we sold 5,175,000 shares of common stock at a price of $1.50 per for gross proceeds of $7,762,500 in a firm commitment underwritten
public offering (the "Public Offering"). We received net proceeds of approximately $6,819,125 from the sale of our
shares in the Public Offering. For additional information concerning the Public Offering and the related Restructuring Transactions,
see the discussion under the caption "Liquidity," below.
Segment Data
We follow Financial
Accounting Standards Board ("FASB") ASC 280, "Segment Reporting" ("ASC 280"), which establishes
standards for reporting information about operating segments in annual and interim financial statements, and requires that companies
report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes
standards for related disclosures about products and services, geographic areas and major customers.
We currently divide
our operations into three operating segments: Complex Machining; Aerostructures & Electronics; and Turbine Engine Components.
Effective January 1, 2015, all operating costs are allocated to our three operating segments. As our businesses continue to develop
and evolve we may deem it appropriate to reallocate our companies into different operating segments. Along with our operating subsidiaries,
we report the results of our corporate division as an independent segment.
The accounting policies
of each of the segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance
of each segment based on revenue, gross profit contribution and assets employed.
RESULTS OF OPERATIONS
Three Months ended March 31, 2017 and 2016
Selected Financial Information:
Three Months Ended March 31, 2017 and
    2016:
2017
2016
(Unaudited)
(Unaudited)
Net sales
$
16,153,000
$
15,184,000
Cost of sales
13,451,000
12,363,000
Gross profit
2,702,000
2,821,000
Operating expenses and interest costs
(4,114,000
)
(4,917,000
)
Other income, net
(193,000
)
10,000
Gain on Sale of Subsidiary
451,000
—
Benefit from income taxes
—
656,000
Net Loss
$
(1,154,000
)
$
(1,430,000
)
18
Balance Sheet Data:
March 31,
2017
December 31,
2016
(Unaudited)
Cash and cash equivalents
$
1,043,000
$
1,304,000
Working capital
3,096,000
2,903,000
Total assets
73,627,000
82,800,000
Total stockholders' equity
$
24,911,000
$
24,890,000
The following sets forth the results of
operations for each of our segments individually and on a consolidated basis for the periods indicated:
Three Months Ended March 31,
2017
2016
(Unaudited)
(Unaudited)
COMPLEX MACHINING
Net Sales
$
9,891,000
$
7,467,000
Gross Profit
2,901,000
1,858,000
Pre Tax (Loss) Income
1,085,000
(400,000
)
Assets
41,940,000
51,076,000
AEROSTRUCTURES & ELECTRONICS
Net Sales
4,320,000
5,160,000
Gross Profit
26,000
948,000
Pre Tax (Loss) Income
(1,279,000
)
(772,000
)
Assets
19,669,000
19,263,000
TURBINE ENGINE COMPONENTS
Net Sales
1,942,000
2,557,000
Gross Profit
(225,000
)
15,000
Pre Tax (Loss) Income
(827,000
)
(914,000
)
Assets
11,233,000
17,247,000
CORPORATE
Net Sales
—
—
Gross Profit
—
—
Pre Tax (Loss) Income
(133,000
)
—
Assets
785,000
534,000
CONSOLIDATED
Net Sales
16,153,000
15,184,000
Gross Profit
2,702,000
2,821,000
Pre Tax (Loss) Income
(1,154,000
)
(2,086,000
)
Benefit from Income Taxes
—
656,000
Net (Loss) Income
(1,154,000
)
(1,430,000
)
Assets
$
73,627,000
$
88,120,000
19
Net Sales:
Consolidated net sales
for the three months ended March 31, 2017 were approximately $16,153,000, an increase of $969,000, or 6.4%, compared with $15,184,000
for the three months ended March 31, 2016. The increase in sales resulted from an increase in our Complex Machining segment of
approximately $2,424,000 or 32.5%. This increase in sales was partially offset by decreases in our Turbine Engine Components and
Aerostructures & Electronics segments of approximately $615,000 and $840,000, respectively. The decrease in our Turbine Engine
Segment in 2017 largely resulted from the inclusion of AMK for three months in 2016 and only one month in 2017. AMK was sold on
January 27, 2017. Without AMK revenues of this segment were essentially flat, declining just $38,000 for the quarter.
As indicated in the
table below, four customers represented 60.5% and 58.4% of total sales for the three months ended March 31, 2017 and 2016, respectively.
Customer
Percentage of Sales
2017
2016
(unaudited)
(unaudited)
Sikorsky Aircraft
16.6
23.2
United States Department of Defense
17.1
12.7
Goodrich Landing Gear Systems
14.1
11.9
Northrop Grumman Corporation
12.7
10.6
Gross Profit:
Consolidated gross profit
from operations for the three months ended March 31, 2017 was $2,702,000, a decrease of approximately $119,000, or 4.2%, as compared
to gross profit of $2,821,000 for the three months ended March 31, 2016. Consolidated gross profit as a percentage of sales was
16.7% and 18.6% for the three months ended March 31, 2017 and 2016, respectively. Gross profit from operations increased by approximately
$1,043,000 in our Complex Machining segment. This increase was offset by declines in gross profit in our Turbine & Engine and
Aerostructures & Engineering segments of approximately $239,000 and $922,000, respectively.
Operating Expenses:
Consolidated operating
expenses for the three months ended March 31, 2017 were $3,221,000 and decreased by $1,191,000, or 27.0%, compared to $4,412,000
for the three months ended March 31, 2016. The decrease resulted primarily from a reduction in corporate expense and to a lesser
degree the elimination of operating costs for AMK for two months of 2017.
Interest and financing
costs for the three months ended March 31, 2017 were approximately $893,000, an increase of approximately $388,000, or 76.8%, compared
to $505,000 for the three months ended March 31, 2016. The increase resulted from increases in debt in the form of subordinated
notes bearing interest at higher rates than debt under the PNC Loan Facility and to a lesser degree higher interest rates on the
PNC loan facility, offset in part by less principal outstanding on the PNC loans.
Loss before income taxes
for the three months ended March 31, 2017 was $(1,154,000), a decrease in the loss of $932,000, or a 44.7% improvement, compared
to the loss before income taxes of $(2,086,000) for the three months ended March 31, 2016. Our Complex Machining segment had a
pre-tax profit of approximately $1,085,000. Our Aerostructures & Electronics segment experienced a pre-tax loss of approximately
$(1,279,000). Our Turbine & Engine segment experienced a pre tax loss of approximately $(827,000).
Net Loss:
Net loss for the three
months ended March 31, 2017 was $(1,154,000), a decrease of $276,000, or 19.3%, compared to net loss of $(1,430,000) for the three
months ended March 31, 2016 for the reasons discussed above.
Years ended December 31, 2016 and 2015:
The results of operations
of the businesses we have acquired are included in our financial results for the year ended December 31, 2015 from their respective
dates of acquisition; March 1, 2015, in the case of Sterling and September 1, 2015, in the case of Compac.
20
Selected Financial Information:
2016
2015
Net sales
$
66,915,000
$
80,442,000
Cost of sales
60,195,000
63,161,000
Gross profit
6,720,000
17,281,000
Operating expenses, acquisition costs and interest and financing costs
20,105,000
18,513,000
Other income (expense) net
(126,000
)
114,000
Provision for (benefit from) income taxes
2,112,000
(286,000
)
Net (loss)
$
(15,623,000
)
$
(832,000
)
Balance Sheet Data:
December 31,
2016
December 31,
2015
Cash and cash equivalents
$
1,304,000
$
529,000
Working capital
2,903,000
2,171,000
Total assets
82,800,000
88,250,000
Total stockholders' equity
$
24,890,000
$
28,805,000
The following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods indicated:
Year Ended December 31,
2016
2015
COMPLEX MACHINING
Net Sales
$
37,124,000
$
42,356,000
Gross Profit
4,382,000
10,412,000
Pre Tax Income (Loss)
(5,432,000
)
1,825,000
Assets
45,073,000
48,353,000
AEROSTRUCTURES & ELECTRONICS
Net Sales
18,818,000
27,134,000
Gross Profit
2,489,000
6,553,000
Pre Tax Income (Loss)
(3,985,000
)
386,000
Assets
19,843,000
20,229,000
TURBINE ENGINE COMPONENTS
Net Sales
10,973,000
10,952,000
Gross Profit
(151,000
)
316,000
Pre Tax Income (Loss)
(4,084,000
)
(3,329,000
)
Assets
17,235,000
19,076,000
CORPORATE
Net Sales
—
—
Gross Profit
—
—
Pre Tax Income (Loss)
(10,000
)
—
Assets
649,000
592,000
CONSOLIDATED
Net Sales
66,915,000
80,442,000
Gross Profit
6,720,000
17,281,000
Pre Tax Income (Loss)
(13,511,000
)
(1,118,000
)
Provision for (Benefit from) Income Taxes
2,112,000
(286,000
)
Net (Loss) Income
(15,623,000
)
(832,000
)
Assets
$
82,800,000
$
88,250,000
21
Net Sales:
Consolidated net sales
for the year ended December 31, 2016 were approximately $66,915,000, a decrease of $13,527,000, or 16.8%, compared with $80,442,000
for the year ended December 31, 2015. Net sales of our Complex Machining segment were approximately $37,124,000, a decrease of
$5,232,000, or 12.4%, from $42,356,000 in the prior year. The decline in sales at our Complex Machining segment was due to delays
in producing products exacerbated by disruptions in receipt of materials, and reductions in government procurement orders due to
Sequestration. Net sales of our Aerostructures & Electronics segment were approximately $18,818,000 and decreased by $8,316,000,
or 30.6%, from $27,134,000 in the prior year. This decline can be attributed to decreased volume at each of the divisions within
our Aerostructures & Electronics segment other than Compac which experienced an increase in annual sales largely due to the
fact that it was owned for all of 2016 as compared to four months in 2015. Approximately $4.2 million of the decrease is attributed
to the expected loss of a biennial contract with Raytheon which was awarded in 2015, but not in 2016. An additional $2.2 million
of the decline resulted from a delay in the shipment of a single $3 million order received in 2016. The balance of the decline
is attributable to delays in producing products. Net sales in our Turbine Engine Components segment were approximately $10,973,000,
an increase from net sales of $10,952,000 in the prior year. The stability of sales in our Turbine Engine Components reflects the
fact that during 2016 they included the results of both Sterling and AMK, and an increase in sales of $453,000 at AMK was substantially
offset by a decrease in sales at Sterling, despite the fact that the results of Sterling were included for only ten months in 2015.
AMK was sold in January 2017.
As indicated in the
table below, four customers represented 56.4% and four customers represented 59.3% of total sales for the years ended December
31, 2016 and 2015, respectively.
Customer
Percentage of Sales
2016
2015
Sikorsky Aircraft
19.1
%
20.5
%
Goodrich Landing Gear Systems
12.3
%
15.4
%
United States Department of Defense
14.3
%
12.0
%
Northrup Grumman Corporation
10.7
%
11.4
%
As indicated in the table below, one customer
represented 19.9% and four customers represented 61.1% of gross accounts receivable at December 31, 2016 and 2015, respectively.
Customer
Percentage of Receivables
2016
2015
Goodrich Landing Gear Systems
19.9
%
26.6
%
Northrop Grumman Corporation
*
13.6
%
Sikorsky Aircraft
*
10.5
%
GKN Aerospace
*
10.4
%
*
Customer was less than 10% of Gross Accounts Receivable at December 31, 2016.
Gross Profit:
Consolidated gross profit
from operations for the year ended December 31, 2016 was $6,720,000, a decrease of approximately $10,561,000, or 61.1%, as compared
to gross profit of $17,281,000 for the year ended December 31, 2015. Consolidated gross profit as a percentage of sales was 10.0%
and 21.5% for the years ended December 31, 2016 and 2015, respectively. The decrease in gross profit is due to the effects of lower
total sales and related absorption of non-variable manufacturing costs into cost of sales, increased slow moving reserves, and
less profitable contracts. The decline in gross profit percentage resulted from under absorption of factory overhead expenses.
The decrease in consolidated gross profit reflects decreases in each of our operating segments, caused, in the case of our Complex
Machining and Aerostructures & Electronics segments, by a substantial reduction in sales.
Selling, General & Administrative ("SG&A"):
Consolidated SG&A
costs for the year ended December 31, 2016 totaled approximately $17,509,000 and increased by $952,000 or 5.7% compared to $16,557,000
for the year ended December 31, 2015. The increase in SG&A costs reflects the addition of a number of management level personnel
at the Company's headquarters. Due to the failure of sales to increase as anticipated, we have begun to take steps to reduce
the increase in SG&A costs.
22
Interest and financing costs of approximately
$2,596,000 for the year ended December 31, 2016 increased $738,000 or 39.7% as compared to $1,858,000 for the year ended December
31, 2015. This increase can be attributed to additional amounts of debt incurred from term loans due to the AMK and Sterling acquisitions,
the purchase of inventory from Circor Aerospace which was not sold in 2016 and cash used for operations to fund our losses. In
addition to increasing our debt in absolute terms, the convertible debt issued during 2016 bears a higher per annum rate of interest
than our bank debt. Due to our inability to generate significant cash from operations, however, during 2016 we paid the interest
accrued on our convertible debt "in–kind" through the issuance of additional debt, which further increased the
amount of our debt outstanding.
We had an income tax
expense of $2,112,000 for the year ended December 31, 2016 compared to an income tax benefit of $286,000 for the year ended December
31, 2015. The tax provision for 2016 was primarily the result of providing a full valuation allowance on our deferred tax asset.
Net Loss
Net loss for the year
ended December 31, 2016 was $15,623,000, an increase of $14,791,000, compared to a net loss of $832,000 for the year ended December
31, 2015, for the reasons discussed above.
Impact of Inflation
Inflation has not had a material effect
on our results of operations.
LIQUIDITY AND CAPITAL RESOURCES
We are highly leveraged
and rely upon our ability to continue to borrow under our Loan Facility with PNC or to raise debt and equity from third parties
to support operations and acquisitions. Substantially all of our assets are pledged as collateral under our Loan Facility. We are
required to maintain a lockbox account with PNC, into which substantially all of our cash receipts are paid. If PNC were to cease
providing revolving loans to us under the Loan Facility, we would lack funds to continue our operations. Over the past twelve months
we have also relied upon our ability to borrow money from certain stockholders and raise debt and equity capital to support our
operations. Should we continue to need to borrow funds from our principal stockholders or raise debt or equity, there is no assurance
that we will be able to do so or that the terms on which we borrow funds or raise equity will be favorable to us or our existing
shareholders.
The Loan Facility has
been amended many times during its term. The Loan Facility was amended in June 2016 (the "Twelfth Amendment"), September
2016 (the "Thirteenth Amendment"), January 2017 (the "Fourteenth Amendment") and June 2017 (the "Fifteenth
Amendment").
The Twelfth Amendment
provides for a $33,000,000 revolving loan. In addition, in the Twelfth Amendment the four term loans (Term Loan A, Term Loan B,
Term Loan C and Term Loan D) then outstanding were consolidated into a single term loan with the initial principal amount of $7,387,854.
Further, in the Twelfth Amendment we acknowledged that there were then outstanding excess advances under the revolver in the amount
of $12,500,000. At the closing of the Twelfth Amendment we paid $1,500,000 to reduce the outstanding excess under the revolving
loan. We also agreed to reduce the excess advances by $100,000 each week commencing the second week after the closing of the Twelfth
Amendment. In connection with the Twelfth Amendment, we paid PNC a fee of $100,000 and reimbursed PNC for the fees and expenses
of its counsel.
Under the terms of the
Loan Facility, as amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters
of one percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent
(4.50%) with respect to LIBOR Rate Loans. The amount outstanding under the revolving loan (including excess advances) was $24,393,000
and $29,604,000, as of December 31, 2016 and December 31, 2015, respectively.
The Loan Facility was
further amended pursuant to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be the lesser
of (i) 75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, an
increase from 85%, subject to the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper. In addition, in
the Thirteenth Amendment the lender waived any default resulting from our failure to comply with the minimum EBITDA covenant for
the period ended June 30, 2016, consented to the issuance of our 12% Subordinated Convertible Notes and the amendment to our Articles
of Incorporation to increase the authorized number of shares of Preferred Stock and Series A Preferred Stock.
23
The repayment terms of the Term Loan provided
for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first fifty-nine (59) of which
are in the amount of $123,133 commencing on the first business day of July, 2016, and continuing on the first business day of each
month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal and interest payable on the last
business day of June, 2021.
The terms of the Loan
Facility require that, among other things, we maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA for
specified periods. In addition, we are limited in the amount of Capital Expenditures we can make. We are also limited to the amount
of dividends we can pay our shareholders as defined in the Loan Facility. As of December 31, 2016, we were not in compliance with
the minimum EBITDA covenant, the Fixed Charge Coverage Ratio and the Capital Expenditures covenant. At March 31, 2017, we were
not in compliance with the minimum EBITDA covenant.
In connection with the
sale of AMK to Meyer Tool, Inc., on January 27, 2017 we, together with our wholly-owned subsidiaries, entered into the Fourteenth
Amendment to the Loan Facility which amended certain terms and conditions of the Loan Facility and released AMK from its obligations
under the Loan Facility.
The proceeds of the
sale of AMK, net of a working adjustment in the amount of ($240,000), were applied as follows: $1,700,000 to the payment of the
Term Loan, $1,800,000 to the payment of outstanding revolving loans, and $500,000 to the payment of existing accounts payable.
The remaining $260,000 will be applied to outstanding accounts payable on a future date to be determined by PNC or used to reduce
the revolving loans. The Fourteenth Amendment to the Loan Facility also waived the noncompliance at September 30, 2016 with the
Fixed Charge Coverage Ratio and the minimum EBITDA covenants for the period then ended, and required that we maintain a Fixed Charge
Coverage Ratio of not less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis; however,
for the quarter ending June 30, 2017, which was to be tested based upon the prior six (6) months, we were required to maintain
a Fixed Charge Coverage Ratio of not less than 1.00 to 1.00 and for the quarter ending September 30, 2017, which was to be tested
based upon the prior nine (9) months, we were required to maintain a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00.
The amendment also reduced the amount to be paid weekly in repayment of excess advances under the revolving credit facility from
$100,000 to $50,000 for each Monday during the months of January, February and March of 2017. Thereafter, the weekly payments were
to return to $100,000 until such excess advances were repaid in full.
On June 19, 2017, we
entered into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant
for the periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December
31, 2016. The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated
basis beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the
prior three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months
and (iii) 1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine (9) months and that we maintain
EBITDA of not less than $345,000 for the period ending June 30, 2017. The amendment also provided that we were not required to
maintain a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending
December 31, 2016 and March 31, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing
will be required of the Fixed Charge Coverage Ratio for the period ending June 30, 2017. In addition, the amendment reduces the
weekly payments we are required to make to reduce our $2,244,071 over-advance under the revolving credit facility as of June 19,
2017 from $100,000 to $25,000 per week during the period commencing May 22, 2017 through and including July 10, 2017. We paid $50,000
to PNC in connection with the amendment and reimbursed PNC's counsel fees.
As of March 31, 2017,
our outstanding indebtedness to PNC was $23,427,000 and consisted of revolving loans in the amount of $18,847,000 (including excess
advances of $3,044,071) and the term loan of $4,580,000, as compared to December 31, 2016, when our debt to PNC was $31,042,000
and consisted of revolving loans of $24,393,000 (including excess advances of $5,694,071) and the term loan of $6,649,000. In addition,
as of March 31, 2017 we had capitalized lease obligations to third parties of $3,902,000, as compared to capitalized lease obligations
of $4,215,000 as of December 31, 2016.
As of June 30, 2017,
our debt to PNC was approximately $23,203,866, and consisted of revolving loans in the amount of $18,993,611 (including excess
advances of $2,194,071) and the term loan in the amount of $4,210,254.
24
Significant Transactions Since January 1, 2016 Which Have
Impacted Our Liquidity
Dispositions
On April 11, 2016 we
sold our South Windsor, Connecticut property for a purchase price of $1,700,000, less closing adjustments of approximately $200,000,
pursuant to a Real Estate Purchase and Sale Contract dated as of December 7, 2015, as amended, and entered into a lease with the
purchaser of the property for an initial term of 15 years, with an option to renew the lease for an additional five years. In addition
to rent, initially $155,000 per annum, subject to annual escalation increase of 3%, we also will be responsible for real estate
taxes and the maintenance of the buildings and the property. The net proceeds from the sale of the property were applied to the
amounts owed to PNC.
On January 27, 2017,
we sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017,
for a purchase price of $4,500,000, net of a working capital adjustment of $(240,000), plus additional quarterly payments, not
to exceed $1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. The proceeds of the sale were
applied in accordance with the terms of the Fourteenth Amendment to the Loan Facility, as discussed above.
AMK, based in South
Windsor, Connecticut, is a provider of sophisticated welding and machining services for diversified aerospace and industrial customers
which we acquired in October 2014.
Series A Preferred Stock Financing
On May 25, 2016, and
June 1, 2016, we completed a private placement of 700,000 shares of our Series A Preferred Stock for $10.00 per share and received
gross cash proceeds of $5,250,000, net of $1,750,000 principal amount of our promissory notes exchanged by Michael N. Taglich and
Robert F. Taglich, two of our principal stockholders, for shares of Series A Preferred Stock. We had issued the promissory notes
to Michael N. Taglich and Robert F. Taglich for amounts borrowed from September 2015 through May 2016. The September 2015 loan
bore interest at the rate of 4% per annum and was to be paid on September 7, 2016. The other loans bore interest at the rate of
7% per annum and were to be repaid on June 30, 2016, or, if earlier, upon the sale of the Company's equity from which it
derived proceeds of $1,800,000 or $2,000,000 depending upon the promissory notes issued.
The shares of Series
A Preferred Stock have a stated value of $10.00 per share and are initially convertible into shares of common stock at a price
of $4.92 per share (subject to adjustment upon the occurrence of certain events). The dividend rate on the Series A Preferred Stock
is 12% per annum, payable quarterly. The dividend rate increases to 15% per annum if we issue PIK Shares in lieu of payment of
cash dividends payable until June 15, 2018.
Although holders of
Series A Preferred Stock may convert their shares into common stock they are unlikely to convert if we are unable to pay cash dividends
and the price of the common stock does not increase significantly above $4.92 per share, the conversion price, for a sustained
period. We have the right to redeem the Series A Preferred Stock after May 26, 2018 for a redemption price of $10.00, plus accrued
and unpaid dividends; however, we may not have sufficient cash available to effect such redemption.
As of June 30, 2017,
we had outstanding 1,294,441 shares of Series A Preferred Stock, including 46,010 PIK Shares issued on March 15, 2017 and 46,787
PIK Shares issued on June 15, 2017.
In July 2017, we
amended the Certificate of Designation authorizing the issuance of the Series A Preferred Stock to provide for the automatic
conversion of the outstanding shares of Series A Preferred Stock into common stock at a conversion price of $1.50, the
offering price of the shares of common stock in the public offering of our shares of common stock consummated on July 12,
2017, subject to stockholder approval in accordance with the applicable rules of the NYSE MKT. In addition, the amendment to
the Certificate of Designation eliminated the liquidation preference and quarterly dividend payable to holders of the Series
A Preferred Stock. Holders of the Series A Preferred Stock now share ratably with the holders of the common stock on an
as-converted basis (2.0325 shares of common stock for each share of Series A Preferred Stock held of record) with respect to
dividends declared, paid or set aside for payment, assets available for distribution to stockholders upon the liquidation,
dissolution or winding up of our affairs, in addition to voting upon the election of directors and other matters submitted to
stockholders for approval, except for matters requiring a class vote of the holders of the Series A Preferred Stock specified
in the Certificate of Designation or under applicable law. At a meeting on June 24, 2017, our Board of Directors adopted a
further amendment to the Certificate of Designation, subject to approval by holders of a majority of the outstanding shares
of Series A  Preferred Stock, to provide for the automatic conversion of the outstanding shares of Series A  Preferred Stock
into shares of common stock at a conversion price of $1.50 per share if stockholders do not approve the Restructuring
Transactions at our 2017 Annual Meeting of Stockholders.
25
In connection with the
private placement of the Series A Preferred Stock, we incurred approximately $606,000 of direct offering costs and $57,000 in legal
expenses and granted to the placement agents warrants to purchase 8% of the number of shares of our common stock (113,820 shares)
issuable upon conversion of the Series A Preferred Stock sold in the offering. The warrants are exercisable in whole or in part,
at an initial exercise price per share of $6.15, and are exercisable for cash or on a cashless basis commencing on November 26,
2016 and expiring on May 26, 2021. The exercise price and number of shares of common stock issuable under the warrants are subject
to adjustments for stock dividends, splits, combinations and similar events.
Of the proceeds generated
by the sale of our shares of Series A Preferred Stock, $1,500,000 was paid to PNC to reduce the amount outstanding under our Loan
Facility.
12% Subordinated Convertible Note Financing
In August 2016, we completed
the private placement of $2,720,000 principal amount of our 12% Subordinated Convertible Notes due December 31, 2017 (the "12%
Notes"), together with warrants to purchase an aggregate of 110,658 shares of common stock, for a total purchase price of
$2,720,000, from which we derived net proceeds of approximately $2,319,800, which was used to pay down our indebtedness under the
Loan Facility and for working capital. We also issued to Michael N. Taglich a 12% Note in the principal amount of $1,520,713, together
with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of promissory notes in the aggregate principal
amount of $1,500,000, together with accrued interest thereon and on notes previously exchanged for Series A Preferred Stock of
$20,713. We had issued the promissory notes to Michael N. Taglich for amounts borrowed in August 2016. The promissory notes bore
interest at the rate of 7% per annum and were to be repaid on December 31, 2016, or, if earlier, upon the sale of our equity securities
from which we derived proceeds of $2,000,000. In addition, we issued to Robert F. Taglich a 12% Note in the principal amount of
$4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness of interest of $4,373
accrued on notes previously exchanged for Series A Preferred Stock.
The 12% Notes provided
for the automatic conversion of the principal and accrued interest of the 12% Notes into shares of Series A Preferred Stock at
a price of $10.00 per share, the stated value of the Series A Preferred Stock, upon the filing of an amendment to our Articles
of Incorporation increasing the number of shares of preferred stock we are authorized to issue from 1,000,000 shares to 3,000,000
shares, including 2,000,000 shares of Series A Preferred Stock (the "Charter Amendment"). We issued 438,770 shares
of Series A Preferred Stock to the holders of the 12% Notes on November 30, 2016, the date we filed the certificate of amendment
effecting the Charter Amendment. As a result of the automatic conversion of the 12% Notes into shares of Series A Preferred Stock,
no 12% Notes are outstanding.
As compensation for
its services as placement agent for the offering of the 12% Notes, we paid Taglich Brothers, Inc. ("Taglich Brothers")
a fee of $295,400 and issued to Taglich Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise
price of $6.15, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as mergers and other business combinations.
Private Placements of 8% Subordinated Convertible Notes
From November 23, 2016
through March 21, 2017, we received gross proceeds of $4,775,000 from the sale of our 8% Notes, together with warrants to purchase
a total of 383,032 shares of our common stock, in private placement transactions with accredited investors (the "8% Note
Offerings"). In connection with the 8% Notes offerings, we issued 8% Notes in the aggregate principal amount of $382,000
to Taglich Brothers, placement agent for the 8% Note Offerings, in lieu of payment of cash compensation for sales commissions,
together with warrants to purchase a total of 180,977 shares of our common stock. Of the $5,147,000 principal amount of 8% Notes
issued in connection with the Note Offerings, $2,781,000 principal amount is due November 30, 2018 (the "2018 Notes")
and $2,366,000 principal amount is due January 31, 2019 (the "2019 Notes"). Payment of the principal and accrued interest
on the 8% Notes are junior and subordinate in right of payment to our indebtedness under the Loan Facility.
Interest on
the outstanding principal of the 2018 Notes is payable quarterly commencing February 28, 2017 at the annual rate of 8%, in
cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest in
cash, or we otherwise elect to do so, we may pay accrued interest, in additional 2018 Notes ("PIK Notes"),
provided that if accrued interest with respect to the 2018 Notes issued in December 2018 (which represented approximately
$1,269,000 in principal amount when issued in December 2016, and as of May 31, 2017, represented approximately $1,336,770 in
principal amount after giving effect to the issuance of PIK Notes) is paid in additional 2018 Notes, interest for that
quarterly   interest payment will be calculated at the rate of 12% per annum. Upon the occurrence and
continuation of an event of default, interest shall accrue at the rate of 12% per annum.
26
Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest in
cash, or we otherwise elect to do so, we may pay accrued interest, in additional 2019 Notes. Upon the occurrence and continuation
of an event of default, interest shall accrue at the rate of 12% per annum.
Since covenant defaults
under our Loan Facility have prohibited us from paying accrued interest in cash on our 8% Notes, we have paid accrued interest
on the 8% Notes through the issuance of additional Notes. We intend to pay accrued interest on the 8% Notes for the interest period
ending August 15, 2017 in cash; however, there can be no assurance that we will be able to do so.
On February 28, 2017,
we issued an additional $61,596 principal amount of 2018 Notes in payment of accrued interest. As of March 1, 2017, we had $5,262,596
principal amount of 8% Notes outstanding, consisting of $2,842,596 principal amount of 2018 Notes and $2,420,000 principal amount
of 2019 Notes.
On May 31, 2017, we
issued 2018 Notes and 2019 Notes in the aggregate principal amount of $68,871 and $72,285, respectively, in lieu of cash payment
of accrued interest for the period then ended.
The outstanding principal
amount plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock at conversion
prices ranging from $2.25 to $4.00 per share, subject to certain anti-dilution and other adjustments, including stock splits, and
in the event of certain fundamental transactions such as mergers and other business combinations.
For a more detailed
description of the 8% Notes, see "Description of Securities – 8% Subordinated Convertible Notes."
The exercise price of
the warrants issued in connection with the 8% Note Offerings ranges from $3.00 to $4.53 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the common stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November
30, 2021 and 243,307 warrants may be exercised until January 31, 2022.
Recent Loans from Principal Stockholders
On March 17, 2017, we
borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, directors and principal stockholders
of our company, and issued our promissory notes in the principal amounts of $200,000 and $300,000, respectively, to evidence our
obligation to repay that indebtedness (the "Taglich Notes"). The Taglich Notes bear interest at the rate of 7% per
annum and are payable on March 17, 2017. The Taglich Notes  have been amended to provide for the automatic conversion
of the indebtedness evidenced thereby into shares of common stock at a conversion price of $1.50 per share, the public offering
price of the shares of our common stock sold in the Public Offering, following the stockholder vote on the Restructuring Transactions
at our 2017 Annual Meeting of Stockholders, even if the Restructuring Transactions are not approved by stockholders in accordance
with applicable rules of the NYSE MKT.
On May 2 and 10, 2017,
we borrowed an aggregate of $1,500,000 from Michael N. Taglich and Robert F. Taglich, each of whom loaned us $750,000. The demand
loans were exchanged for May 2018 Notes in the same principal amount of indebtedness.
May Note Financing
On May 12 and May 19,
2017, we issued and sold to a total of 17 accredited investors (including Michael N. Taglich and Robert F. Taglich individually
and a partnership of which they are partners), our May 2018 Notes in the aggregate principal amount of $4,158,624, together with
warrants to purchase an aggregate of 501,039 shares of common stock, for gross proceeds (net of the exchange of indebtedness totaling
$1,503,288 due to Michael N. Taglich and Robert F. Taglich for working capital advances made on May 2 and 10, 2017) of $2,534,196.
Roth Capital LLC and Taglich Brothers acted as placement agents in connection with the sale of the May 2018 Notes and warrants
for which they are to be paid commissions in the aggregate amount of $191,155.
The May 2018 Notes
and warrants were issued for a purchase price equal to 97% of the principal amount of the May 2018 Notes. The principal
amount of each May 2018 Note will be increased by 2% for each 30 days it remains outstanding commencing August 1, 2017. Upon the
occurrence of, and during the continuance of an Event of Default (as defined in the May 2018 Notes), the May 2018 Notes will accrue
late interest at the rate of 10% per annum. Payment of the principal and accrued interest, if any, on the May 2018 Notes is junior
and subordinate in right of payment to our indebtedness under the Loan Facility.
27
The principal amount,
together with accrued interest, if any, of the May 2018 Notes, when issued, were convertible into shares of common stock until
November 12, 2017 at a conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock splits and
certain fundamental transactions, including recapitalizations, mergers and other business combination transactions (the "Fixed
Conversion Price"), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5) Weighted Average Prices
(as defined in the May 2018 Notes) of the common stock during the five consecutive trading day period ending on the trading day
immediately preceding the day of a request by the holder for conversion of the May 2018 Note. We have the right to redeem all,
or a portion of (on a pro rata basis), the May 2018 Notes upon written notice to the holders not less than three trading days prior
to the applicable redemption date.
We issued warrants
to purchase 501,039 shares of common stock as part of the private placement of the May 2018 Notes. The warrants, when issued,
were exercisable at an initial exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis
for a lesser number of shares based upon prevailing market prices when exercised. The exercise price of the warrants is subject
to anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations,
mergers and other business combination transactions. In accordance with the terms of the warrants, the exercise price was reduced
to $1.50 per share, the public offering price of the shares of common stock sold in a Public Offering.
Effect of the Public Offering and
Restructuring Transactions on our Capitalization
On July 12, 2017,
we sold 5,175,000 shares of common stock at a price of $1.50 per share for gross proceeds of $7,762,500 in the Public
Offering. We received net proceeds of approximately $6,819,125 from the sale of our shares in the Public Offering, of which
approximately $4,000,000 was used to pay outstanding trade payable, $463,501 was used to redeem an equal principal amount of
May 2018 Notes at a redemption price of 100% of the principal amount thereof and approximately $2,355,624 was added to our
working capital.
In connection with
the Public Offering, approximately $1,860,908 aggregate principal amount of the May 2018 Notes were converted into an aggregate
of 1,240,605 shares of our common stock at a conversion price of $1.50 per share, the public offering price of the shares sold
in the Public Offering.
In addition, the Restructuring
Transactions, described below, contemplated by the Public Offering, are to be effected at a conversion price of $1.50 per share,
the public offering price of the shares sold in the Public Offering, following a stockholder vote thereon at our 2017 Annual Meeting
of Stockholders, which we expect to hold in September 2017:
·
Holders of an additional $1,834,214 aggregate principal amount of May 2018 Notes have agreed to
convert their 2018 Notes into additional 1,222,809 shares of common stock.
·
Holders of our outstanding 1,294,441 shares of Series A Preferred Stock will be automatically converted
into 8,629,606 shares of common stock.
·
The Taglich Notes in the aggregate principal amount of $500,000, together with accrued
                                                                                                               interest thereon, will automatically be converted into approximately 344,667 shares of common stock.
28
Upon consummation of
the Restructuring Transactions, we will have outstanding approximately 24,252,852 shares of common stock and no shares of preferred
stock. In addition, other than the indebtedness under our Loan Facility, which as of June 30 2017, was approximately $23,203,866,
our only other indebtedness for money borrowed is the indebtedness for our 8% Notes, which as of May 31, 2017 was $5,359,420.
Cash Flow
The following table
summarizes our net cash flow from operating, investing and financing activities for the periods indicated below (in thousands):
Three Months
Ended March 31,
2017
Year Ended
December 31,
(Unaudited)
2016
2015
Cash provided by (used in)
Operating activities
$
900
$
(692
)
(894
)
Investing activities
3,926
(924
)
(8,560
)
Financing activities
(5,087
)
2,391
8,565
Net (decrease) increase in cash and cash equivalents
$
(261
)
$
775
(889
)
Cash Provided By (Used In) Operating Activities
Cash provided by operating
activities primarily consists of our net income (loss) adjusted for certain non-cash items and changes to working capital items.
For the three months
ended March 31, 2017, our net cash provided by operating activities of $900,000 was comprised of a net loss of $1,154,000 offset
by a positive adjustment of $1,258,000 provided by changes in operating assets and liabilities, plus a net positive adjustment
for non-cash items of $796,000. Adjustments for non-cash items consisted primarily of depreciation of property and equipment of
$728,000, amortization of capitalized engineering costs, intangibles and other items of $616,000. These non-cash items were offset
by $10,000 of deferred gain on the sale of real estate, forfeiture of non-cash compensation of $73,000, bad debt recovery of $14,000
and $451,000 from the gain on sale of our AMK subsidiary. The net decrease in operating assets and liabilities consisted of a net
decrease in operating assets of $2,097,000 and a net decrease in operating liabilities of $839,000. The net decrease in operating
assets was comprised of a decrease in accounts receivable of $578,000 due to the timing of shipments to and cash receipts from
customers, an increase in prepaid expenses and other assets of $102,000, an increase in deposits and other assets of $276,000,
a decrease in prepaid taxes of 178,000 and decrease in inventory of $1,719,000. The net decrease in operating liabilities was comprised
of decreases in accounts payable and accrued expenses of $621,000 due to the timing of the receipt and payment of invoices, and
increases in deferred rent of $6,000 and a decrease of deferred revenue of $224,000.
For the year ended
December 31, 2016, our net cash used in operating activities of $692,000 was comprised of a net loss of $15,623,000 offset by
a $6,712,000 positive adjustment provided by changes in operating assets and liabilities plus a net positive adjustment for non-cash
items of $8,219,000. Adjustments for non-cash items consisted primarily of depreciation of property and equipment of $3,347,000,
amortization of capitalized engineering costs, intangibles and other items of $2,229,000, bad debt expense of $274,000, representing
amounts reserved for as potentially uncollectible, and non-cash compensation of $167,000, deferred income taxes of $2,063,000,
loss on sale of fixed assets held for sale of $5,000, loss on extinguishment of debt of $172,000, and prepaid taxes of $126,000.
These non-cash items were offset by $38,000 of deferred gain on the sale of real estate. The increase in operating assets and
liabilities consisted of a net decrease in operating assets of $2,045,000 and a net increase in operating liabilities of $4,667,000.
The increase in operating assets was comprised of an increase in inventory of $2,902,000, and a net decrease in prepaid expenses
and other current assets, and deposits and other assets of $394,000, partially offset by a decrease in accounts receivable of
$4,616,000. The net increase in operating liabilities was comprised of increases in accounts payable and accrued expenses of $4,495,000
due to the timing of the receipt and payment of invoices, an increase in deferred rent of $82,000, and an increase in deferred
revenue of $84,000, partially offset by, an increase in income taxes payable of $6,000.
29
Cash Used in Investing Activities
Cash used in investing
activities consists of capital expenditures for property and equipment, capitalized engineering costs and the cash received from
the businesses we sold. A description of capitalized engineering costs can be found below and in Note 3 Summary of Significant
Accounting Policies in our Consolidated Financial Statements for the year ended December 31, 2016.
For the three months
ended March 31, 2017, cash provided by investing activities was $3,926,000. This was comprised of the proceeds from the sale of
the AMK subsidiary of $4,260,000 offset by $245,000 for capitalized engineering costs and $89,000 for the purchase of property
and equipment.
For the year ended December
31, 2016 net cash used in investing activities was $924,000. This was comprised of $963,000 for capitalized engineering costs,
$1,632,000 for the purchase of property and equipment, partially offset by $1,671,000 in proceeds from the sale of fixed assets.
Cash Provided By (Used In) Financing Activities
Cash provided by (used
in) financing activities consists of the borrowings and repayments under our credit facilities with our senior lender, increases
in and repayments of capital lease obligations and other notes payable.
For the three months
ended March 31, 2017, cash used by financing activities was $5,087,000. This was comprised of repayments of $2,069,000 on our term
loan, $5,545,000 on our revolving loans, $173,000 on our capital lease obligations, offset by proceeds from notes payable issuances
of $850,000 and $1,850,000.
For the year ended December
31, 2016, net cash provided by financing activities was $2,391,000. This was comprised of proceeds of $4,500,000 and $3,695,000
from the issuance of notes, proceeds from the issuance of Series A Preferred of $5,250,000 reduced by repayments of $5,211,000
under our revolving credit facility, repayments on our term loans of $3,184,000, repayments under our capital leases of $1,226,000,
expense for issuance of preferred stock of $663,000, expense for issuance of debt of $547,000 and deferred financing costs of $223,000.
CONTRACTUAL OBLIGATIONS
The following table sets forth our future
contractual obligations as of December 31, 2016:
Payment due by period (in thousands)
Total
Less than
1 year*
1-3
years
3-5
years
More than
5 years
Debt and capital leases
$
37,363
34,197
2,637
529
—
Operating leases
15,459
1,947
3,402
3,082
7,028
Total
$
52,822
36,144
6,039
3,611
7,028
*
The revolving loans and term loans with our senior lender are classified as due in less than 1 year, see Note 11 to our Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet
arrangements as of March 31, 2017 and December 31, 2016.
30
Going Concern
We suffered net losses
from operations of $10,789,000 and $519,000 and net losses of $15,623,000 and $1,154,000 for the year ended December 31, 2016 and
the three months ended March 31, 2017, respectively. We also had negative cash flows from operations for the year ended December
31, 2016. In addition, in 2015 we ceased paying dividends on our common stock and in 2016 disposed of the real estate on which
one of our operating subsidiaries was located through a sale leaseback transaction, and in January 2017 sold this operating subsidiary.
During the year ended December 31, 2016 and subsequent thereto, we sold debt and equity securities to secure funds to operate.
Since September 2016, we have been issuing additional shares of Series A Preferred Stock in lieu of cash payment of accrued dividends
on outstanding shares of Series A Preferred Stock and since February 2017 have issued additional convertible notes in lieu of cash
payment of accrued interest on outstanding convertible notes. Furthermore, as of December 31, 2016 and March 31, 2017 we were not
in compliance with two financial covenants under our Loan Facility.
On June 19, 2017, we
entered into the Fifteenth Amendment to the Loan Facility, which waived the failure to comply with the minimum EBITDA covenant
for the periods ended December 31, 2016 and March 31, 2017 and the Capital Expenditures covenant for the period ended December
31, 2016. The amendment also requires that we maintain at all times a Fixed Charge Coverage Ratio, tested quarterly on a consolidated
basis beginning September 30, 2017, as follows: (i) 1.00 to 1.00 for the quarter ending September 30, 2017, tested based upon the
prior three (3) months, (ii) 1.05 to 1.00 for the quarter ending December 31, 2017, tested based upon the prior six (6) months
and (iii) 1.05 to 1.00 for the quarter ending March 31, 2018, tested based upon the prior nine (9) months and that we maintain
EBITDA of not less than $345,000 for the period ending June 30, 2017. The amendment also provided that we were not required to
maintain a Fixed Charge Coverage Ratio and that no testing was required to the Fixed Charge Coverage Ratio for the periods ending
December 31, 2016 and March 31, 2017 and that we are not required to maintain a Fixed Charge Coverage Ratio and that no testing
will be required of the Fixed Charge Coverage Ratio for the period ending June 30, 2017.
The continuation of
our business is dependent upon future issuances of equity or other financing to fund ongoing operations. Although no assurances
can be given, management believes that the net proceeds from the Public Offering, together with borrowings under the Loan Facility
and anticipated cash flow, should provide the necessary funding for us to continue as a going concern for the foreseeable future.
The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a
going concern.
Critical Accounting Policies
We have identified the
policies below as critical to our business operations and the understanding of our financial results.
Inventory Valuation
For annual reporting,
the Company values inventory at the lower of cost on a first-in-first-out basis or market.
The Company presents
inventory net of progress billings in accordance with the specified contractual arrangements with the United States Government,
which results in the transfer of title of the related inventory from the Company to the United States Government, when such progress
payments are received.
The Company does not
take physical inventories at interim quarterly reporting periods. Approximately 85% of the inventory value at March 31, 2017 has
been estimated using a gross profit percentage based on sales of previous periods to the net sales of the current period. The remainder
of the inventory value at March 31, 2017 is estimated based on the Company's standard cost perpetual inventory system. Adjustments
to reconcile the annual physical inventory to the Company's books are treated as changes in accounting estimates and are
recorded in the fourth quarter. The Company valued inventory at December 31, 2016 at the lower of cost on a first-in-first-out
basis or market.
We generally purchase
raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only when non-cancellable
contracts for orders have been received for finished goods. We occasionally produce larger more complex products, such as landing
gear, in excess of purchase order quantities in anticipation of future purchase order demand. Historically this excess has been
used in fulfilling future purchase orders. We purchase supplies and materials useful in a variety of products as deemed necessary
even though orders have not been received. The Company periodically evaluates inventory items that are not secured by purchase
orders and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow-moving goods,
and for other impairments of value.
The Company presents
inventory net of progress billings in accordance with the specified contractual arrangements with the United States Government,
which results in the transfer of title of the related inventory from the Company to the United States Government, when such progress
payments are received.
31
Capitalized Engineering Costs
The Company has contractual
agreements with customers to produce parts, which the customers design. Though the Company has not designed and thus has no proprietary
ownership of the parts, the manufacturing of these parts requires pre-production engineering and programming of our machines. The
pre-production costs associated with a particular contract are capitalized and then amortized beginning with the first shipment
of product pursuant to such contract. These costs are amortized on a straight line basis over the shorter of the estimated length
of the contract, or three years.
If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as progress billings (a reduction of the associated inventory) until the appropriate revenue recognition criteria have been met.
The Terms and Conditions contained in customer purchase orders may provide for liquidated damages in the event that a stop-work
order is issued prior to the final delivery of the product.
Revenue Recognition
The Company recognizes
revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." The Company recognizes revenue
when products are shipped and/or the customer takes ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Payments received in advance
from customers for products delivered are recorded as customer deposits until earned, at which time revenue is recognized. The
Terms and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop work
order is issued prior to the final delivery. The Company utilizes a Returned Merchandise Authorization or RMA process for determining
whether to accept returned products. Customer requests to return products are reviewed by the contracts department and if the request
is approved, a credit is issued upon receipt of the product. Net sales represent gross sales less returns and allowances. Freight
out is included in operating expenses.
The Company recognizes
certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement,
the Company makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition. The customer must
initiate the request for the bill and hold arrangement. The customer must have made this request in writing in addition to their
fixed commitment to purchase the item. The risk of ownership has passed to the customer, payment terms are not modified and payment
will be made as if the goods had shipped.
Income Taxes
The Company accounts
for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires
that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected
to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities.
A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
The Company accounts
for uncertainties in income taxes under the provisions of FASB ASC 740-10-05, "Accounting for Uncertainty in Income Taxes."
The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The
ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Stock-Based Compensation
The Company accounts
for stock-based compensation expense in accordance with FASB ASC 718, "Compensation – Stock Compensation." Under
the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair
value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton
option pricing model.
32
Goodwill
Goodwill represents
the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill is not amortized,
but is tested at least annually for impairment, or if circumstances change that will more likely than not reduce the fair value
of the reporting unit below its carrying amount.
The Company accounts
for the impairment of goodwill under the provisions of ASU 2011-08 ("ASU 2011-08"), "Intangibles Goodwill and
Other (Topic 350): Testing Goodwill for Impairment." ASU 2011-08 updated the guidance on the periodic testing of goodwill
for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount.
The Company performs
impairment testing for goodwill annually, or more frequently when indicators of impairment exist, using a three-step approach.
Step "zero" is a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. Step one compares the fair value of the net assets of the relevant reporting unit (calculated
using a discounted cash flow method) to its carrying value, a second step is performed to compute the amount of the impairment.
In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to
its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.
Long-Lived and Intangible Assets
Identifiable intangible
assets are amortized using the straight-line method over the period of expected benefit. Long-lived assets and intangible assets
subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that
the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found
to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce the carrying
amount of the asset to fair value. There has been no impairment as of March 31, 2017 and December 31, 2016.
Recently Issued Accounting Pronouncements
In January 2016, the
FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)"
("ASU 2016-01").The main objective of ASU 2016-01 is enhancing the reporting model for financial instruments to provide
users of financial statements with more decision-useful information. The amendments address certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company does not expect the adoption of this amended to have a significant
impact on its consolidated financial statements.
In February 2016, the
FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The main objective of ASU 2016-02 is to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards
Codification and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company does not expect the adoption of this amended to have a significant impact
on its consolidated financial statements.
In March 2016, the
FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment"
("ASU 2016-09"). ASU 2016-09 is part of the FASB Simplification Initiative. The objective of the Simplification Initiative
is to identify, evaluate, and improve areas of generally accepted accounting principles for which cost and complexity can be reduced
while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2016-09 will affect
all entities that issue share-based payment awards to their employees. The areas for simplification involve several aspects of
the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The Company adopted this ASU during the first quarter
of 2017, and the adoption did not materially impact its consolidated financial statements.
33
In April 2016, the
FASB issued ASU 2016-10 "Revenue from Contracts with Customers (Topic 606)" ("ASU 2016-10"). The core principle
of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2016-10
affect the guidance in ASU 2014-09, "Revenue from Contracts with Customers", which is not yet effective. The effective
date and transition requirements of ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09.
They are effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not permitted. The
Company is currently assessing the impact of the adoption of these amendments on its consolidated financial statements.
In May 2016, the FASB
issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide
clarifying guidance in certain arrow areas and add some practical expedients. These amendments are effective at the same date that
Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017,
including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for nonpublic
entities one year later. The Company is currently assessing the impact of the adoption of the amendments to Topic 606 and these
amendments on its consolidated financial statements.
In November 2016, the
FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted
cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should
be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash,
cash equivalents, restricted cash or restricted cash equivalents are presented in more than one-line item within the statement
of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount
shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard
is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard on our financial statements.
In January 2017, the
FASB issued ASU 2017-01 ("ASU 2017-01"), Business Combinations, which clarifies the definition of a business, particularly
when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first
part of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.
In January 2017, FASB
issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step
2 of the goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit with
its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities having one
or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting units, (2) the amount
of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU No. 2017-04 is effective
as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard
on our financial statements.
The Company does not
believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.
JOBS Act
On April 5, 2012, the
JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements
for qualifying public companies. As an "emerging growth company," we may, under Section 7(a)(2)(B) of the Securities
Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise
apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that
we (i) are no longer an "emerging growth company" or (ii) affirmatively and irrevocably opt out of this extended transition
period. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements
may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date
that we are no longer an "emerging growth company" or affirmatively and irrevocably opt out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our consolidated financial
statements and that has a different effective date for public and private companies, we will disclose the date on which adoption
is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.
34
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are:
Name:
Age
Position
Peter D. Rettaliata
66
Acting President and CEO and Director
Michael E. Recca
66
Chief Financial Officer
Michael N. Taglich
52
Chairman of the Board
Seymour G. Siegel
74
Director
Robert F. Taglich
50
Director
David J. Buonnano
61
Director
Robert C. Schroeder
50
Director
Michael Brand
59
Director
Peter D. Rettaliata
has been our Acting President and Chief Executive Officer since March 2, 2017, and has been a director of our company since 2005.
He served as our President and Chief Executive Officer from November 30, 2005 to December 31, 2014. He also served as the President
of our wholly-owned subsidiary, AIM, from 1994 to 2008. Prior to his involvement at AIM, Mr. Rettaliata was employed by Grumman
Aerospace Corporation for twenty-two years. Professionally, Mr. Rettaliata has served as the Chairman of "ADDAPT",
an organization of regional aerospace companies, as a member of the Board of Governors of the Aerospace Industries Association,
and as a member of the Executive Committee of the AIA Supplier Council. He is a graduate of Niagara University where he received
a B.A. in History and Harvard Business School where he completed the PMD Program. Mr. Rettaliata's extensive experience in
the aerospace industry and his knowledge of our operations qualify him to serve as a Director.
Michael E. Recca
has been our Chief Financial Officer since October 1, 2016. Mr. Recca has been engaged by us since September 2008 in a variety
of positions related to our capital finance and acquisition programs. Most recently he served as Chief of Corporate Development
& Capital Markets, a position in which he directed our acquisition program and coordinated with our lenders. Mr. Recca received
a Bachelor of Arts degree from the SUNY Stony Brook and an MBA from Columbia University.
Michael N. Taglich
has been Chairman of our Board of Directors since September 22, 2008. He is Chairman and President of Taglich Brothers, a
New York City based securities firm which he co-founded in 1992 and which is focused on public and private micro-cap companies. 
Mr. Taglich is currently Chairman of the Board of Mare Island Dry Dock LLC, a company engaged in ship repair services,
and BioVentrix, Inc., a privately held medical device company whose products are directed at heart failure. He also serves as
a Director of Bridgeline Digital Inc., a publicly traded company, Icagen Inc., a reporting but not trading company engaged
in early stage pharmaceutical research, Decision Point Systems Inc., a private company engaged in Field service automation, Dilon
Technologies, a private medical device company and Autonet Mobile Inc., a private company focused on connecting automobiles to
the internet.   Mr. Taglich's extensive experience in the capital markets and his knowledge of the general industry
qualify him to serve as a Director.
Seymour G. Siegel
has been a director of our company since 2005. A Certified Public Accountant no longer in practice, he was a principal emeritus
at Rothstein Kass (now KPMG), an international firm of accountants and consultants until July 2014. Mr. Siegel was a founder of
Siegel Rich & Co., CPAs, which eventually merged with what is now known as WeiserMazars LLP, where he was a senior partner
until January 1995, when he sold his interest in the firm and co-founded a business advisory firm which later became a part of
Rothstein Kass. In addition to serving as a Director and Chairman of the Audit Committees of our Board, Mr. Siegel also serves
as a Director and Chairman of the Audit Committee of Root 9B Technologies Inc. Mr. Siegel received his Bachelor of Business Administration
from the Bernard M. Baruch School of the City College of New York. Mr. Siegel's extensive knowledge and experience in accounting
matters and familiarity with the issues of manufacturing businesses qualify him to serve as a Director.
Robert F. Taglich
has been a director of our company since 2008. He is a Managing Director of Taglich Brothers, which he co-founded in 1992.
Prior to founding Taglich Brothers, Mr. Taglich was a Vice President at Weatherly Securities. Mr. Taglich has served in various
positions in the brokerage securities industry for the past 25 years. Mr. Taglich is a Director of Bridgeline Digital, Inc., a
publicly traded company He also serves on the board of privately held BioVentrix, Inc., a medical device company whose products
are directed at heart failure. Mr. Taglich holds a Bachelor's degree from New York University. Mr. Taglich's extensive
experience in the capital markets and his knowledge of the aerospace industry qualify him to serve as a Director.
35
David J. Buonanno
has been a director of our company since 2008. He is the Founder and President of Buonanno Enterprises Consulting, providing strategic
management, supply chain/operations and recruitment services to aerospace and defense industry clients.  Mr. Buonanno has extensive experience in manufacturing,
supply management and operations. He was employed by Sikorsky Aircraft, Inc., a subsidiary of United Technologies Corporation,
as Vice President, Supply Management and International Offset (from January 1997 to July 2006) and as Director, Systems Subcontracts
(from November 1992 to January 1997). From May 1987 to November 1992, he was employed by General Electric Company serving as Operations
Manager and Manager, Program Materials Management of GE's Astro-Space Division. From June 1977 to May 1987, he was employed
by RCA and affiliated companies. Mr. Buonanno attended Lehigh University College of Electrical Engineering and holds a B.S. in
Business Administration from Rutgers University. He completed the Program for Management Development at Harvard Business School
in 1996. Mr. Buonanno's extensive experience in the aerospace and defense industries and familiarity with the operations
of companies in the industry qualify him to serve as a Director.
Robert C. Schroeder
has been a director of our company since 2008. He is Vice President - Investment Banking of Taglich Brothers and specializes in
advisory services and capital raising for small public and private companies. Mr. Schroeder joined Taglich Brothers in April 1993
as an Equity Analyst publishing sell-side research. Prior to joining Taglich Brothers, he served in various positions in the brokerage
and public accounting industry. Mr. Schroeder also serves as a director of the following publicly traded companies: DecisionPoint
Systems, Inc., a leading provider and integrator of Enterprise Mobility, Wireless Applications and RFID solutions, and Intellinetics,
Inc., a provider of cloud-based enterprise content management solutions. Mr. Schroeder received a B.S. degree in accounting and
economics from New York University. He is a Chartered Financial Analyst and a member of the Association for Investment Management
and Research and a member of the New York Society of Security Analysts. Mr. Schroeder's extensive experience in the capital
markets qualify him to serve as a Director.
Michael Brand
has been a director of our company since 2012, and since March 2017 has served as a consultant to our company focused on day to
day production issues, scheduling of the products to be manufactured and related operational issues such as the maintenance of
appropriate inventory levels. He was the President of Goodrich Landing Gear, a unit of Goodrich Corporation, from July 2005 to
June 2012. Prior to joining Goodrich for over 25 years he held senior management positions in the Aerospace industry. He began
his career at General Electric Corporation and rose to senior management in its jet engine manufacturing operations. Mr. Brand
is a graduate of Clarkson University, with advanced degrees and certificates from Xavier University and the Wharton School. Mr.
Brand's extensive experience in the aerospace and defense industries and familiarity with the operations of companies in
the industry qualify him to serve as a Director.
Michael N. Taglich and Robert F. Taglich are brothers.
All directors hold office
until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers are elected
by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services
as directors. Non-employee directors are entitled to receive compensation per year for serving as directors and may receive option
grants from our company.
Information Concerning the Board of Directors
Board Leadership Structure and Risk Oversight
The Board does not have
a policy requiring separation of the roles of Chief Executive Officer and Chairman of the Board. Nevertheless, Michael N. Taglich
is Chairman of the Board and Peter D. Rettaliata is Acting Chief Executive Officer of the Company.
The Board has determined
that a non-employee director serving as Chairman is in the best interests of our stockholders at this time. This structure ensures
a greater role of non-employee Directors in the active oversight of our business, including risk management oversight, and in setting
agendas and establishing Board priorities and procedures. This structure also allows the Chief Executive Officer to focus to a
greater extent on the management of our day-to-day operations.
The Board of Directors
as a whole is responsible for consideration and oversight of risks facing the Company, and is responsible for ensuring that material
risks are identified and managed appropriately. Certain risks are overseen by committees of the Board of Directors and these committees
make reports to the full Board of Directors, including reports on noteworthy risk-management issues. Members of the Company's
senior management team regularly report to the full Board about their areas of responsibility and a component of these reports
is risk within the area of responsibility and the steps management has taken to monitor and control such exposures. Additional
review or reporting on risks is conducted as needed or as requested by the Board or one of its committees.
36
Board Independence
Our Board of Directors
has determined that Robert Schroeder, Seymour G. Siegel, David Buonanno and Michael Brand are "independent directors"
within the meaning of NYSE MKT Rule 803A(2).
Director Compensation
Non-employee Directors
are entitled to receive compensation for serving as directors and may receive option grants from our company. Each Director also
is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred
in attending meetings of our Board of Directors or committees of our Board of Directors or shareholder meetings or otherwise in
connection with the discharge of his duties as a Director. The compensation committee will assist the directors in reviewing and
approving the compensation structure for our directors.
The following table
sets forth certain information regarding the compensation paid to, earned by or accrued for, our directors during the fiscal year
ended December 31, 2016.
DIRECTOR COMPENSATION
Name
Fees Earned
or Paid in
Cash
($)
Stock
Awards
($)
Option
Awards ($)
Non-Equity
Incentive Plan
Compensation
($)
Non-Qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Michael N. Taglich
$
57,500
—
$
1,276
—
—
—
$
58,776
Robert F. Taglich
$
57,500
—
$
1,276
—
—
—
$
58,776
Robert Schroeder
$
31,000
—
$
1,276
—
—
—
$
32,276
David Buonanno
$
31,000
—
$
1,276
—
—
—
$
32,276
Seymour G. Siegel
$
43,000
—
$
1,276
—
—
—
$
44,276
Michael Brand
$
31,000
—
$
1,276
—
—
$
36,400
(1)
$
68,676
Peter D. Rettaliata
$
50,000
—
$
—
—
—
—
$
50,000
__
(1) Consulting/advisory fees.
Board Meetings; Committees and Membership
The Board of Directors
held four meetings during the fiscal year ended December 31, 2016 ("fiscal 2016"). During fiscal 2016, each of the
directors then in office attended more than 75% of the aggregate of (i) the total number of meetings of the Board of Directors
and (ii) the total number of meetings of all committees of the Board on which such director served.
We maintain the following
committees of the Board of Directors: the Audit Committee, the Compensation Committee and the Nominating Committee. Each committee
is comprised entirely of directors who are "independent" within the meaning of NYSE MKT Rule 803A(2). Each committee
acts pursuant to a separate written charter, and each such charter has been adopted and approved by the Board of Directors. Copies
of the committee charters are available on our website at airindustriesgroup.com under the heading "Investor Relations."
Audit Committee
.
Messrs. Siegel, Schroeder and Buonanno are members of the Audit Committee. Mr. Siegel serves as Chairman of the Audit Committee
and also qualifies as an "audit committee financial expert," as that term is defined in Item 407(d)(5)(ii) of Regulation
S-K. The Board has determined that each member of our Audit Committee meets the financial literacy requirements under the Sarbanes-Oxley
Act and SEC rules and the independence requirements under NYSE MKT Rule 803A(2).
Our Audit Committee
is responsible for preparing reports, statements and charters of audit committees required by the federal securities laws, as well
as:
·
overseeing and monitoring the integrity of our consolidated financial statements, our
                                                                                                                           compliance with legal and regulatory requirements as they relate to financial statements or accounting matters, and our
                                                                                                                           internal accounting and financial controls;
37
·
preparing the report that SEC rules require be included
in our annual proxy statement;
·
overseeing and monitoring our independent registered
public accounting firm's qualifications, independence and performance;
·
providing the Board with the results of its monitoring
and its recommendations; and
·
providing to the Board additional information and materials
as it deems necessary to make the Board aware of significant financial matters that require the attention of the Board.
Compensation Committee
.
Our Compensation Committee is composed of Messrs. Siegel, Buonanno and Brand. The Compensation Committee is responsible for:
·
establishing the Company's general compensation
policy, in consultation with the Company's senior management, and overseeing the development and implementation of compensation
programs;
·
reviewing and approving corporate goals and objectives
relevant to the compensation of the CEO, and evaluating the performance of the CEO at least annually in light of those goals and
objectives and communicating the results of such evaluation to the CEO and the Board, and determining the CEO's compensation
level based on this evaluation, subject to ratification by the independent directors on the Board. In determining the incentive
component of CEO compensation, the Committee will consider, among other factors, the Company's performance and relative
stockholder return, the value of similar incentive awards to CEOs at comparable companies, the awards given to the CEO in past
years, and such other factors as the Committee may determine to be appropriate;
·
reviewing and approving the compensation of all other
executive officers of the Company, such other managers as may be directed by the Board, and the directors of the Company;
·
overseeing the Board's benefit and equity compensation
plans, overseeing the activities of the individuals and committees responsible for administering these plans, and discharging
any responsibilities imposed on the Committee by any of these plans;
·
approving issuances under, or any material amendments
to, any stock option or other similar plan pursuant to which a person not previously an employee or director of the Company, as
an inducement material to the individual's entering into employment with the Company, will acquire stock or options;
·
in consultation with management, overseeing regulatory
compliance with respect to compensation matters, including overseeing the Company's policies on structuring compensation
programs to preserve related tax objectives;
·
reviewing and approving any severance or similar termination
payments proposed to be made to any current or former officer of the Company; and
·
preparing an annual report on executive compensation
for inclusion in our proxy statement for the election of directors, if required under the applicable SEC rules.
Nominating Committee
.
Our Nominating Committee is composed of Messrs. Schroeder, Siegel and Brand. The purpose of the Nominating Committee is to seek
and nominate qualified candidates for election or appointment to our Board of Directors. The Nominating Committee will seek candidates
for election and appointment that possess the integrity, leadership skills and competency required to direct and oversee the Company's
management in the best interests of its stockholders, customers, employees, communities it serves and other affected parties.
A candidate must be
willing to regularly attend Committee and Board of Directors meetings, to develop a strong understanding of the Company, its businesses
and its requirements, to contribute his or her time and knowledge to the Company and to be prepared to exercise his or her duties
with skill and care. In addition, each candidate should have an understanding of all corporate governance concepts and the legal
duties of a director of a public company.
Stockholders may contact
the Nominating Committee Chairman, the Chairman of the Board or the Corporate Secretary in writing when proposing a nominee. This
correspondence should include a detailed description of the proposed nominee's qualifications and a method to contact that
nominee if the Nominating Committee so chooses.
38
Stockholder Communications
Any stockholder who
desires to contact any of our Directors can write to Air Industries Group, 360 Motor Parkway, Suite 100, Hauppauge, NY 11788 Attention:
Stockholder Relations. Your letter should indicate that you are an Air Industries Group stockholder. Depending on the subject matter,
our stockholder relations personnel will:
·
forward the communication to the Director(s) to whom
it is addressed;
·
forward the communication to the appropriate management
personnel;
·
attempt to handle the inquiry directly, for example
where it is a request for information about the Company, or it is a stock-related matter; or
·
not forward the communication if it is primarily commercial
in nature or if it relates to an improper or irrelevant topic.
Code of Ethics
We have adopted a written
code of ethics that applies to our principal executive officers, senior financial officers and persons performing similar functions.
Upon written request to our corporate secretary, we will provide you with a copy of our code of ethics, without cost.
39
EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary
compensation table shows, for the periods indicated, information regarding the compensation awarded to, earned by or paid to our
principal executive officer and our chief accounting officer (our only other executive officer whose compensation exceeded $100,000),
for all services rendered in all capacities to our company and its subsidiaries. The individuals listed in the following table
are referred to herein collectively as our "named executive officers."
Executive Compensation Table
Name and principal Position
Year
Salary
($)
Bonus
($)
Stock
awards
($)
Option
awards
($)
Non-equity
Incentive
Plan
Information
($)
Nonqualified
deferred
compensation
earnings
($)
All other
compensation
($)
Total
($)
Daniel R. Godin
(1)
2016
244,995
—
—
—
—
—
$
9,600
(3)
$
254,595
President and CEO
2015
232,115
125,000
—
—
—
—
9,600
(3)
366,715
Marianne Giglio
(2)
2016
121,896
—
—
—
—
—
$
4,500
(3)
$
120,396
Chief Accounting Officer
__
(1)
Mr. Godin resigned as our President and CEO effective
as of March 24, 2017.
(2)
Ms. Giglio joined our company on March 7, 2016, became
our Chief Accounting Officer on April 22, 2016 and served in that capacity until October 1, 2016.
(3)
Represents car allowance.
None of our executive
officers or key employees named in the above table has an employment agreement providing for a fixed term of employment. All are
employees at will terminable at any time without any severance, other than that payable to employees generally.
Peter D. Rettaliata
receives $50,000 per annum for serving as a director of, and consultant to, our company. We have not yet reached agreement on the
compensation he is to receive for serving as our Acting President and Chief Executive Officer.
Michael E. Recca receives a salary of $200,000
per annum for serving as our Chief Financial Officer.
Executive Compensation Policies as They Relate to Risk Management
The Compensation Committee
and management have considered whether our compensation policies might encourage inappropriate risk taking by the Company's
executive officers and other employees. The Compensation Committee has determined that the current compensation structure aligns
the interests of the executive officers with those of the Company without providing rewards for excessive risk taking by awarding
a mix of fixed and performance based or discretionary bonuses with the performance based compensation focused on profits as opposed
to revenue growth.
During the years ended
December 31, 2016 and 2015, less than 1% of the total compensation paid to employees was paid in performance-based compensation,
including commissions and bonuses.
Equity Awards – 2016
We did not grant any
equity awards in the form of shares to any of the named Executive Officers during 2016 and consequently have omitted the table
which would have described such awards.
40
Outstanding Equity Awards at 2016 Year-End
The following table
shows certain information regarding outstanding equity awards held by our named Executive Officers as of December 31, 2016.
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price ($)
Option
Expiration
Date
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That Have
Not Vested (#)
Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares,
Units or Other Rights
That Have Not Vested
Daniel R. Godin
120,000
—
$
10.12
11 /30/2021*
—
—
Marianne Giglio
—
—
—
—
—
—
___
*Mr. Godin's options expired unexercised upon termination
of his employment on March 24, 2017.
Equity Incentive Plans
We have four equity incentive plans, the 2017 Equity Incentive
Plan (the "2017 Plan"), which our Board of Directors adopted in July 2017, and which we will submit to stockholders
for approval at our 2017 Annual Meeting of Stockholders, the 2016 Equity Incentive Plan ("the "2016 Plan"),
which our Board of Directors adopted in June 2016 and our stockholders approved on November 30, 2016, the 2015 Equity Incentive
Plan (the "2015 Plan"), which our Board of Directors adopted in March 2015 and our stockholders approved in June 2015,
and the 2013 Equity Incentive Plan (the "2013 Plan"), which our Board of Directors adopted in May 2013 and our stockholders
approved in July 2013. The Plans are virtually identical, except that the 2017 Plan authorizes the issuance of 1,200,000 shares
of common stock, each of the 2016 Plan and the 2015 Plan authorizes the issuance of 350,000 shares of common stock and the 2013
Plan authorizes the issuance of 600,000 shares of common stock. As of June 30, 2017, options to purchase 138,000 shares have been
granted and remain outstanding under the 2015 Plan, and 212,000 shares remained available for grant, and options to purchase 564,342
shares remain outstanding and 33,000 shares remain available for issuance under the 2013 Plan. As of June 30, 2017, no stock awards
had been made or options granted under the 2016 Plan.
On
July 24, 2017, we granted options to purchase a total of 525,000 shares under the 2013 Plan, 2015 Plan and 2016 Plan.
We adopted the Plans
to provide a means by which employees, directors, and consultants of our Company and those of our subsidiaries and other designated
affiliates, which we refer to together as our affiliates, may be given an opportunity to purchase our common stock, to assist
in retaining the services of such persons, to secure and retain the services of persons capable of filling such positions, and
to provide incentives for such persons to exert maximum efforts for our success and the success of our affiliates.
41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table
sets forth information known to us regarding beneficial ownership of our Series A Preferred Stock and our common stock as of July
15, 2017 by (i) each person known by us to own beneficially more than 5% of our outstanding Series A Preferred Stock or common
stock, (ii) each of our directors, (iii) our chief executive officer, and (iii) all of our directors and executive officers as
a group. Except as otherwise indicated, we believe, based on information provided by each of the individuals named in the table
below, that such individuals have sole investment and voting power with respect to such shares, subject to community property laws,
where applicable. As of July15, 2017 we had outstanding 1,294,441 shares of our Series A Preferred Stock and 14,065,770 shares
of our common stock. Each share of Series A Preferred Stock is convertible into 2.0325 shares of common stock (at the current conversion
price of $4.92) and holders of Series A Preferred Stock vote together with holders of common stock as a single class, except on
certain matters specified in the Certificate of Designation authorizing the issuance of the Series A Preferred Stock and as required
under applicable law and the rules of any exchange upon which the common stock is listed. Holders of Series A Preferred Stock are
entitled to the number of votes equal to the number of shares of common stock into which the shares of Series A Preferred Stock
owned of record by such shareholder could have been converted on July 15, 2017 (2.0325 times the number of shares of Series A Preferred
Stock owned of record) and each share of common stock entitled to one vote. Except as stated in the table, the address of the holder
is c/o our company, 360 Motor Parkway, Suite 100, Hauppauge, New York 11788.
Number of Shares
Percent of Class
Name
Series A
Preferred
Common
Series A
Preferred
Common
Directors and Executive Officers:
Michael N. Taglich
298,968
2,530,282
(1)
23.10
%
15.61
%
Robert F. Taglich
105,696
(2)
1,675,383
(3)
8.17
%
10.93
%
Peter D. Rettaliata
0
67,035
(4)
—
*
Seymour G. Siegel
0
19,039
(5)
—
*
David Buonanno
2,797
26,550
(6)
*
*
Robert Schroeder
0
122,207
(7)
—
*
Michael Brand
0
15,250
(8)
—
*
Daniel Godin
0
0
(9)
—
—
All Directors and Executive Officers as a group (9 persons)
407,461
4,302,571
(10)
31.48
%
25.54
%
*
Less than 1%
(1)
Includes 30,736 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 607,652 shares he may acquire upon conversion of the Series A Preferred Stock, 727,340
shares he may acquire upon conversion of 8% Notes (including 144,281 shares that may be acquired by Taglich Brothers upon conversion
of 8% Notes), 393,572 shares he may acquire upon conversion of May 2018 Notes (including 82,642 shares which may be acquired by
a partnership of which he is a partner), 395,245 shares he may acquire upon exercise of warrants (including 17,385 shares which
may be acquired by Taglich Brothers and 24,792 shares which may be acquired by a partnership of which he is a partner) and 15,250
shares he may acquire upon exercise of options, in each case exercisable within 60 days.
(2)
Includes 6,478 shares owned as custodian for his children.
(3)
Includes 30,736 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 214,827 shares he may acquire upon conversion of the Series A Preferred Stock (13,646
of which are owned as custodian for his children), 371,698 shares he may acquire upon conversion of 8% Notes (including 144,281
shares that may be acquired by Taglich Brothers upon conversion of 8% Notes), 393,572 shares he may acquire upon conversion of
May 2018 Notes (including 82,642 shares which may be acquired by a partnership of which he is a partner), 271,397 shares he may
acquire upon exercise of warrants (including 17,385 shares which may be acquired by Taglich Brothers, 24,792 shares which may
be acquired by a partnership of which he is a partner and 2,436 shares which may be acquired as custodian for his children) and
15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.
(4)
Includes 64,216 shares he may acquire upon exercise
of options exercisable within 60 days.
(5)
Includes 15,250 shares he may acquire upon exercise
of options exercisable within 60 days.
42
(6)
Includes 5,684 shares he may acquire upon conversion
of Series A Preferred Stock, 1,016 shares he may acquire upon exercise of warrants and 15,250 shares he may acquire upon exercise
of options, in each case exercisable within 60 days.
(7)
Includes 70,520 shares he may acquire upon exercise
of warrants and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.
(8)
Represents shares he may acquire upon exercise of options
exercisable within 60 days.
(9)
Mr. Godin resigned as President and CEO effective March
24, 2017. Options to purchase 100,000 shares of common stock expired unexercised as of that date.
(10)
Includes 828,163 shares that may be acquired upon conversion of Series A Preferred
Stock, 954,757 shares that may be acquired upon conversion of 8% Notes, 393,572 shares that may be acquired upon conversion of
May 2018 Notes, 624,465 shares that may be acquired upon exercise of warrants and 401,768 shares that may be acquired upon exercise
of options, in each case exercisable within 60 days.
Security Ownership After Consummation
of the Restructuring Transactions
After giving effect
to the Restructuring Transactions, as a result of which 1,294,441 shares of Series A Preferred Stock automatically will be converted
into 8,629,606 shares of common stock, an additional 1,222,809 shares of common stock
will be issued upon conversion of $1,914,215 principal amount of the May 2018 Notes, approximately 334,667 shares of common stock
will be issued upon automatic conversion of the Taglich Notes, and assuming we do not
issue any other shares of common stock, or securities convertible, exercisable or exchangeable for shares of common stock, subsequent
to July 15, 2017, we will have outstanding 24,252,852 shares of common stock and no shares of Series A Preferred Stock, and the
number and percent of the outstanding shares of common stock beneficially owned by (i) each person known by us to own beneficially
more than 5% of our outstanding common stock, (ii) each of our directors, (iii) our chief executive officer, and (iii) all of
our directors and executive officers as a group will be as follows:
Directors and Executive Officers:
Number of Shares
Beneficially Owned
Percent
Michael N. Taglich
4,309,395
(1)
16.98
%
Robert F. Taglich
2,625,758
(2)
10.54
%
Peter D. Rettaliata
67,035
(3)
*
Seymour G. Siegel
19,039
(4)
*
David Buonanno
54,159
(5)
*
Robert Schroeder
122,207
(6)
*
Michael Brand
15,250
(7)
*
Daniel Godin
0
(8)
—
All Directors and Executive Officers as a group (9
    persons)
7,005,142
(9)
26.70
%
*
Less than 1%
(1)
Includes 167,923 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 727,340 shares he may acquire upon conversion of 8% Notes (including 144,281 shares
that may be acquired by Taglich Brothers upon conversion of 8% Notes), 395,245 shares he may acquire upon exercise of warrants
(including 17,385 shares which may be acquired by Taglich Brothers and 24,792 shares which may be acquired by a partnership of
which he is a partner) and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.
(2)
Includes 167,923 shares owned by Taglich Brothers and
other entities controlled by Mr. Taglich, 43,187 shares owned by custodial accounts for the benefit of his children under the
NY UGMA, 371,698 shares he may acquire upon conversion of 8% Notes (including 144,281 shares that may be acquired by Taglich Brothers
upon conversion of 8% Notes), 271,397 shares he may acquire upon exercise of warrants (including 17,385 shares which may be acquired
by Taglich Brothers, 24,792 shares which may be acquired by a partnership of which he is a partner and 2,436 shares which may
be acquired as custodian for his children) and 15,250 shares he may acquire upon exercise of options, in each case exercisable
within 60 days.
43
(3)
Includes 64,216 shares he may acquire upon exercise
of options exercisable within 60 days.
(4)
Includes 15,250 shares he may acquire upon exercise
of options exercisable within 60 days.
(5)
Includes 1,016 shares he may acquire upon exercise of
warrants and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.
(6)
Includes 70,528 shares he may acquire upon exercise
of warrants and 15,250 shares he may acquire upon exercise of options, in each case exercisable within 60 days.
(7)
Represents shares he may acquire upon exercise of options
exercisable within 60 days.
(8)
Mr.
Godin resigned as President and CEO effective March 24, 2017. Options to purchase 100,000 shares of common
Stock
expired unexercised as of that date.
(9)
Includes 954,757 shares that may be acquired upon conversion of 8% Notes, 695,739
shares that may be acquired upon exercise of warrants and 272,492 shares that may be acquired upon exercise of options, in each
case exercisable within 60 days.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Policy Concerning Transactions with Related Persons
Under Item 404 of SEC
Regulation S-K, a related person transaction is any actual or proposed transaction, arrangement or relationship or series of similar
transactions, arrangements or relationships, including those involving indebtedness not in the ordinary course of business, to
which we or our subsidiaries were or are a party, or in which we or our subsidiaries were or are a participant, in which the amount
involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last
two completed fiscal years and in which any of our directors, nominees for director, executive officers, beneficial owners of more
than 5% of any class of our voting securities (a "significant shareholder"), or any member of the immediate family
of any of the foregoing persons, had or will have a direct or indirect material interest.
We recognize that transactions
between us and any of our Directors or Executives or with a third party in which one of our officers, directors or significant
shareholders has an interest can present potential or actual conflicts of interest and create the appearance that our decisions
are based on considerations other than the best interests of our Company and stockholders.
The Audit Committee
of the Board of Directors is charged with responsibility for reviewing, approving and overseeing any transaction between the Company
and any related person (as defined in Item 404 of Regulation S-K), including the propriety and ethical implications of any such
transactions, as reported or disclosed to the Committee by the independent auditors, employees, officers, members of the Board
of Directors or otherwise, and to determine whether the terms of the transaction are not less favorable to us than could be obtained
from an unaffiliated party.
Transactions with Related Persons
The following includes
a summary of transactions since January 1, 2014, or any currently proposed transaction, in which we were or are to be a participant
and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end
for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest.
From time to time when
needed, we have borrowed funds from Michael Taglich and Robert F. Taglich, directors and principal stockholders of our company,
as discussed below. In addition, as discussed below, Taglich Brothers, of which Michael Taglich and Robert F. Taglich are the principals,
has acted as placement agent for offerings of our securities and provided us with other investment banking and advisory services.
On January 1, 2014,
we entered into a Capital Market Advisory Agreement with Taglich Brothers pursuant to which Taglich Brothers provided us, on a
non-exclusive basis, business advisory services for a monthly fee of $7,000 and a warrant to purchase 10,000 shares of our common
stock at an exercise price of $8.72 per share. This agreement renewed annually until terminated in October 2016. We paid Taglich
Brothers $1,500 per month for posting its research reports on our company on its website pursuant to a research distribution agreement,
or a total of $18,000 for each of 2014 and 2015 and $9,000 for 2016.
In connection with our
public offering of 1,170,000 shares of common stock completed on June 3, 2014, we paid Taglich Brothers, which acted as placement
agent for the offering, $842,400, representing 8% of the gross proceeds of the offering as a sales commission, plus an additional
$75,000 in reimbursement of counsel fees. In addition, we granted Taglich Brothers placement agent warrants to purchase 46,800
shares of common stock, representing 4% of the shares sold in the offering as additional compensation. The warrants are exercisable
for cash or on a cashless basis at a per share exercise price equal to $11.25, commencing May 29, 2015 and expiring May 28, 2019.
On September 8, 2015,
we borrowed $350,000 from Michael N. Taglich and issued our promissory note in the principal amount of $350,000 to evidence our
obligation to repay that indebtedness. The note bore interest at the rate of 4% per annum and was payable on September 7, 2016.
On April 8, 2016, we
borrowed $350,000 from each of Michael N. Taglich and Robert F. Taglich and issued our promissory notes in the principal amount
of $350,000 to evidence our obligation to repay that indebtedness. The notes bore interest at the rate of 7% per annum and were
payable on June 30, 2016, or earlier upon our receipt of proceeds from the sale of our equity securities in the aggregate amount
of $1,000,000.
45
On May 6, 2016, we borrowed
$400,000 from Michael N. Taglich and $300,000 from Robert F. Taglich and issued our promissory notes in the principal amount of
$400,000 to Michael N. Taglich and $300,000 to Robert F. Taglich to evidence our obligation to repay that indebtedness. The notes
bore interest at the rate of 7% per annum and were payable on June 30, 2016, or earlier upon our receipt of proceeds from the sale
of our equity securities in the aggregate amount of $2,000,000.
On May 26, 2016, we
issued 110,000 shares of our Series A Preferred Stock to Michael N. Taglich and 65,000 shares of our Series A Preferred Stock to
Robert F. Taglich, with a stated value of $10.00 per share, upon exchange of the aforementioned promissory notes in connection
with the private placement of 700,000 shares of our Series A Preferred Stock, for which Taglich Brothers acted as co-placement
agent.
As compensation for
its services as co-placement agent for the private placement of our Series A Preferred Stock completed in June 2016, we paid Taglich
Brothers a fee of $326,000 and issued to Taglich Brothers five-year warrants to purchase 56,910 shares of common stock at an initial
exercise price of $6.15, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations.
In August 2016, we borrowed
a total of $1,500,000 from Michael N. Taglich and issued two promissory notes to Michael N. Taglich in principal amounts of $500,000
and $1,000,000 to evidence our obligation to repay that indebtedness. The notes bore interest at the rate of 7% per annum. The
principal and interest were payable on December 31, 2016, or earlier upon our receipt of proceeds from the sale of our equity securities
in the aggregate amount of $2,000,000.
On August 19, 2016,
we issued to Michael N. Taglich our 12% Subordinated Convertible Note due December 31, 2017 in the principal amount of $1,520,713,
together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation of promissory notes in the aggregate
principal amount of $1,500,000, together with accrued interest thereon and on notes previously exchanged for Series A Preferred
Stock of $20,713. In addition, we issued to Robert F. Taglich our 12% Subordinated Convertible Note due December 31, 2017 in the
principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness
of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock. On November 30, 2016, upon the automatic
conversion of the 12% Notes, we issued 157,191 shares of Series A Preferred Stock to Michael N. Taglich and 21,125 shares of Series
A Preferred Stock to Robert F. Taglich.
As compensation for
its services as placement agent for the private placement in August 2016 of our 12% Notes, we paid Taglich Brothers a fee of $295,400
and issued to Taglich Brothers five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15,
subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions
such as mergers and other business combinations. The warrants may be exercised until July 31, 2021 and may be exercised on a cashless
basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.
On November 23, 2016,
we issued and sold to Michael N. Taglich and Robert F. Taglich our 8% Subordinated Convertible Notes due November 30, 2018 (the
"2018 Notes') in the principal amounts of $1,000,000 and $100,000, respectively, together with five-year warrants to
purchase 88,889 and 8,889 shares of common stock, respectively, for a purchase price of $1,000,000 and $100,000, respectively.
The 2018 Notes have a conversion price of $2.25 per share and the warrants have an exercise price of $3.00 per share. The conversion
price of the 2018 Notes and the exercise price of the warrants, as well as the number of shares issuable upon conversion of the
2018 Notes and the exercise of the warrants, are subject to certain anti-dilution and other adjustments, including stock splits,
and in the event of certain fundamental transactions such as mergers and other business combinations. The warrants may be exercised
until November 30, 2021 and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market
prices at the time of exercise.
As compensation for
its services as placement agent for the private placement in November 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $112,000. We also issued to Taglich Brothers
a five-year warrant to purchase 62,222 shares of common stock. The warrants may be exercised until November 30, 2021, have an
exercise price of $3.00, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser
number of shares depending upon prevailing market prices at the time of exercise.
46
On December 22, 2016,
we issued and sold to Michael N. Taglich and Robert F. Taglich 2018 Notes in the principal amounts of $300,000 and $200,000, respectively,
together with warrants to purchase 22,815 shares and 15,209 shares, respectively, of common stock for a purchase price of $300,000
and $200,000, respectively. The outstanding principal amount plus accrued interest on the 2018 Notes are convertible at the option
of the holder into shares of common stock at an initial conversion price of $2.63, subject to certain anti-dilution and other adjustments,
including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations. The
warrants may be exercised until November 30, 2021 and have an exercise price of $3.00 per share, subject to certain anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business
combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market prices at
the time of exercise.
As compensation for
its services as placement agent for the private placement in December 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $94,000. We also issued to Taglich Brothers five-year
placement agent warrants to purchase 44,677 shares of common stock at an exercise price pf $3.00 per share and having the same
terms as the warrants issued to purchasers of the 2018 Notes in the December 2016 private placement.
On February 7, 2017,
we issued and sold to Robert F. Taglich our 8% Subordinated Convertible Notes due January 31, 2019 in the principal amount of $250,000
(one of a series of our 8% Subordinated Convertible Notes due January 31, 2019, hereinafter referred to as the "2019 Notes"),
together with a five year warrant to purchase 19,230 shares of common stock for a purchase price of $250,000. The 2019 Note issued
to Robert F. Taglich has a conversion price of $3.71 per share, and the warrant issued to Robert F. Taglich has an exercise price
of $3.71 per share. The conversion price of the 2019 Notes and the exercise price of the warrants, as well as the number of shares
issuable upon conversion of the 2019 Notes and the exercise of the warrants, are subject to certain anti-dilution and other adjustments,
including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations. The
warrants may be exercised until January 31, 2022 and may be exercised on a cashless basis for a lesser number of shares depending
upon prevailing market prices at the time of exercise.
As compensation for
its services as placement agent for the private placement in February 2017 of the 2019 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2019 Notes in the principal amount of $80,000 (of which a 2019 Note in the principal
amount of $20,000 has a conversion price of $3.71 per share and a 2019 Note in the principal amount of $60,000 has a conversion
price of $4.45 per share). We also issued to Taglich Brothers five-year placement agent warrants to purchase 29,816 shares of common
stock at an exercise price of $4.45 per share having the same terms as the warrants issued to purchasers of the 2019 Notes in the
February 2019 private placement.
On March 8, 2017, we
issued and sold to Robert F. Taglich a 2019 Note in the principal amount of $100,000, together with a five year warrant to purchase
7,692 shares of common stock for a purchase price $100,000. The 2019 Note issued to Robert F. Taglich has a conversion price of
$3.30 per share, and the warrant issued to Robert F. Taglich has an exercise price of $3.30 per share. The conversion price of
the 2019 Notes and the exercise price of the warrants, as well as the number of shares issuable upon conversion of the 2019 Notes
and the exercise of the warrants, are subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations. The warrants may be exercised until
January 31, 2022 and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market prices
at the time of exercise.
As compensation for
its services as placement agent for the private placement in March 2017 of the 2019 Notes, we issued to Taglich Brothers, in lieu
of cash payment of sales commissions, 2019 Notes in the principal amount of $96,000 (of which a 2019 Note in the principal amount
of $44,400 has a conversion price of $3.30 per share, a 2019 Note in the principal amount of $43,600 has a conversion price of
$3.78 per share and a 2019 Note in the principal amount of $8,000 has a conversion price of $3.25 per share) and five-year warrants
to purchase a total of 7,386 shares of common stock (of which warrants to purchase 3,416 shares have an exercise price of $3.30
per share, warrants to purchase 3,354 shares have an exercise price of $3.78 and warrants to purchase 616 shares have an exercise
price of $4.00). We also issued to Taglich Brothers placement agent warrants to purchase a total of 36,877 shares of common stock,
of which warrants to purchase 17,030 shares have an exercise price of $3.30 per share, warrants to purchase 16,770 shares have
an exercise price of $3.78 and warrants to purchase 3,077 shares have an exercise price of $4.00, and having the same terms as
the warrants issued to purchasers of the 2019 Notes in the March 2019 private placement.
47
On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, directors and principal
stockholders of our company, and issued our promissory notes in the principal amounts of $200,000 and $300,000 to Michael N. Taglich
and Robert F. Taglich, respectively, to evidence our obligation to repay that indebtedness (the "Taglich Notes").
The Taglich Notes bear interest at the rate of 7% per annum and are payable on March 17, 2018. The Taglich Notes have been amended
to provide for the automatic conversion of the indebtedness evidenced thereby into shares of common stock at a conversion price
of $1.50 per share, the public offering price of the shares of our common stock sold in the Public Offering, following the stockholder
vote upon the Restructuring Transactions at our 2017 Annual Meeting of Stockholders, even if stockholders do not approve the Restructuring
Transactions.
On May 2, 2017, we borrowed
$500,000 from each of Michael N. Taglich and Robert F. Taglich, and on May 10, 2017 we borrowed an additional $250,000 from each
of Michael N. Taglich and Robert F. Taglich (collectively, the "Taglich Loans"). The Taglich Loans were exchanged for
May 2018 Notes in the same principal amount of indebtedness.
On May 12, 2017
each of Michael N. Taglich and Robert F. Taglich acquired $774,217 principal amount of our May 2018 Notes, together with
warrants to purchase 93,279 shares of our common stock, in consideration for the cancellation of the indebtedness related to
the Taglich Loans. For a discussion of the terms of the May 2018 Notes, see the section of this prospectus captioned
"Description of Securities – May 2018 Notes". On May 19, 2017, a partnership of which Michael N. Taglich
and Robert F. Taglich are partners, acquired $205,780 principal amount of May 2018 Notes and warrants to purchase 24,792
shares of our common stock for a purchase price of $199,786. The warrants, when issued, were exercisable at an initial
exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a lesser number of shares
based upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution and other
adjustments, including stock splits, and in the event of certain fundamental transactions such as recapitalizations, mergers
and other business combination transactions. In accordance with the terms of the warrants, the exercise price has been
reduced to $1.50 per share, the public offering price of the shares of common stock sold in the Public Offering. We have
agreed to pay Taglich Brothers $176,155 in sales commissions in connection with the May 2018 Note financing.
The May 2018 Notes beneficially owned by Michael N. Taglich and Robert F. Taglich have been
amended to require stockholder approval for the conversion thereof to comply with applicable rules of the NYSE MKT. At a meeting
on July 24, 2017, the Board of Directors adopted a resolution authorizing the conversion of the May 2018 Notes at a conversion
price of $1.50 per share following the stockholder vote upon the Restructuring Transactions at our 2017 Annual Meeting of Stockholders,
even if stockholders do not approve the Restructuring Transactions.
In connection with the
Public Offering, on July 12, 2017, we amended the Certificate of Designation authorizing the issuance of the Series A Preferred
Stock, to provide for the automatic conversion of the outstanding shares of Series A Preferred Stock into shares of common stock
at a conversion price of $1.50 per shares, the public offering price of the shares sold in the Public Offering, subject to stockholder
approval in accordance with the applicable rules of the NYSE MKT, including the automatic conversion of 298,968 shares of Series
A Preferred Stock beneficially owned by Michael N. Taglich and 105,696 shares of Series A Preferred Stock beneficially owned by
Robert F. Taglich, principal partners of Taglich Brothers and principal stockholders and directors of our company, into 1,993,120
shares and 704,640 shares, respectively, of common stock. At a meeting on July 24, 2017, the Board of Directors adopted a further
amendment to the Certificate of Designation, subject to approval by a majority of the holders of the Series A Preferred Stock,
authorizing the automatic conversion of the outstanding shares of Series A Preferred Stock at a conversion price of $1.50 per share
following the stockholder vote upon the Restructuring Transactions at our 2017 Annual Meeting of Stockholders, even if stockholders
do not approve the Restructuring Transactions.
Taglich Brothers or
its affiliates may in the future provide investment banking, commercial banking and/or other services to us from time to time,
for which they may in the future receive customary fees and expenses.
The foregoing transactions
were reviewed and approved by the Audit Committee or our Board of Directors. We believe that the terms of each transaction were
not less favorable to us than those terms that could be obtained from an unaffiliated third party.
48
SELLING STOCKHOLDERS
This prospectus relates
to the offering by the Selling Stockholders named below of 1,293,938 shares of common stock acquired or to be acquired upon conversion
of our May 2018 Notes, subject to stockholder approval in accordance with the applicable rules of the NYSE MKT. The conversion
of the May 2018 Notes into shares of common stock at a conversion price of $1.50 per share, the offering price of the shares of
common stock sold in the Public Offering, will be consummated following the stockholder vote on the Restructuring Transactions
at our 2017 Annual Meeting of Stockholders which we expect to hold in September 2017.
The following table
sets forth, based on information provided to us by the Selling Stockholders or known to us, the name of each Selling Stockholder,
the nature of any position, office or other material relationship, if any, which the Selling Stockholder has had, within the past
three years, with us or with any of our predecessors or affiliates, and the number of shares of our common stock beneficially owned
by the Selling Stockholder before this offering. We have not independently verified this information. The Selling Stockholders
identified in each table may have sold, transferred or otherwise disposed of some or all of their shares since the date on which
the information in the following table is presented in transactions exempt from, or not subject to, the registration requirements
of the Securities Act. Information concerning the Selling Stockholders may change from time to time and, if necessary, we
will amend or supplement this prospectus accordingly.
The number of shares
owned are those beneficially owned, without regard to any limitations on conversions or exercises, as determined under the rules
of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares of Common Stock as to which a person has sole or shared voting power or investment power
and any shares of common stock which the person has the right to acquire within 60 days through the exercise of any option, warrant
or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a
trust, discretionary account or similar arrangement. The percentage of outstanding shares beneficially owned prior to the offering
is based on 14,065,770 shares of our common stock outstanding as of July 15, 2017 and is calculated in accordance with Rule 13d-3
under the Exchange Act.
We have assumed all
shares reflected in the tables will be sold from time to time in the offering covered by this prospectus. Because the Selling
Stockholders may offer all or any portions of the shares listed in the table, no estimate can be given as to the amount of those
shares covered by this prospectus that will be held by the Selling Stockholders upon the termination of the offering. The Selling
Stockholders also may sell, transfer or otherwise dispose of all or a portion of their shares in transactions exempt from the registration
requirements of the Securities Act, including under Rule 144. For purposes of the tables, we have assumed that, after completion
of the offering, all of the shares covered by this prospectus will be sold by the Selling Stockholders.
The shares of common
stock being offered by the Selling Stockholders includes all shares issuable upon conversion of the 8% Notes and outstanding warrants.
We are registering
the shares of common stock offered by this prospectus pursuant to an agreement we entered into with the Selling Stockholders in
order to induce them to convert their May 2018 Notes into shares of common stock in connection with the public offering we completed
on July 12, 2017 so as to permit the Selling Stockholders to offer the shares for resale from time to time. Except as set forth
in the following sentence, the Selling Stockholders have not had any material relationship with us within the past three years.
The Selling Stockholders have entered into lock-up agreements pursuant to which they have agreed not to offer, sell, assign, transfer
or otherwise dispose of their shares, or enter into any agreement to do any of the foregoing, prior to October 11, 2017.
The Selling Stockholders
may sell all, some or none of their shares in this offering. See "Plan of Distribution."
We have agreed to indemnify
each Selling Stockholder whose shares we have included in this prospectus from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement of which this prospectus is a part.
If the registration statement of which this prospectus is a part is not declared effective on or before
August 11, 2017, we have agreed to issue to each Selling Stockholder a number of shares of common stock equal to 8% of the number
of shares of common stock held by such Selling Stockholder, plus for each additional 30 days thereafter during which the registration
statement is not declared effective, a number of shares of common stock equal to an additional one percent (1%) of the number of
shares offered by this prospectus, provided that no Selling Stockholder shall receive in the aggregate more than ten percent (10%)
of the number of shares of common stock being offered by this prospectus by such Selling Stockholder.
49
Selling Stockholder
Shares of Common Stock Owned Before this Offering
Percentage of Common Stock Beneficially Owned Before
    this Offering (1)
Shares of Common Stock Being Offered in this Offering
    (2)
Shares of Common Stock Owned After this Offering (3
Percentage of Common Stock Beneficially Owned After this
    Offering
Dolphin Offshore Partners
666,666
4.74%
666,666
0
--
Shadow Capital LLC
344,344
2.45%
137,333
207,011
1.47%
Broms Financial LLC
103,000
*
103,000
0
--
Barktones LLC
155,500(4)
1.11%
68,666(4)
86,834
*
Bridgitte Ferrada-Stetson
68,666
*
68,666
0
--
Edward J. Cook
59,307
*
51,500
7,807
*
Alvin R. Bonette Revocable Trust
72,536
*
50,470
21,796
*
Robert Brooks
39,099
*
34,333
4,766
*
Brent Eastwood
34,333
*
34,333
0
--
Norper Investments
49,035
*
34,333
14,702
*
Roger Lunstra and Joyce
Lunstra Trust
32,799
*
27,466
5,333
*
Jeffrey Golden
24,166
*
17,166
7,000
*
_____
*
Represents less than 1%.
(1)
Based
on 14,065,770 shares of common stock outstanding as of July 15, 2017.
(2)
Represents
shares acquired or to be acquired upon conversion of May 2018 Notes at a conversion price of $1.50 per share.
(3)
Assumes
that (i) all of the shares of common stock to be registered on the registration statement of which this prospectus is a part are
sold in the offering and (ii) that no other shares of common stock are acquired or sold by the selling stockholder prior to the
completion of the offering. However, the selling stockholders may sell all, some or none of the shares offered pursuant to this
prospectus or sell some or all of their shares pursuant to an exemption from the registration provisions of the Securities Act,
including under Rule 144.
(4)
Includes
53,333 shares to be acquired upon conversion of $80,000 principal amount of May 2018 Notes, subject to stockholder approval in
accordance with the applicable rules of the NYSE MKT.
50
PLAN OF DISTRIBUTION
We are registering
the shares of common stock offered by the Selling Stockholders pursuant to this prospectus to permit the resale of these shares
by the Selling Stockholders from time to time after the date of this prospectus.  We will not receive any of the proceeds
from the sale by the Selling Stockholders of the shares of common stock offered by this prospectus. We will bear all fees
and expenses incident to our obligation to register the shares of common stock, other than any underwriting discounts or commissions
or agent's commissions.
Each Selling Stockholder
of the shares of common stock offered hereby and any of their pledgees, assignees and successors-in-interest may, from time to
time, sell any or all of their shares covered hereby on the NYSE MKT or any other stock exchange, market or trading facility on
which shares of the common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling
Stockholder may use any one or more of the following methods when selling securities:
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
·
an exchange distribution in accordance with the rules of the applicable exchange;
·
privately negotiated transactions;
·
settlement of short sales;
·
in transactions through broker-dealers that agree with the Selling Shareholders to sell a specified number of such shares of
common stock at a stipulated price per share;
·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
·
a combination of any such methods of sale; or
·
any other method permitted pursuant to applicable law.
The Selling Stockholders
may also sell securities under Rule 144 or any other exemption from registration under the Securities Act, if available, rather
than under this prospectus.
Broker-dealers engaged
by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares of common stock,
from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with FINRA IM-2440.
In connection with
the sale of the shares of common stock offered hereby, the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions
they assume. The Selling Stockholders may also sell shares of common stock short and deliver shares of common stock to close out
their short positions, or loan or pledge shares of common stock to broker-dealers that in turn may sell these shares of common
stock. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions
or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of
the shares of common stock offered by this prospectus, which securities such broker-dealer or other financial institution may resell
pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders
and any broker-dealers or agents that are involved in selling the shares of common stock offered hereby may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act. Each Selling Shareholder has informed the Company that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to distribute the shares of common stock offered hereby.
51
We are required to
pay certain fees and expenses incurred by us incident to the registration of the shares of common stock offered hereby. We have
agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under
the Securities Act.
We agreed to keep this
prospectus effective until the earlier of (i) the date on which the shares of common stock may be resold by the Selling Stockholders
without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement
for us to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar
effect or (ii) all of the shares of common stock offered hereby have been sold pursuant to this prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The shares of common stock offered hereby will be sold only through registered
or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the shares of
common stock covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution of the shares of common stock offered hereby may
not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as
defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the
timing of purchases and sales of the shares of common stock by the Selling Shareholders or any other person. We will make copies
of this prospectus available to the Selling Shareholders and have informed them of the need to deliver a copy of this prospectus
to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
52
DESCRIPTION OF SECURITIES
General
Our authorized capital
stock consists of 25,000,000 shares of common stock, par value $0.001 per share, of which, as of July 15, 2017, 14,065,758 shares
are issued and outstanding, and 3,000,000 shares of preferred stock, 2,000,000 of which have been designated as Series A Convertible
Preferred Stock, of which as of July 15, 2015, 1,294,441 shares are outstanding. The outstanding shares of Series A Preferred Stock
will be automatically converted into 8,629,606 shares of common stock following the stockholder vote upon the Restructuring Transactions,
as discussed below under the caption "Series A Preferred Stock." At a meeting of our Board of Directors on July 24,
2017, we adopted an amendment, subject to stockholder approval, to amend our Articles of Incorporation to increase the number of
shares of common stock we are authorized to issue from 25,000,000 to 50,000,000 (the "Charter Amendment"). The Charter
Amendment will be submitted to stockholders for approval at our 2017 Annual Meeting of Stockholders scheduled to be held in September
2017.
The authorized and unissued
shares of common stock and preferred stock are available for issuance without further action by our stockholders, unless such action
is required by applicable law or the rules of any stock exchange on which our securities may be listed. Unless approval of our
stockholders is so required, our board of directors will not seek stockholder approval for the issuance and sale of our common
stock or our preferred stock.
Common Stock
Holders of our common
stock are entitled to one vote per share on all matters submitted to a stockholder vote, including the election of directors. Holders
our common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of our common stock voting
for the election of directors will be able to elect all of the directors. A vote by the holders of a majority of our outstanding
shares of common stock will be required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment
to our articles of incorporation. In the event of liquidation, dissolution or winding up of our affairs, either voluntarily or
involuntarily, each outstanding share of our common stock will be entitled to share equally in our assets.
Holders of our common
stock do not have pre-emptive rights or conversion rights and there are no redemption provisions applicable to our common stock.
Holders of our common stock are entitled to receive dividends when and as declared by our board of directors, out of funds legally
available therefor.
All shares of our common
stock offered hereby will, when issued, be fully paid and non-assessable, including shares of common stock issued on the conversion
of preferred stock, the exercise of common stock warrants or subscription rights, if any.
Preferred Stock
Our Articles of Incorporation
gives our Board of Directors authority to issue shares of "blank check" preferred stock from time to time in one or
more series, pursuant to resolutions adopted by the Board in accordance with Section 78.196 of the Nevada Revised Statutes, each
having the voting powers, if any, designations, powers, preferences, and the relative, participating, optional, or other rights,
if any, and the qualifications, limitations, or restrictions thereof, of any unissued series of preferred stock, to fix the number
of shares constituting such series, and to increase or decrease the number of shares of any such series, but not below the number
of shares thereof then outstanding, without the delay attendant to obtaining stockholder approval for such issuance.
Prior to the issuance
of shares of each series of preferred stock, the board of directors is required to adopt resolutions and file a certificate of
designation with the Secretary of State of the State of Nevada for that series. The purpose of authorizing the board of directors
to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage
a third party from acquiring, a majority of a corporation's outstanding voting stock.
We may issue preferred
stock to effect a business combination, to raise capital or for other reasons. In addition, preferred stock could be utilized
as a method of discouraging, delaying or preventing a change in control of our company.
53
Our board of directors
has no intention at the present time to create any additional series of preferred stock. The issuance of any new series of preferred
stock could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt.
Any future issuance
of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by
the shareholders and may adversely affect the voting and/or other rights of the holders of common stock or any other securities
we may issue in the future. The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could
be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the holders to block such a transaction, or facilitate
a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition,
under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common
stock. Although our board of directors is required to make any determination to issue such stock based on its judgment as to the
best interests of our stockholders, the board of directors could act in a manner that would discourage an acquisition attempt or
other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders
might receive a premium for their stock over the then market price of such stock. Our board of directors does not at present intend
to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law.
Series A Convertible Preferred Stock
The following summary
of the powers, preferences, rights, qualifications and limitations of the Series A Preferred Stock is qualified in its entirety
by the Certificate of Designation authorizing the issuance of the Series A Preferred Stock, as amended on July 12, 2017, as filed
with the Office of the Secretary of State of Nevada incorporated as an exhibit to the Registration Statement of which this prospectus
is a part.
As of July 15, 2017, we had outstanding 1,294,441
shares of Series A Preferred Stock.
Holders of the Series
A Preferred Stock (the "Preferred Shares") are entitled to receive dividends when, if and as declared, paid or set
side by the Board of Directors ratably on an as-converted basis (2.0325 shares of common stock for each share of Series A Preferred
Stock owned of record) with the holders of our common stock.
Upon any voluntary or
involuntary liquidation, dissolution or winding up of our affairs, holders of Preferred Shares are entitled to be paid out of our
assets legally available for distribution to stockholders, after payment of or provision for our debts and other liabilities, ratably
on an as-converted basis (2.0325 shares of common stock for each share of Series A Preferred Stock owned of record) with the holders
of our common stock.
Holders of Series A
Preferred Stock may elect at any time to convert their Preferred Shares into shares of common stock at the conversion rate of 2.0325
shares of common stock for each Preferred Share (equivalent to an initial conversion price of approximately $4.92 per share of
common stock. The conversion rate and the corresponding conversion price are subject to certain anti-dilution and other adjustments,
including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions such
as mergers and other business combinations.
On July 12, 2017, we
filed a Certificate of Amendment to the Certificate of Designation in connection with the Public Offering, pursuant to which each
share of Series A Preferred Stock is automatically convertible, without any action on the part of the holders thereof, into 6.6667
shares of our common stock, upon stockholder approval in accordance with the applicable rules of the NYSE MKT. The automatic conversion
of the outstanding 1,294,441 shares of Series A Preferred Stock into 8,629,606 shares of common stock will be submitted to stockholders
for their approval at our 2017 Annual Meeting of Stockholders which we expect to hold in September 2017. At a meeting on July 24,
2017, our Board of Directors adopted a further amendment to the Certificate of Designation, subject to approval by the holders
of a majority of the Series A Preferred Stock, which provides for the automatic conversion of the outstanding shares of Series
A Preferred Stock at a conversion price of $1.50 per share following the stockholder vote on the Restructuring Transactions, even
if stockholders do not approve the Restructuring Transactions.
We may at our option,
at any time and from time to time after the market price of a share of common stock is in excess of $9.84 for 30 consecutive trading
days, cause all of the Preferred Shares to be converted into shares of common stock at the then-prevailing conversion rate, subject
to the certain conditions set forth in the certificate of designation.
Commencing May 26, 2018,
we may redeem all of the Preferred Shares for a redemption price of $10.00, plus accrued and unpaid dividends.
54
Holders of Preferred
Shares vote on an as-converted basis, together with holders of common stock, as a single class, on the election of directors and
all other matters presented to stockholders, except for matters as to which under applicable law and the certificate of designation
a class vote of the holders of the Series A Preferred Stock is required. The Certificate of Designation provides that the affirmative
vote of the holders of a majority of the then outstanding shares of Series A Preferred Stock is required to (a) alter or change
adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Certificate of Designation,
(b) amend our articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders
of the Series A Preferred Stock, (c) increase the number of authorized shares of Series A Preferred Stock, (d) authorize a new
series of preferred stock with dividend, liquidation or redemption rights senior or pari passu to the Series A Preferred Stock
or (e) enter into any agreement with respect to any of the foregoing.
Upon the automatic conversion
of 1,294,441 shares of Series A Preferred Stock, we will have 3,000,000 authorized shares of preferred stock, none of which will
be outstanding.
8% Subordinated Convertible Notes
In November 2016 we
issued our 8% Subordinated Convertible Notes due November 30, 2018 (the "2018 Notes") in the original aggregate principal
amount of $1,512,000 (the "First Tranche of 2018 Notes"), including First Tranche of 2018 Notes in the principal amount
of $112,000 issued to Taglich Brothers in lieu of cash payment of sales commissions for the private placement of the First Tranche
of 2018 Notes, and in December 2016 we issued our 8% Notes in the original aggregate principal amount of $1,269,000 (the "Second
Tranche of 2018 Notes"), including Second Tranche of 2018 Notes in the principal amount of $94,000 issued to Taglich Brothers
in lieu of cash payment of sales commissions for the private placement of the Second Tranche of 2018 Notes. Except as set forth
below, the terms of the First Tranche of 2018 Notes and the Second Tranche of 2018 Notes are the same. Payment of the principal
and accrued interest on the 8% Notes is junior and subordinate in right of payment to our indebtedness under the Loan Facility.
All of our 8% Notes will remain outstanding following this offering.
Interest on the 2018
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28,
2017, in cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest
in cash, or we otherwise elect to do so, we may pay accrued interest on the First Tranche of 2018 Notes by the issuance of additional
2018 Notes having the same terms as the First Tranche of 2018 Notes, and in the case of the Second Tranche of 2018 Notes, by issuing
additional 2018 Notes having the same terms as the Second Tranche of 2018 Notes (2018 Notes issued in lieu of the cash payment
of accrued interest is hereinafter referred to as "2018 PIK Notes"), except that if accrued interest for any quarterly
interest period on the Second Tranche of 2018 Notes (including the 2018 PIK Notes issued in lieu of cash payment of accrued interest
thereon) is paid in additional Second Tranche of 2018 PIK Notes interest for that quarterly interest payment is calculated at the
rate of twelve percent (12%) per annum. Upon the occurrence and continuation of an event of default, interest on the 2018 Notes
will accrue at the rate of 12% per annum.
In February and March
of 2017, we issued our 8% Subordinated Convertible Notes due January 31, 2019 (the "2019 Notes") in the original aggregate
principal amount of $2,376,000, including 2019 Notes in the aggregate principal amount of $176,000 issued to Taglich Brothers in
lieu of cash payment of sales commissions for the private placements of the 2019 Notes in February and March of 2017.
Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if we are prohibited by applicable law or PNC, our principal lender under our Loan Facility, from paying interest in
cash, or we otherwise elect to do so, we may pay accrued interest, in additional 2019 Notes, provided that if accrued interest
is paid in additional 2019 Notes, interest for that quarterly interest payment is calculated at the rate of 12% per annum. Upon
the occurrence and continuation of an event of default, interest will accrue at the rate of 12% per annum.
Since covenant defaults
under our Loan Facility have prohibited us from paying accrued interest in cash on our 8% Notes, we have paid accrued interest
on the 8% Notes through the issuance of additional 8% Notes. If and when the Loan Facility is no longer in default, we will no
longer be restricted from paying cash interest on the 8% Notes.
On February 28, 2017,
we issued 2018 PIK Notes in the principal amount of $32,477 in respect of the First Tranche of 2018 Notes and in the principal
amount of $23,908 in respect of the Second Tranche of 2018 Notes in lieu of cash payment of accrued interest for the interest
period then ended.
55
On May 31, 2017, we
issued 2018 PIK Notes in the principal amount of $30,489 in respect of the First Tranche of 2018 Notes and in the principal amount
of $38,383 in respect of the Second Tranche of 2018 Notes in lieu of cash payment of accrued interest for the interest period then
ended, and we issued 2019 PIK Notes in the principal amount of $72,285 in lieu of cash payment of accrued interest on the 2019
Notes for the interest period then ended.
As of May 31, 2017,
we had outstanding $5,359,420 principal amount of our 8% Notes, including $1,574,965 principal amount of First Tranche of 2018
Notes, $1,336,170 principal amount of Second Tranche of 2018 Notes and $2,448,285 principal amount of 2019 Notes. We intend to
pay accrued interest on the 8% Notes for the period ending August 15, 2017 in cash, although there is no assurance that we will
be able to do so.
The outstanding principal
amount plus accrued interest on the 8% Notes is convertible at the option of the holder into shares of common stock at conversion
prices ranging from $2.25 to $4.00, subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations.
May 2018 Notes
As of July 15, 2017,
we had outstanding $3,695,123 principal amount of May 2018 Notes. The principal amount of each May 2018 Note will be increased
by 2% for each 30 days it remains outstanding commencing August 1, 2017. Upon the occurrence of, and during the continuance of
an Event of Default (as defined in the May 2018 Notes), the May 2018 Notes will accrue late interest at the rate of 10% per annum.
Payment of the principal and accrued interest, if any, on the May 2018 Notes is junior and subordinate in right of payment to our
indebtedness under the Loan Facility.
The principal amount,
together with accrued interest, if any, of the May 2018 Notes are convertible into
shares of our common stock until November 12, 2017 at an initial conversion price of $2.49 per share, subject to anti-dilution
and other adjustments for stock splits and certain fundamental transactions, including recapitalizations, mergers and other business
combination transactions (the "Fixed Conversion Price"), and thereafter at the lower of the Fixed Conversion Price
and 75% of the five (5) Weighted Average Prices (as defined in the May 2018 Notes) of the common stock during the five consecutive
trading day period ending on the trading immediately preceding the day of a request by the holder for conversion of the May 2018
Note. We have the right to redeem all, or a portion of (on a pro rata basis), the May 2018 Notes upon written notice to the holders
not less than three trading days prior to the applicable redemption date. Subject to the subordination provisions of the May 2018
Notes, holders of the May 2018 Notes have the right to request the redemption of their May 2018 Notes at any time, and following
an Event of Default or in advance of a Change of Control (as defined in the May 2018 Notes).
In connection with the
Public Offering, holders of approximately $1,780,908 aggregate principal amount of our May 2018 Notes converted their May 2018
Notes into an aggregate of 1,240,605 shares of our common stock at a conversion price of $1.50 per share, the offering price of
the shares offered in the Public Offering. We also redeemed an additional $463,501 aggregate principal amount of May 2018 Notes
for a redemption price equal to 100% of the principal amount thereof from the net proceeds of the Public Offering. Immediately
prior to the closing of the sale of the shares in the Public Offering and the conversion of the May 2018 Notes, we were advised
by the NYSE MKT that the conversion of the remaining $1,914,215 aggregate principal amount of May 2018 Notes at a conversion price
of $1.50 per share and the exercise of all 501,039 of the warrants issued as part of the sale of the 2018 Notes in May 2017 at
a price of $1.50 per share, the public offering price of the shares sold in the Public Offering, was subject to stockholder approval
in accordance with the applicable rules of the NYSE MKT since the conversion of the May 2018 Notes and exercise of the warrants
at the $1.50 per share price would result in the issuance of 20% or more of the shares of common stock outstanding. At a meeting on July 24, 2017, our Board of
Directors adopted a resolution authorizing the conversion of the May 2018 Notes at a conversion price of $1.50 per share following
the stockholder vote at our 2017 Annual Meeting of stockholders, even if stockholders do not approve the Restructuring Transactions.
The warrants to purchase
501,039 shares of common stock, when issued, were exercisable at an initial exercise price of $2.49 per share until May 12, 2022,
and may be exercised on a cashless basis for a lesser number of shares based upon prevailing market prices when exercised. The
exercise price of the warrants is subject to anti-dilution and other adjustments, including stock splits, and in the event of
certain fundamental transactions such as recapitalizations, mergers and other business combination transactions. In accordance
with the terms of the warrants, the exercise price was reduced to $1.50 per share, the public offering price of the shares
of common stock sold in the Public Offering, subject to stockholder approval in accordance with the applicable rules of the NYSE
MKT for the reason discussed in the immediately preceding paragraph. At a meeting on July 24, 2017, our Board of Directors adopted
a resolution authorizing the reduction of the exercise price of the warrants to $1.50 per share following the stockholder vote
at our 2017 Annual Meeting of Stockholders, even if stockholders do not approve the Restructuring Transactions.
We intend to
submit the conversion of the remaining $1,914,215 aggregate principal amount of May 2018 Notes at a conversion price of $1.50
per share and the exercise of all 501,039 of the warrants issued as part of the sale of the May 2018 Notes at a $1.50 per
share to our stockholders at the 2017 Annual Meeting of Stockholders, which we expect to hold in September 2017.
56
Taglich Notes
On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, and issued our promissory
notes in the principal amounts of $200,000 and $300,000 to Michael N. Taglich and Robert F. Taglich, respectively, to evidence
our obligation to repay that indebtedness. The notes bear interest at the rate of 7% per annum and are payable on March 17, 2018.
These notes were to be amended to provide for the conversion of the indebtedness evidenced thereby into shares of common stock
at a conversion price of $1.50 per share, the public offering price of the shares sold in the Public Offering, as part of the
Restructuring Transactions which we will to submit to stockholders for approval in compliance with the applicable rules of the
NYSE MKT at our 2017 Annual Meeting of Stockholders which we expect to hold in September 2017. Following a meeting of our Board
of Directors on July 24, 2017, the Taglich Notes were amended to provide for the automatic conversion of the indebtedness evidenced
thereby at a conversion price of $1.50 per share following our 2017 Annual Meeting of Stockholders, even if stockholders do not
approve the Restructuring Transactions.
Warrants
As of July 15,
2017, we had outstanding warrants to purchase a total of 1,469,530 shares of common stock. The exercise price of the warrants
ranges from $2.49 to $11.25 per share (including 501,039 shares issuable upon the exercise of warrants having an exercise
price of $2.49 per share), subject to adjustment for stock splits and certain fundamental transactions, including
recapitalizations, mergers and other business combination transactions. The warrants may be exercised on a cashless basis for
a lesser number of shares depending upon prevailing market prices at the time of exercise. The warrants have various
expiration dates extending until May 12, 2022.
Stock Options
At July 15, 2017, we
had outstanding options to purchase a total of 516,342 shares of common stock, exercisable at prices ranging from $4.50 to $11.73
per share, with a weighted average exercise price of $6.29 per share and expiration dates ranging from July 2018 to April 2021.
Articles of Incorporation and Bylaws
Our Articles of Incorporation
and Bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes
in our control or our management, including, but not limited to the following:
·
Our Bylaws provide that special meetings of our stockholders
may be called only by the Chairman of the Board, President, or a majority of the Board.
·
Our Bylaws provide that stockholders seeking to present
proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must
provide timely notice in writing and also specify requirements as to the form and content of a stockholder's notice. These
provisions may delay or preclude stockholders from bringing matters before a meeting of our stockholders or from making nominations
for directors at a meeting of stockholders, which could delay or deter takeover attempts or changes in our management.
·
Our Articles of Incorporation do not include a provision
for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class
of shares could be able to ensure the election of one or more directors.
These and other provisions
contained in our Articles of Incorporation and Bylaws are expected to discourage coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board.
However, these provisions could delay or discourage transactions involving an actual or potential change in control of us, including
transactions in which stockholders might otherwise receive a premium for their shares over then current prices. Such provisions
could also limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to
be in their best interests and, therefore, could adversely affect the price of our common stock.
See "Where You
Can Find Additional Information About Us" elsewhere in this prospectus for information on where you can obtain copies of
our Articles of Incorporation and our Bylaws, which have been filed with and are publicly available from the SEC.
57
Limitations on Indemnification of Directors and Officers
Section 78.138 of the
NRS provides that a director or officer will not be individually liable unless it is proven that (i) the director's or officer's
acts or omissions constituted a breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud
or a knowing violation of the law.
Article 9 of our Articles of Incorporation ("Limitation
on Liability") provides as follows:
"Unless otherwise
provided by law, a director or officer is not individually liable to the Corporation or its stockholders or creditors for any damages
as a result of any act or failure to act in his individual capacity as a director or officer unless it is proven that his act or
failure to act constituted a breach of his fiduciary duties as a director or officer and his breach of those duties involved intentional
misconduct, fraud, or a knowing violation of law. If the NRS is amended to further eliminate or limit or authorize corporate action
to further eliminate or limit the liability of directors or officers, the liability of directors and officers of the Corporation
shall be eliminated or limited to the fullest extent permitted by the NRS as so amended from time to time. Neither any amendment
nor repeal of this Article, nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article,
shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director or officer of the
Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision."
Section 78.7502 of the
Nevada Revised Statutes ("NRS") permits a company to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action,
suit or proceeding if the officer or director (i) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner
the officer or director reasonably believed to be in or not opposed to the best interests of the corporation and, if a criminal
action or proceeding, had no reasonable cause to believe the conduct of the officer or director was unlawful.
Section 78.751 of NRS
permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending a civil or criminal
action, suit or proceeding as they are incurred and in advance of final disposition thereof, upon receipt of an undertaking by
or on behalf of the officer or director to repay the amount advanced if it is ultimately determined by a court of competent jurisdiction
that such officer or director is not entitled to be indemnified by the company. Section 78.751 of NRS further permits the company
to grant its directors and officers additional rights of indemnification under its articles of incorporation or bylaws or otherwise.
Section 78.752 of NRS
provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director,
officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, for any liability asserted
against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, or arising out
of his status as such, whether or not the company has the authority to indemnify him against such liability and expenses.
Article 10 of our Articles of Incorporation
("Indemnification") provides as follows:
"Every person
who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she, or a person with whom he or she is a legal representative,
is or was a director or officer of the Corporation, or who is serving at the request of the Corporation as a director or officer
of another corporation, or is a representative in a partnership, joint venture, trust or other enterprise, shall be indemnified
and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys' fees, judgments, fines, and amounts paid or to be paid in a settlement)
reasonably incurred or suffered by him or her in connection therewith. The right of indemnification shall be a contract right
which may be enforced in any manner desired by such person. The expenses of officers and directors incurred in defending a civil
suit or proceeding must be paid by the Corporation as incurred and in advance of the final disposition of the action, suit, or
proceeding, under receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the Corporation. Such right
of indemnification shall not be exclusive of any other right such directors, officers or representatives may have or hereafter
acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification
under any bylaw, agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this article.
58
Without limiting the
application of the foregoing, the Board of Directors may adopt bylaws from time to time with respect to indemnification, to provide
at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the Corporation to purchase
or maintain insurance on behalf of any person who is or was a director or officer of the corporation or who is serving at the request
of the Corporation as an officer, director or representative of any other entity or other enterprise against any liability asserted
against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have
the power to indemnify such person.
Any repeal or modification
of the above provisions of this Article 10, approved by the stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the liability of a director or officer of the Corporation existing as of the time of such
repeal or modification. In the event of any conflict between the above indemnification provisions, and any other Article of the
Articles, the terms and provisions of this Article shall control."
We maintain a director and officer insurance
policy on behalf of any person who is or was a director or officer of our company. Under such insurance policy, the directors and
officers of our company are insured, within the limits and subject to the limitations of the policy, against certain expenses in
connection with the defense of certain claims, actions, suits or proceedings, and certain liabilities which might be imposed as
a result of such claims, actions, suits or proceedings, which may be brought against them by reason of being or having been such
directors or officers.
Insofar as indemnification
by us for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling the Company
pursuant to provisions of our articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the
SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification by such director, officer or controlling person of us (other than the payment by us of expenses
incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Market Information
Our common stock is listed on the NYSE MKT under the ticker
symbol "AIRI."
Holders
As of July 24,
2017 there were 197 stockholders of record of our common stock. The number of record holders does not include persons who
held our common stock in nominee or "street name" accounts through brokers.
Transfer Agent and Registrar
The transfer agent
and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc. Its address is 51 Mercedes Way, Edgewood, New
York 11717, and its telephone number is (631) 254-7400.
59
SHARES AVAILABLE FOR FUTURE SALES
Future sales of our
common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market
prices prevailing from time to time. As described below, the sale of a portion of our shares will be limited after this offering
due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions
lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability
to raise equity capital in the future.
We have outstanding
14,065,770 shares of common stock. All of our directors and officers have entered into lock-up agreements with the representative
of the underwriters for our Public Offering restricting the transfer or sale of shares of common stock beneficially owned by them,
including securities convertible or exercisable for common stock, until October 11, 2017. Upon consummation of the Restructuring
Transactions following the stockholder vote thereon at our 2017 Annual Meeting of Stockholders, which we expect to hold in September
2017, we will have outstanding approximately 24,252,852 shares, assuming we do not issue any other shares of common stock, or
securities convertible into, exercisable or exchangeable for, shares of our common stock, subsequent to July 15, 2017. Except
for shares of our common stock subject to lock-up agreements and shares of common stock issued upon the automatic conversion of
the Series A Preferred Stock, substantially all of our outstanding shares will be freely tradable, except that any shares held
by our affiliates (as that term is defined in Rule 144 under the Securities Act), may only be sold in compliance with Rule 144,
including the volume limitations described below. The shares issuable upon the automatic conversion of the Series A Preferred
Stock, may be sold under Rule 144, and all of those shares will have satisfied the one-year holding period requirement of Rule
144 by the end of August 2017. Holders of an aggregate of 1,293,938 shares of common stock issuable upon conversion of the May
2018 Notes will be able to sell those shares pursuant to this prospectus. For information concerning the number of shares of common
stock beneficially owned by our directors, officers and principal stockholders, see the section of this prospectus entitled "Security
Ownership of Management and Certain Beneficial Owners."
Rule 144
In general, under Rule
144 of the Securities Act, as in effect on the date of this prospectus, any person who is not our affiliate at any time during
the preceding three months, and who has beneficially owned their shares for at least six months (including the holding period of
any prior owner other than one of our affiliates), would be entitled to sell shares of our common stock, subject to the provisions
of Rule 144, including the volume limitations set forth below, provided current public information about us is available, and after
owning such shares for at least one year (including the holding period of any prior owner other than one of our affiliates), would
be entitled to sell an unlimited number of shares of our common stock without restriction, provided current public information
about us is available.
A person who is our
affiliate or who was our affiliate at any time during the preceding three months, and who has beneficially owned restricted securities
for at least six months, including the affiliates, is entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
·
1% of the number of shares of our common stock then
outstanding, which will equal approximately 140,657 based on the number of shares of our common stock outstanding as of July 15,
2017; or
·
the average weekly trading volume of our common stock
on the NYSE MKT during the four calendar weeks preceding the filing of a Form 144 notice with respect to the sale.
Sales under Rule 144
by our affiliates are also subject to manner of sale provisions and notice requirements and all sales of our securities pursuant
to Rule 144 are subject to the availability of current public information about us.
60
LEGAL MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Eaton & Van Winkle LLP, New York, New York. Eaton & Van Winkle LLP and its partners own in the
aggregate 14,028.506 shares of Series A Preferred Stock and 38,040 shares of common stock.
EXPERTS
Rotenberg Meril Solomon
Bertiger & Guttilla, P.C, an independent registered public accounting firm, has audited, as set forth in its report thereon
appearing elsewhere herein, our consolidated financial statements at December 31, 2016 and 2015 and for the years then ended that
appear in the prospectus. The financial statements referred to above are included in this prospectus in reliance upon the independent
registered public accounting firm's report given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT
US
We have filed a registration
statement on Form S-1 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Air Industries
Group filed as part of the registration statement, and it does not contain all information in the registration statement, as certain
portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.
We are subject to the
informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected
at public reference facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549 on official business days during the hours
of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission
at 1-800-SEC-0330. Copies of such material can be obtained from the Public Reference Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information
by visiting the SEC's Internet website at http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE
As a smaller reporting
company, the SEC allows us to "incorporate by reference" information from reports, proxy statements and other documents
that we file with them after the date of this prospectus, which information will automatically update and supersede the information
in this prospectus. We hereby incorporate by reference all reports and other documents subsequently filed by us pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, after the date of this prospectus and prior to the
termination of this offering, which reports and documents shall be deemed to be incorporated by reference in this prospectus and
to be a part hereof from the date of filing such reports and other documents (unless otherwise noted, the SEC file number for each
of the reports and documents incorporated herein by reference is 001-35927).
A
statement contained in a document incorporated by reference into this prospectus shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document
which is also incorporated in this prospectus modifies or replaces such statement. Any statements so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this prospectus,
We will provide
to each person, including any beneficial owner, to whom a prospectus is delivered, upon request and without cost, a copy of
any or all of the reports or documents that have been incorporated by reference in this prospectus after the date hereof. All
reports and other documents we file with the SEC also are available on our website at airindustriesgroup.com. In addition,
you may request a copy of these filings, at no cost, by writing, telephoning or e-mailing us at the following addresses:
Air Industries Group
360 Motor Parkway, Suite 100
Hauppauge, New York 11788
Attention: Investor Relations
Telephone: (631) 881-4920 or e-mail:cmcgivney@airindustriesgroup.com.
61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AIR INDUSTRIES GROUP
CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements for the Years Ended December 31, 2016 and 2015
Report of Independent Registered Accounting Firm
F-1
Consolidated Balance Sheets as of December 31, 2016 and 2015
F-2
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015
F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016 and 2015
F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015
F-5
Notes to Consolidated Financial Statements for the years ended December 31, 2016 and 2015
F-7
Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016 (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016
F-39
Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (Unaudited)
F-40
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)
F-41
Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2017 and 2016 (Unaudited)
F-42
62
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of Air Industries
Group
We have audited the accompanying consolidated
balance sheets of Air Industries Group and Subsidiaries (the "Company") as of December 31, 2016 and 2015 and the related
consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. The consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2016 and 2015 and the results of their operations and cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, among other going concern matters discussed, the Company has suffered a net loss in 2016 and has had negative
cash flows from operating activities, and is dependent upon future issuances of equity or other financing to fund ongoing operations,
all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P. C.
ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P. C.
Saddle Brook, New Jersey
April 19, 2017
F-
1
AIR INDUSTRIES GROUP
Consolidated Balance Sheets
December 31,
2016
December 31,
2015
ASSETS
Current Assets
Cash and Cash Equivalents
$
1,304,000
$
529,000
Accounts Receivable, Net of Allowance for Doubtful Accounts of $756,000 and $985,000, respectively
8,050,000
13,662,000
Inventory
39,851,000
36,923,000
Deferred Tax Asset, Net
—
1,725,000
Prepaid Expenses and Other Current Assets
557,000
1,048,000
Prepaid Taxes
409,000
535,000
Assets Held for Sale
6,050,000
1,700,000
Total Current Assets
56,221,000
56,122,000
Property and Equipment, Net
12,219,000
15,299,000
Capitalized Engineering Costs - Net of Accumulated Amortization of $4,957,000 and $4,595,000, respectively
1,627,000
1,027,000
Deferred Financing Costs, Net, Deposits and Other Assets
1,096,000
1,094,000
Intangible Assets, Net
1,754,000
3,852,000
Deferred Tax Asset, Net
—
338,000
Goodwill
9,883,000
10,518,000
TOTAL ASSETS
$
82,800,000
$
88,250,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable and Capitalized Lease Obligations - Current Portion
$
33,999,000
$
40,895,000
Accounts Payable and Accrued Expenses
16,160,000
12,046,000
Deferred Gain on Sale - Current Portion
38,000
38,000
Deferred Revenue
946,000
958,000
Liabilities Directly Associated with Assets Held for Sale
2,155,000
—
Income Taxes Payable
20,000
14,000
Total Current Liabilities
53,318,000
53,951,000
Long Term Liabilities
Notes Payable and Capitalized Lease Obligations -
Net of Current Portion
2,971,000
3,917,000
Deferred Gain on Sale - Net of Current Portion
333,000
371,000
Deferred Rent
1,288,000
1,206,000
TOTAL LIABILITIES
$
57,910,000
$
59,445,000
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, par value $. 001-Authorized 2,000,000 shares Designated as Series A Convertible Preferred Stock - par value $. 001, Authorized 1,000,000 shares, 1,202,548 shares and -0- shares issued and outstanding as of December 31, 2016 and 2015, respectively, Aggregate liquidation preference $12,025,480 and $0 as of December 31, 2016 and 2015, respectively.
1,000
—
Common Stock - Par Value $. 001 - Authorized 25,000,000 Shares, 7,626,945 and 7,560,040 Shares Issued and Outstanding as of December 31, 2016 and 2015, respectively
7,000
7,000
Additional Paid-In Capital
55,862,000
44,155,000
Accumulated Deficit
(30,980,000
)
(15,357,000
)
TOTAL STOCKHOLDERS' EQUITY
24,890,000
28,805,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
82,800,000
$
88,250,000
See Notes to Consolidated Financial Statements
F-
2
AIR INDUSTRIES GROUP
Consolidated Statements of Operations For the Years Ended December 31,
2016
2015
Net Sales
$
66,915,000
$
80,442,000
Cost of Sales
60,195,000
63,161,000
Gross Profit
6,720,000
17,281,000
Operating Expenses
17,509,000
16,557,000
Acquisition Costs
—
98,000
(Loss) Income from Operations
(10,789,000
)
626,000
Interest and Financing Costs
(2,596,000
)
(1,858,000
)
Other (Expense) Income, Net
(126,000
)
114,000
Loss before Provision for (Benefit from) Income Taxes
(13,511,000
)
(1,118,000
)
Provision for (Benefit from) Income Taxes
2,112,000
(286,000
)
Net Loss
$
(15,623,000
)
$
(832,000
)
Loss per share - basic
$
(2.06
)
$
(0.11
)
Loss per share - diluted
$
(2.06
)
$
(0.11
)
Weighted average shares outstanding - basic
7,579,419
7,478,223
Weighted average shares outstanding - diluted
7,579,419
7,478,223
See Notes to Consolidated Financial Statements
F-
3
AIR INDUSTRIES GROUP
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2016 and 2015
Preferred Stock
Common Stock
Additional
Total
Paid-in
Accumulated
Stockholders'
Shares
Amount
Shares
Amount
Capital
Deficit
Equity
Balance, January 1, 2015
—
—
7,108,677
7,000
42,790,000
(14,525,000
)
28,272,000
Issuance of Shares For Acquisitions and Restricted Stock Grants
—
—
425,005
—
4,666,000
—
4,666,000
Issuance of Shares For Records Correction
—
—
539
—
—
—
—
Exercise of Options/Warrants
—
—
25,819
—
—
—
—
Dividends Paid
—
—
—
—
(3,401,000
)
—
(3,401,000
)
Stock Compensation Expense
—
—
—
—
100,000
—
100,000
Net Loss
—
—
—
—
—
(832,000
)
(832,000
)
Balance, December 31, 2015
—
$
—
7,560,040
$
7,000
$
44,155,000
$
(15,357,000
)
$
28,805,000
Issuance of Preferred Stock
1,202,548
1,000
—
—
10,304,000
—
10,305,000
Fair Value Allocation of Warrants
—
—
—
—
1,236,000
—
1,236,000
Issuance of Restricted Stock
—
—
42,000
—
—
—
—
Exercise of Options and warrants
—
—
24,905
—
—
—
—
Stock Compensation Expense
—
—
—
—
167,000
—
167,000
Net Loss
—
—
—
—
—
(15,623,000
)
(15,623,000
)
Balance, December 31, 2016
1,202,548
$
1,000
7,626,945
$
7,000
$
55,862,000
$
(30,980,000
)
$
24,890,000
See Notes to Consolidated Financial Statements
F-
4
AIR INDUSTRIES GROUP
Consolidated Statements of Cash Flows For the Years Ended December 31,
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss
$
(15,623,000
)
$
(832,000
)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation of property and equipment
3,347,000
3,090,000
Amortization of intangible assets
1,279,000
1,262,000
Amortization of capitalized engineering costs
362,000
341,000
Bad debt expense
274,000
176,000
Non-cash compensation expense
167,000
100,000
Amortization of deferred financing costs
371,000
204,000
Deferred gain on sale of real estate
(38,000
)
(38,000
)
Loss on sale of fixed assets held for sale
5,000
—
Deferred income taxes
2,063,000
(215,000
)
Loss on extinguishment of debt
172,000
—
Amortization of convertible notes payable
217,000
—
Changes in Assets and Liabilities
(Increase) Decrease in Operating Assets:
Assets Held for Sale - AMK Cash
(39,000
)
—
Accounts receivable
4,616,000
91,000
Inventory
(2,902,000
)
(8,412,000
)
Prepaid expenses and other current assets
394,000
(748,000
)
Prepaid taxes
126,000
—
Deposits and other assets
(150,000
)
(18,000
)
Increase (Decrease) in Operating Liabilities:
Accounts payable and accrued expenses
4,495,000
3,593,000
Deferred rent
82,000
29,000
Deferred revenue
84,000
540,000
Income taxes payable
6,000
(57,000
)
NET CASH USED IN OPERATING ACTIVITIES
(692,000
)
(894,000
)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized engineering costs
(963,000
)
(656,000
)
Purchase of property and equipment
(1,632,000
)
(1,564,000
)
Proceeds from the sale of fixed assets
1,671,000
—
Cash paid for acquisitions
—
(6,945,000
)
Cash acquired in acquisitions
—
605,000
NET CASH USED IN INVESTING ACTIVITIES
(924,000
)
(8,560,000
)
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable - revolver, net
(5,211,000
)
11,933,000
Proceeds from note payable - term loans
—
3,500,000
Payments of note payable - term loans
(3,184,000
)
(2,030,000
)
Capital lease obligations
(1,226,000
)
(717,000
)
Proceeds from capital lease financing
—
500,000
Proceeds from notes payable - related party
4,500,000
350,000
Proceeds from notes payable
3,695,000
—
Deferred financing costs
(223,000
)
(402,000
)
Notes payable - sellers
—
(41,000
)
Payments related to lease impairment
—
(60,000
)
Expense for issuance of preferred stock
(663,000
)
—
Expenses for issuance of debt offering
(547,000
)
—
Proceeds from the issuance of preferred stock
5,250,000
—
Dividends paid
—
(4,468,000
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
2,391,000
8,565,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
775,000
(889,000
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
529,000
1,418,000
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
1,304,000
$
529,000
See
Notes to Consolidated Financial Statements
F-
5
AIR INDUSTRIES GROUP
Consolidated Statements of Cash Flows For the Years Ended December 31, (Continued)
2016
2015
Supplemental cash flow information
Cash paid during the period for interest
$
1,494,000
$
1,649,000
Cash paid during the period for income taxes
$
13,000
$
445,000
Supplemental schedule of non-cash investing and financing activities
Preferred shares issued for notes payable - related party
$
3,250,000
$
—
Preferred shares issued for notes payable - other
$
2,745,000
$
—
Preferred shares issued for PIK dividends
$
502,000
$
—
Acquisition of property and equipment financed by capital lease
$
2,096,000
$
1,811,000
Classification of assets held for sale
$
6,050,000
$
1,700,000
Liabilities directly associated with assets held for sale
$
(2,155,000
)
$
—
Purchase of assets of Compac and assumption of liabilities in the acquisition as follows:
Fair Value of tangible assets acquired
$
—
$
406,000
Intangible assets
—
600,000
Goodwill
—
560,000
Liabilities assumed
—
(95,000
)
Cash paid for acquisition
$
—
$
1,471,000
Purchase of stock of The Sterling Engineering Corporation and assumption of liabilities in the acquisition as follows:
Fair Value of tangible assets acquired
$
—
$
8,181,000
Goodwill
—
4,540,000
Cash acquired
—
588,000
Liabilities assumed
—
(3,169,000
)
Common stock issued
—
(4,666,000
)
Cash paid for acquisition
$
—
$
5,474,000
See Notes to Consolidated Financial Statements
F-
6
AIR INDUSTRIES GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. FORMATION AND BASIS OF PRESENTATION
Organization
On August 30, 2013,
Air Industries Group, Inc. ("Air Industries Delaware") changed its state of incorporation from Delaware to Nevada as
a result of a merger with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation ("Air
Industries Nevada" or "AIRI") and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation
was approved by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is
deemed to be the successor.
The accompanying consolidated
financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. ("AIM"),
Welding Metallurgy, Inc. ("WMI" or "Welding"), Miller Stuart, Inc. ("Miller Stuart"), Nassau
Tool Works, Inc. ("NTW"), Woodbine Products, Inc. ("Woodbine" or "WPI"), Decimal Industries,
Inc. ("Decimal"), Eur- Pac Corporation ("Eur - Pac" or "EPC"), Electronic Connection Corporation
("ECC"), AMK Welding, Inc. ("AMK"), Air Realty Group, LLC ("Air Realty"), the Sterling Engineering
Corporation ("Sterling") effective March 1, 2015, and Compac Development Corporation ("Compac") effective
September 1, 2015, (together, the Company ).
Going Concern
The Company suffered
a net loss from operations of $10,789,000 and a net loss of $15,623,000 for the year ended December 31, 2016. The Company also
had negative cash flows from operations for the year ended December 31, 2016. In addition, in 2015 the Company ceased paying dividends
on its common stock and in 2016 it disposed of the real estate on which one of its operating subsidiaries is located through a
sale leaseback transaction, and in January 2017 sold of one of its operating subsidiaries. During the year ended December 31, 2016
and subsequent thereto, the Company has had to sell its debt and equity securities to secure funds to operate its business. Since
September 2016 the Company has been issuing additional shares of its Series A Convertible Preferred Stock in lieu of cash payment
of accrued dividends on its outstanding shares of Series A Convertible Preferred Stock and since February 2017 it has issued additional
convertible notes in lieu of cash payment of accrued interest on its outstanding convertible notes. Furthermore, as of December
31, 2016 the Company was not in compliance with its debt covenants under the Company's loan facility with PNC Bank.
The continuation of
the Company's business is dependent upon future issuances of equity or other financing to fund ongoing operations. Management
of the Company plans to obtain additional financing during the second quarter and the remainder of 2017 through the issuance of
common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the
extent available, may be on terms that result in dilution to the Company's existing shareholders. Although no assurances
can be given, management of the Company believes that potential additional issuances of equity or other potential financing transactions
as discussed above should provide the necessary funding for the Company to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Subsequent Events
Management has evaluated subsequent events through the date
of this filing.
Sale of AMK
On January 27, 2017,
the Company sold all of the outstanding shares of AMK to Meyer Tool, Inc., pursuant to a Stock Purchase Agreement dated January
27, 2017 for a purchase price of $4,500,000, subject to a working capital adjustment, plus additional quarterly payments, not to
exceed $ 1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017.
At December 31, 2016,
AMK's assets and liabilities have been reclassified as Assets Held for Sale and Liabilities Directly Associated with Assets
Held for Sale, respectively. The carrying value of the assets, net of liabilities, held for sale was less than the contract sales
price and accordingly no loss or impairment was recorded for the year ended December 31, 2016.
F-
7
In connection with the
sale of AMK to Meyer Tool, Inc., on January 27, 2017, the Company, together with its wholly-owned subsidiaries, entered into the
Fourteenth Amendment to the Amended and Restated Revolving Credit, Term Loan And Security Agreement with PNC Bank, N. A. (the "PNC
Loan Agreement") which amends certain terms and conditions of the PNC Loan Agreement and releases AMK from its obligations
under the PNC Loan Agreement.
The proceeds of the
sale of AMK were applied as follows: $1,700,000 to the payment of the Term Loan (as defined in the PNC Loan Agreement), $1,800,000
to the payment of outstanding Revolving Advances (as defined in the PNC Loan Agreement), and $500,000 to the payment of existing
accounts payable. The remaining $500,000 will be applied to outstanding accounts payable on a future date to be determined by PNC
or used to reduce the amount of the Revolving Advance. The amendment also waives the noncompliance at September 30, 2016 with the
Fixed Charge Coverage Ratio and the Minimum EBITDA covenants for the period then ended, and requires that the Company maintain
a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, tested quarterly on a consolidated rolling twelve (12) month basis;
however, for the quarter ending June 30, 2017, which shall be tested based upon the prior six (6) months, the Fixed Charge Coverage
Ratio shall not be less than 1.00 to 1.00 and for the quarter ending September 30, 2017, which shall be tested based upon the prior
nine (9) months, the Fixed Charge Coverage Ratio shall not be less than 1.10 to 1.00. The amendment also reduces the amount to
be paid weekly in repayment of excess advances in the amount of $5,294,071 under the revolving credit facility from $100,000 to
$50,000 for each Monday during the months of January, February and March of 2017. Thereafter, the weekly payments will return to
$100,000 until such excess advances have been repaid in full.
Related Party Transactions
On February 7, 2017,
the Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the "Placement Agent"),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $1,200,000 of the
Company's 8% Subordinated Convertible Notes due January 31, 2019 (the "2019 Notes") to accredited investors,
together with five-year warrants to purchase 7,692 shares of Common Stock for each $100,000 principal amount of 2019 Notes purchased
(the "Warrants"), in a private placement exempt from the registration requirements of the Securities Act. The conversion
price of the 2019 Notes, exercise price of the Warrants, as well as the number of shares issuable upon conversion of the 2019 Notes
and the exercise of the Warrants, are subject to certain anti-dilution and other adjustments, including stock splits, and in the
event of certain fundamental transactions such as mergers and other business combinations. The Warrants may be exercised on a cashless
basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.
Under the terms of the
Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 8% of the gross proceeds of the offering,
payable at the Company's option, in cash or additional convertible notes having the same terms and conditions as the 2019
Notes, and five year warrants to purchase 10% of the number of shares of the Common Stock (the "Placement Agent Warrants")
issuable upon immediate conversion of the 2019 Notes sold in the offering. The Placement Agent Warrants are exercisable at a per
share price equal to the closing price of the Common Stock as of the closing immediately prior to the issuance of each 2019 Note.
On February 7, 2017,
the Company issued and sold to Robert Taglich a 2019 Note in the principal amount of $250,000, together with a Warrant to purchase
19,230 shares of Common Stock for a purchase price of $250,000. The 2019 Note issued to Robert Taglich has a conversion price of
$3.71 per share, and the Warrant issued to Robert Taglich has an exercise price of $3.71 per share.
On March 8, 2017, the
Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the "Placement Agent"),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $1,250,000 of the
2019 Notes to accredited investors, together with Warrants to purchase 7,692 shares of Common Stock for each $100,000 principal
amount of 2019 Notes purchased, in a private placement exempt from the registration requirements of the Securities Act.
Under the terms of
the Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 8% of the gross proceeds of
the offering, payable at the Company's option, in cash or additional convertible notes and warrants having the same terms
and conditions as the 2019 Notes and Warrants, and five year warrants to purchase 10% of the number of shares of the Company's
Common Stock (the "Placement Agent Warrants") issuable upon immediate conversion of the 2019 Notes. The Placement
Agent Warrants are exercisable at a per share price equal to the closing price of the Common Stock as of the closing immediately
prior to the issuance of each 2019 Note.
F-
8
On March 8, 2017, the
Company issued and sold to Robert Taglich a 2019 Note in the principal amount of $100,000, together with a Warrant to purchase
7,692 shares of Common Stock for a purchase price of $100,000. The 2019 Note issued to Robert Taglich has a conversion price of
$3.30 per share, and the Warrant issued to Robert Taglich has an exercise price of $3.30 per share.
On March 17, 2017, Michael
Taglich and Robert Taglich, principal stockholders of the Company, loaned the Company $500,000 on terms to be determined.
Sale of Unregistered Equity Securities
On February 7, 2017
and February 17, 2017, the Company issued an aggregate principal amount of $ 1,000,000 of its 2019 Notes, together with Warrants
to purchase an aggregate of 76,929 shares of Common Stock for a total purchase price of $1,000,000 to 9 accredited investors, including
Robert Taglich, a director and principal stockholder of the Company. Interest on the 2019 Notes is payable on the outstanding principal
amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017, in cash, or if the Company is prohibited by
applicable law or PNC Bank, National Association, its principal lender under the PNC Loan Agreement from paying interest in cash,
or otherwise elects to do so, the Company may pay interest at the rate of twelve percent (12%) per annum in the form of additional
notes having the same terms and conditions as the 2019 Notes. The outstanding principal amount plus accrued interest on the 2019
Notes is convertible at the option of the holder into shares of Common Stock at an initial conversion price of $3.25, subject to
certain anti-dilution and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event
of certain fundamental transactions such as mergers and other business combinations, except that the initial conversion price of
the Notes issued to Robert Taglich is $3.71. The Warrants are exercisable on or prior to January 31, 2022. Taglich Brothers, Inc.
acted as the placement agent.
On March 8, 2017, March
15, 2017 and March 21, 2017, the Company issued an aggregate principal amount of $1,200,000 of its 2019 Notes, together with Warrants
to purchase an aggregate of 92,309 shares of Common Stock for a total purchase price of $1,200,000 to 23 accredited investors,
including Robert Taglich, a director and principal stockholder of the Company.
Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if the Company is prohibited by applicable law or PNC Bank, National Association, its principal lender under the PNC
Loan Agreement, from paying interest in cash, or otherwise elects to do so, the Company may pay interest at the rate of twelve
percent (12%) per annum in the form of additional notes having the same terms and conditions as the 2019 Notes. The outstanding
principal amount plus accrued interest on the 2019 Notes is convertible at the option of the holder into shares of Common Stock
at an initial conversion price of $3.25, subject to certain anti-dilution and other adjustments, including stock splits, and in
the event of certain fundamental transactions such as mergers and other business combinations, except that the initial conversion
price of the Notes issued to Robert Taglich is $3.30. The Warrants are exercisable on or prior to January 31, 2022. The Warrants
issued to the purchasers of the 2019 Notes have an exercise price of $3.30 per share, subject to certain anti-dilution and other
adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business combinations,
and may be exercised on a cashless basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.
The Warrants may be exercised until January 31, 2022. Taglich Brothers, Inc. acted as placement agent.
Note 2. ACQUISITIONS
The Company accounts
for all business combinations in accordance with Financial Accounting Standards Board ("FASB") ASC 805, Business Combinations
("ASC 805"), using the acquisition method of accounting. Under this method, assets and liabilities, including any
remaining non - controlling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price
over the fair value of assets acquired, net of liabilities assumed, and non-controlling interests is recognized as goodwill. Certain
adjustments to the assessed fair values of the assets, liabilities, or non-controlling interests made subsequent to the acquisition
date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent
to the measurement period are recorded in income. Results of operations of the acquired entity are included in the Company's
results from the date of the acquisition onward and include-amortization expense arising from acquired tangible and intangible
assets. The Company expenses all costs as incurred related to an acquisition in the condensed consolidated statements of income.
F-
9
Sterling
On March 1, 2015, the
Company acquired all of the common stock of Sterling for $5.4 million in cash and 425,005 shares of its common stock. The common
stock was valued at $9.89 per share, which was the closing share price on February 27, 2015. The cash consideration is subject
to adjustment for working capital changes. The Company has also entered into employment and non-compete agreements for two and
three year periods with two of the principals of Sterling. In connection with these agreements, the Company granted 52,000 shares
of restricted common stock to these individuals, which was accounted for as additional purchase price. The Company financed the
acquisition of Sterling with the proceeds from the issuance of Term Loan D (see Note 11).
At the time of acquisition,
Sterling had capital lease obligations for equipment with a remaining balance of approximately $1.3 million. On April 21, 2015,
the Company refinanced the $1.3 million capital lease obligations with the same financing company. This refinancing generated approximately
$588,000 of cash for the Company. This capital lease obligation has been accounted for and summarized with the remainder of the
Company's capital leases as disclosed in Note 11.
Sterling, founded in 1941, manufactures components for aircraft
and ground turbine engines.
The acquisition of Sterling was accounted
for under ASC 805. The provisional purchase price allocation is set forth below.
Fair value of tangible assets acquired
$
8,181,000
Goodwill
4,540,000
Cash acquired
588,000
Liabilities assumed
(3,169,000
)
Total
$
10,140,000
Compac
On September 1, 2015,
the Company, through its wholly-owned subsidiary WMI, acquired certain assets, including production equipment, inventory and intangible
assets, of Compac in an asset acquisition for $1.2 million in cash plus a working capital adjustment of $271,000.
Compac located in Bay
Shore, New York specializes in the manufacture of RFI/EMI (Radio Frequency Interference Electro - Magnetic Interference) shielded
enclosures for electronic components.
In connection with the
asset purchase, the Company has assumed Compac's lease for its Bay Shore facility which extends through April 30, 2018 and
has annual rent of approximately $ 80,000, which is offset by rent received from the sub-tenant of approximately $20,000 per year.
The acquisition of Compac was accounted
for under ASC 805. The provisional purchase price allocation is set forth below.
Fair value of tangible assets acquired
$
406,000
Intangible assets
600,000
Goodwill
560,000
Liabilities assumed
(95,000
)
Total
$
1,471,000
The below table sets forth selected financial
information for the 2015 acquisitions, which are included in our reported results of operations, for the year ended December 31,
2015.
For the Year Ended December 31, 2015
Sterling
Compac
Net Sales
$
6,894,000
$
467,000
Loss from operations
$
(1,196,000
)
$
(14,000
)
F-
10
The below table sets forth selected proforma
financial information as if Sterling were owned for the year ended December 31, 2015.
For the Year Ended December 31, 2015
Net Sales
$
82,281,000
Income from operations
$
773,000
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company through
its AIM subsidiary is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors
in the aerospace industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16
and F-18 fighter aircraft. Welding is a specialty welding and products provider whose significant customers include the world's
largest aircraft manufacturers, subcontractors, and original equipment manufacturers. Miller Stuart is a manufacturer of aerospace
components whose customers include major aircraft manufacturers and the US Military. Miller Stuart specializes in electromechanical
systems, harness and cable assemblies, electronic equipment and printed circuit boards. Woodbine is a manufacturer of aerospace
components whose customers include major aircraft component suppliers. Woodbine specializes in welded and brazed chassis structures
housing electronics in aircraft. Eur-Pac specializes in military packaging and supplies. Eur-Pac s primary business is "kitting"
of supplies for all branches of the United States Defense Department including ordnance parts, hose assemblies, hydraulic, mechanical
and electrical assemblies. AMK is a provider of sophisticated welding and machining services for diversified aerospace and industrial
customers. Sterling manufactures components for aircraft and ground turbine engines. Compac specializes in the manufacture of RFI/EMI
(Radio Frequency Interference Electro-Magnetic Interference) shielded enclosures for electronic components. The Company's
customers consist mainly of publicly traded companies in the aerospace industry.
Principles of Consolidation
The accompanying consolidated
financial statements include accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all highly
liquid instruments with an original maturity of three months or less.
Accounts Receivable
Accounts receivable
are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides
for allowances for uncollectible receivables based on management's estimate of uncollectible amounts considering age, collection
history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful
accounts when a balance is determined to be uncollectible.
Inventory Valuation
The Company values inventory at the lower of cost on a first
- in -first-out basis or market.
The Company generally
purchases raw materials and supplies uniquely suited to the production of larger more complex parts, such as landing gear, only
when non-cancellable contracts for orders have been received for finished goods. It occasionally produces larger more complex
products, such as landing gear, in excess of purchase order quantities in anticipation of future purchase order demand. Historically
this excess has been used in fulfilling future purchase orders. The Company purchases supplies and materials useful in a variety
of products as deemed necessary even though orders have not been received. The Company periodically evaluates inventory items
that are not secured by purchase orders and establishes reserves for obsolescence accordingly. The Company also reserves for excess
quantities, slow-moving goods, and for other impairments of value.
F-
11
Assets Held for Sale and Liabilities Directly Associated
Assets held for sale
are reported at the lower of their carrying amount or fair value less cost to sell and included in current assets. Liabilities
associated to business units held for sale are classified as a current liability.
Capitalized Engineering Costs
The Company has contractual
agreements with customers to produce parts, which the customers design. Even though the Company has not designed and thus has no
proprietary ownership of the parts, the manufacturing of these parts requires pre-production engineering and programming of the
Company's machines. The pre-production costs associated with a particular contract are capitalized and then amortized beginning
with the first shipment of product pursuant to such contract. These costs are amortized on a straight-line basis over the estimated
length of the contract, or if shorter, three years.
If the Company is reimbursed
for all or a portion of the pre-production expenses associated with a particular contract, only the unreimbursed portion would
be capitalized. The Company may also progress bill customers for certain engineering costs being incurred. Such billings are recorded
as deferred revenues until the appropriate revenue recognition criteria have been met. The Terms and Conditions contained in customer
purchase orders may provide for liquidated damages in the event that a stop-work order is issued prior to the final delivery of
the product.
Property and Equipment
Property and equipment
are carried at cost net of accumulated depreciation and amortization. Repair and maintenance charges are expensed as incurred.
Property, equipment, and improvements are depreciated using the straight- line method over the estimated useful lives of the assets
or the particular improvements. Expenditures for repairs and improvements in excess of $1,000 that add to the productive capacity
or extend the useful life of an asset are capitalized. Upon disposition, the cost and related accumulated depreciation are removed
from the accounts and any related gain or loss is reflected in earnings.
Long-Lived and Intangible Assets
Identifiable intangible assets are amortized
using the straight-line method over the period of expected benefit.
Long-lived assets and
intangible assets subject to amortization to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash
flows are found to be less than the carrying amount of the asset. If an impairment loss has occurred, a charge is recorded to reduce
the carrying amount of the asset to fair value. There has been no impairment as of December 31, 2016 and 2015.
Deferred Financing Costs
Costs incurred with
obtaining and executing revolving debt arrangements are capitalized and amortized using the effective interest method over the
term of the related debt. The amortization of such costs are included in interest and financing costs. Costs incurred with obtaining
and executing other debt arrangements are presented as a direct deduction from the carrying value of the associated debt.
Derivative Liabilities
In connection with the
issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances,
these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may
contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may
be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument.
The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, Derivatives and Hedging.
Revenue Recognition
The Company recognizes
revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." The Company recognizes revenue
when products are shipped and/or the customer takes ownership and assumes risk of loss, collection of the relevant receivable
is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable.
F-
12
The Company recognizes
certain revenues under a bill and hold arrangement with two of its large customers. For any requested bill and hold arrangement,
the Company makes an evaluation as to whether the bill and hold arrangement qualifies for revenue recognition as follows:
•
The customer requests that the transaction be on a bill and hold basis. A customer must initiate the request for any bill and hold arrangement. Upon request for a bill and hold, the Company requires a signed letter from the customer upon which the customer specifically requests the bill and hold arrangement. Upon receipt of the letter, the Company begins its evaluation process to determine whether a bill and hold arrangement can be granted.
•
The customer has made fixed commitment to purchase in written documentation. All customers' orders are through firm written purchase orders.
•
The goods are segregated from other inventory and are not available to fill any other customers' orders. The Company's goods are made to customers' or their customer's specifications and could not be sold to others.
•
The risk of ownership has passed to the customer. The product is complete and ready for shipment. The earnings process is complete. An internal evaluation is made as to whether the product is complete and ready for shipment. This involves a review of the purchase order and a completed inspection process by the Company's quality control department.
•
The date is determined by which the Company expects payment and the Company has not modified its normal billing and credit terms for this buyer. Payment is expected as if the goods had been shipped.
•
The customer has the expected risk of loss in the event of a decline in the market value of goods. All goods are made to firm purchase orders with fixed prices. Any decline in value would not affect the pricing of the goods. The Company has not at any point, agreed to a price reduction on a bill and hold arrangement.
The Company had approximately
$2,914,000 and $150,000 of net sales that were billed but not shipped under such bill and hold arrangements as of December 31,
2016 and 2015, respectively.
Payments received in
advance from customers for products delivered are recorded as deferred revenue until earned, at which time revenue is recognized.
The Terms and Conditions contained in our customer purchase orders often provide for liquidated damages in the event that a stop
work order is issued prior to the final delivery.
The Company utilizes
a Returned Merchandise Authorization or RMA process for determining whether to accept returned products. Customer requests to return
products are reviewed by the contracts department and if the request is approved, a credit is issued upon receipt of the product.
Net sales represent gross sales less returns and allowances.
Use of Estimates
In preparing the financial
statements, management is required to make estimates and assumptions that affect the reported amounts in the financial statements
and accompanying notes. The more significant management estimates are the allowance for doubtful accounts, useful lives of property
and equipment, provisions for inventory obsolescence, accrued expenses and whether to accrue for various contingencies. Actual
results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded
in the period in which they become known.
Credit and Concentration Risks
There were four customers
that represented 56.4% of total sales, and four customers that represented 59.3% of total sales, of total sales for the years ended
December 31, 2016 and 2015, respectively. This is set forth in the table below.
Customer
Percentage of Sales
2016
2015
1
19.1
20.5
2
14.3
12.0
3
12.3
15.4
4
10.7
11.4
F-
13
There was one customers that represented
19.9% of gross accounts receivable and four customers that represented 61.1% of gross accounts receivable at December 31, 2016
and 2015, respectively. This is set forth in the table below.
Customer
Percentage of Receivables
2016
2015
1
19.9
26.6
2
*
10.4
3
*
13.6
4
*
10.5
*
Customer was less than 10% of gross accounts receivable at December 31, 2016
During the year, the
Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The Company has not experienced
any losses on these accounts.
The Company has several
key sole-source suppliers of various parts that are important for one or more of its products. These suppliers are its only source
for such parts and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason,
its business could be severely harmed.
Income Taxes
The Company accounts
for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires
that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected
to reverse.
The provision for, or
benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes
using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and
liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward
period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that
the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax
benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, "Income Taxes,"
includes the consideration of all available evidence, both positive and negative, regarding historical operating results including
recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated
future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which
may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The Company accounts
for uncertainties in income taxes under the provisions of FASB ASC 740- 10 -05, "Accounting for Uncertainty in Income Taxes."
The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Effective July 1,
2016, the Company adopted FASB Accounting Standards Update 2015 - 17, Balance Sheet Classification of Deferred Taxes. The ASU
is part of the Board's simplification initiative aimed at reducing complexity in accounting standards. To simplify
presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation
allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net
noncurrent deferred tax asset or liability. Importantly, the guidance does not change the existing requirement that only
permits offsetting within a jurisdiction - that is, companies are still prohibited from offsetting deferred tax liabilities
from one jurisdiction against deferred tax assets of another jurisdiction. The amendments in this Update may be applied
either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity
applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change, the
nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively
adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual
period of change the nature of and reason for the change in accounting principle and quantitative information about the
effects of the accounting change on prior periods. The Company has applied this guidance prospectively and has not
restated prior period balances.
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14
Earnings per share
Basic earnings per share
is computed by dividing the net income applicable to common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share
calculations for all periods when the effect of their inclusion is dilutive.
The following is a reconciliation of the denominators of basic
and diluted earnings per share computations:
December 31,
2016
December 31,
2015
Weighted average shares outstanding used to compute basic earnings per share
7,579,419
7,478,223
Effect of dilutive stock options and warrants
—
—
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share
7,579,419
7,478,223
The following securities have been excluded
from the calculation as the exercise price was greater than the average market price of the common shares:
December 31,
2016
December 31,
2015
Stock Options
633,000
234,000
Warrants
520,000
46,800
1,153,000
280,800
The following securities have been excluded
from the calculation even though the exercise price was less than the average market price of the common shares because the effect
of including these potential shares was anti-dilutive due to the net loss incurred during the years:
December 31,
2016
December 31,
2015
Stock Options
3,000
330,000
Warrants
321,000
118,000
324,000
448,000
Stock-Based Compensation
The Company accounts
for stock-based compensation in accordance with FASB ASC 718, "Compensation Stock Compensation." Under the fair value
recognition provision of the ASC, stock -based compensation cost is estimated at the grant date based on the fair value of the
award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing
model.
Goodwill
Goodwill represents
the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amounts
of $9,883,000 and $10,518,000 at December 31, 2016 and 2015, respectively, relates to the acquisitions of Welding $291,000, NTW
$162,000, Woodbine $2,565,000, Eur-Pac $1,656,000, ECC $109,000, AMK $635,000, Sterling $4,540,000 and Compac $560,000. During
2016 AMK goodwill amount of $635,000 was reclassified to assets held for sale. Goodwill is not amortized, but is assessed and/or
tested at least annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting
unit below its carrying amount.
F-
15
The Company
accounts for the impairment of goodwill under the provisions of ASU 2011-08 ("ASU 2011-08"), "Intangibles
Goodwill and Other (Topic 350): Testing Goodwill for Impairment." ASU 2011-08 updated the guidance on the periodic
testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The Company performs
impairment testing for goodwill annually, or more frequently when indicators of impairment exist. As discussed above, the Company
adopted ASU 2011- 08 and performs an annual qualitative assessment in the fourth quarter each year to determine whether it was
more likely than not that the fair value of each of Welding, including Woodbine, NTW, Eur-Pac, ECC, AMK, Sterling and Compac was
less than its carrying amount.
The Company has determined that there has
been no impairment of goodwill at December 31, 2016 and 2015.
Freight Out
Freight out is included
in operating expenses and amounted to $180,000 and $197,000 for the years ended December 31, 2016 and 2015, respectively.
JOBS Act
On April 5, 2012, the
JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements
for qualifying public companies. As an "emerging growth company," the Company may, under Section 7(a)(2)(B) of the
Securities Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would
otherwise apply to private companies. An emerging growth company is one with less than $1.0 billion in annual sales, has less than
$700 million in market value of its shares of common stock held by non-affiliates and issues less than $1.0 billion of non-convertible
debt over a three year period. The Company may take advantage of this extended transition period until the first to occur of the
date that it (i) is no longer an "emerging growth company" or (ii) affirmatively and irrevocably opts out of this extended
transition period. The Company has elected to take advantage of the benefits of this extended transition period. Until the date
that it is no longer an "emerging growth company" or affirmatively and irrevocably opts out of the exemption provided
by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to its consolidated financial
statements and that has a different effective date for public and private companies, the Company will disclose the date on which
adoption is required for non-emerging growth companies and the date on which the Company will adopt the recently issued accounting
standard.
Recently Issued Accounting Pronouncements
In January 2016, the
Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2016-01, Recognition
and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) ("ASU 2016-01"). The main objective
of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company does not expect the adoption of this amendment to have a significant impact on its consolidated financial statements.
In February 2016, the
FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The main objective of ASU 2016-02 is to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards
Codification and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The Company does not expect the adoption of this amendment to have a significant impact
on its consolidated financial statements.
In March 2016,
the FASB issued ASU 2016-09, "Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based
Payment ("ASU 2016-09"). ASU 2016-09 is part of the FASB Simplification Initiative. The objective of the
Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles for which
cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of
financial statements. ASU 2016-09 will affect all entities that issue share-based payment awards to their employees. The
areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. The Company does not expect the adoption of these amendments to have a significant impact on its consolidated
financial statements.
F-
16
In April 2016, the FASB
issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606) ("ASU 2016-10"). The core principle of the guidance
in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
amendments in ASU 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective.
The effective date and transition requirements of ASU 2016-10 are the same as the effective date and transition requirements of
ASU 2014-09. They are effective prospectively for reporting periods beginning after December 15, 2017 and early adoption is not
permitted. The Company is currently assessing the impact of the adoption of these amendments on its consolidated financial statements.
In May 2016, the FASB
issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow -Scope Improvements and
Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide
clarifying guidance in certain narrow areas and add some practical expedients. These amendments are effective at the same date
that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15,
2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for
nonpublic entities one year later. The Company is currently assessing the impact of the adoption of the amendments to Topic 606
and these amendments on its consolidated financial statements.
In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard
provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including
beneficial interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables.
The standard is intended to reduce current diversity in practice. Early adoption is permitted, including adoption in an interim
period. The Company does not expect the adoption of these amendments to have a significant impact on its consolidated financial
statements.
In November 2016, the
FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted
cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should
be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash,
cash equivalents, restricted cash or restricted cash equivalents are presented in more than one-line item within the statement
of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount
shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard
is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. The Company is currently in the process of evaluating the impact of the adoption of this standard on our financial statements.
In January 2017, the
FASB issued ASU 2017-01 ("ASU 2017-01"), Business Combinations, which clarifies the definition of a business, particularly
when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first
part of the guidance provides a screen to determine when a set is not a business; the second part of the guidance provides a framework
to evaluate whether both an input and a substantive process are present. The guidance will be effective after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that
have not been reported in issued financial statements. The Company is currently assessing the impact of this update on the presentation
of these financial statements.
In January 2017,
FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment, Step 2 of the goodwill impairment test, which requires determining the implied fair value of goodwill and
comparing it with its carrying amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the
fair value of a reporting unit with its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU
No. 2017-04 requires entities having one or more reporting units with zero or negative carrying amounts to disclose (1) the
identity of such reporting units, (2) the amount of goodwill allocated to each, and (3) in which reportable segment the
reporting unit is included. ASU No. 2017-04 is effective as follows: (1) for a public business entity that is an SEC filer
for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently
in the process of evaluating the impact of the adoption of this standard on our financial statements.
F-
17
The Company does not
believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.
Reclassifications
Certain account balances in 2015 have been reclassified to conform
to the current year presentation.
Note 4. ACCOUNTS RECEIVABLE
The components of accounts receivable at December 31, are detailed
as follows:
2016
2015
Accounts Receivable Gross
$
8,806,000
$
14,647,000
Allowance for Doubtful Accounts
(756,000
)
(985,000
)
Accounts Receivable Net
$
8,050,000
$
13,662,000
The allowance for doubtful accounts for the years ended December
31, 2016 and 2015 is as follows:
Balance at
Beginning of
Year
Charged to
Costs and
Expenses
Deductions from
Reserves
Balance at End
of Year
Year ended December 31, 2016
Allowance for Doubtful Accounts
$
985,000
$
274,000
$
503,000
$
756,000
Year ended December 31, 2015
Allowance for Doubtful Accounts
$
1,566,000
$
177,000
$
758,000
$
985,000
Note 5. INVENTORY
The components of inventory at December 31, consisted of the
following:
2016
2015
Raw Materials
$
7,031,000
$
9,188,000
Work In Progress
25,635,000
19,743,000
Finished Goods
11,751,000
11,838,000
Inventory Reserve
(4,566,000
)
(3,846,000
)
Total Inventory
$
39,851,000
$
36,923,000
The Company periodically
evaluates inventory and establishes reserves for obsolescence, excess quantities, slow-moving goods, and for other impairment of
value.
Balance at
Beginning of
Year
Additions to
Reserve
Deductions from
Reserves
Balance at End
of Year
Year ended December 31, 2016
Reserve for Inventory
$
(3,846,000
)
$
(806,000
)
$
86,000
$
(4,566,000
)
Year ended December 31, 2015
Reserve for Inventory
$
(3,475,000
)
$
(785,000
)
$
414,000
$
(3,846,000
)
F-
18
Note 6. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, consisted
of the following:
2016
2015
Land
$
300,000
$
300,000
Buildings and Improvements
1,650,000
1,658,000
31.5 years
Machinery and Equipment
14,032,000
15,109,000
5 - 8 years
Capital Lease Machinery and Equipment
5,573,000
5,869,000
5 - 8 years
Tools and Instruments
7,520,000
6,993,000
1.5 - 7 years
Automotive Equipment
195,000
191,000
5 years
Furniture and Fixtures
438,000
425,000
5 - 8 years
Leasehold Improvements
966,000
910,000
Term of Lease
Computers and Software
519,000
482,000
4 - 6 years
Total Property and Equipment
31,193,000
31,937,000
Less: Accumulated Depreciation
(18,974,000
)
(16,638,000
)
Property and Equipment, net
$
12,219,000
$
15,299,000
Depreciation expense
for the years ended December 31, 2016 and 2015 was approximately $3,347,000 and $3,090,000, respectively. Assets held under capitalized
lease obligations are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation
of assets under capital leases is included in depreciation expense for 2016 and 2015. Accumulated depreciation on these assets
was approximately $2,320,000 and $1,065,000 as of December 31, 2016 and 2015, respectively.
Note 7. INTANGIBLE ASSETS
The components of the intangibles assets at December 31, consisted
of the following:
2016
2015
Customer Relationships
$
6,115,000
$
6,555,000
5 to 14 years
Trade Names
970,000
1,480,000
15-20 years
Technical Know-how
660,000
660,000
10 years
Non-Compete
150,000
150,000
5 years
Professional Certifications
15,000
15,000
25 to 2 years
Total Intangible Assets
7,910,000
8,860,000
Less: Accumulated Amortization
(6,156,000
)
(5,008,000
)
Intangible Assets, net
$
1,754,000
$
3,852,000
The expense for amortization
of the intangibles for the years ended December 31, 2016 and 2015 was approximately $1,279,000 and $1,262,000, respectively.
As of December 31, 2016 the future amortization of intangibles
are as follows:
For the year ending
Amount
December 31, 2017
$
689,000
December 31, 2018
219,000
December 30, 2019
219,000
December 31, 2020
219,000
December 31, 2021
130,000
Thereafter
278,000
Total
$
1,754,000
F-
19
Note 8. ASSETS HELD FOR SALE AND LIABILITIES DIRECTLY ASSOCIATED
As discussed in Note
1, on January 27, 2017, the Company sold all of the outstanding shares of AMK Welding, Inc. ("AMK") to Meyer Tool,
Inc., pursuant to a Stock Purchase Agreement dated January 27, 2017 ("the Stock Purchase Agreement") for a purchase
price of $4,500,000, subject to a working capital adjustment, plus additional quarterly payments, not to exceed $1,500,000, equal
to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. At December 31, 2016, the Company reclassified its assets
held for sale and the liabilities directly associated to these assets. The components of these assets and liabilities are as follows:
Components of Assets Held for Sale and Liabilities Directly Associated
Assets Held for Sale
Cash
$
40,000
Accounts Receivable, net of allowance for doubtful accounts
722,000
Inventory, net of reserves
260,000
Prepaid and other assets
96,000
Property and equipment, net of accumulated depreciation
3,478,000
Intangible Assets, net of accumulated amortization
819,000
Goodwill
635,000
Assets Held for Sale
$
6,050,000
Accounts payable and accrued expenses
379,000
Capital lease obligations
1,680,000
Deferred revenues
96,000
Liabilities directly associated to Assets Held for Sale
$
2,155,000
Additionally, AMK's
operations are reported in the Company's Turbine Engine Components segment. AMK makes up the following amounts of this segment
for the year ended December 31, 2016:
Segment Data
Turbine Engine Components
AMK
Total
Net Sales
$
4,511,000
$
10,973,000
Gross Profit
169,000
(151,000
)
Pre Tax (Loss) Income
(1,595,000
)
(4,084,000
)
Assets
6,050,000
17,235,000
Note 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable at December 31, are detailed
as follows:
2016
2015
Accounts Payable
$
13,843,000
$
9,837,000
Accrued Expenses
2,317,000
2,160,000
Other Payables
—
49,000
$
16,160,000
$
12,046,000
Note 10. SALE AND LEASEBACK TRANSACTION
On April 11, 2016, the
Company executed a Sale - Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor,
Connecticut (the "South Windsor Property") for a purchase price of $1,700,000. The net proceeds from the sale of the
property were applied to the amounts owed to PNC Bank.
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20
Simultaneous with
the closing of the sale of the South Windsor Property, the Company entered into a 15-year lease (the "Lease")
with the purchaser for the property. Base annual rent is approximately $155,000 for the first year and increases
approximately 3% per year, each year thereafter. The Lease grants the Company an option to renew the Lease for an additional
period of five years. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated with the
operation of the facilities, including, without limitation, insurance, taxes and maintenance. The Lease also contains
representations, warranties, obligations, conditions and indemnification provisions in favor of the purchaser and grants the
purchaser remedies upon a breach of the Lease by the Company, including the right to terminate the Lease and hold the Company
liable for any deficiency in future rent.
On October 24, 2006,
the Company consummated a Sale - Leaseback Arrangement, whereby the Company sold the buildings and real property located in Bay
Shore, New York (the "Bay Shore Property") for a purchase price of $6,200,000. The Company realized a gain on the sale
of $1,051,000 of which $300,000 was recognized during the year ended December 31, 2006. The remaining $751,000 is being recognized
ratably over the remaining term of the twenty - year lease at approximately $38,000 per year. The gain is included in Other Income
in the accompanying Consolidated Statements of Operations. The unrecognized portion of the gain in the amount of $371,000 and $409,000
as of December 31, 2016 and 2015, respectively, is classified as Deferred Gain on Sale in the accompanying Consolidated Balance
Sheets.
Simultaneous with the
closing of the sale of the Bay Shore Property, the Company entered into a 20-year triple- net lease (the "Lease") with
the purchaser for the property. Base annual rent is approximately $540,000 for the first five years, $560,000 for the sixth year,
and thereafter increases 3% per year. The Lease grants the Company an option to renew the Lease for an additional period of five
years. The Company has on deposit with the purchaser $89,000 as security for the performance of its obligations under the Lease.
In addition, the Company has on deposit $150,000 with the landlord as security for the completion of certain repairs and upgrades
to the Bay Shore Property. This amount is included in the caption Deferred Finance costs, Net, Deposit and Other Assets in the
accompanying Consolidated Balance Sheets. Pursuant to the terms of the Lease, the Company is required to pay all of the costs associated
with the operation of the facilities, including, without limitation, insurance, taxes and maintenance. The lease also contains
customary representations, warranties, obligations, conditions and indemnification provisions and grants the purchaser customary
remedies upon a breach of the lease by the Company, including the right to terminate the Lease and hold the Company liable for
any deficiency in future rent. See Note 13 Commitments and Contingencies.
The Company accounted
for these transactions under the provisions of FASB ASC 840-40, "Leases-Sale-Leaseback Transactions".
On January 27, 2017,
the Company entered into an agreement to sell the stock of AMK. Included in this agreement was the transfer of the capital lease
obligation on the South Windsor Property transferred to the purchaser of AMK. At December 31, 2016, the Company reclassified the
capital asset of $1,700,000 and lease obligation of $1,680,000 to Assets Held for Sale and Liabilities Held for Sale, respectively.
See Note 1 for additional discussion regarding the sale of AMK.
Note 11. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consist of the following:
December 31,
2016
December 31,
2015
Revolving credit note payable to PNC Bank N. A. ("PNC")
$
24,393,000
$
29,604,000
Term loans, PNC
6,649,000
9,833,000
Capital lease obligations
4,215,000
5,025,000
Related party notes payable, net of debt discount
1,086,000
350,000
Note payable (private placement), net of debt discount
627,000
—
Subtotal
36,970,000
44,812,000
Less: Current portion of notes and capital obligations
(33,999,000
)
(40,895,000
)
Notes payable and capital lease obligations, net of current portion
$
2,971,000
$
3,917,000
PNC Bank N. A. ("PNC")
The Company has a
credit facility with PNC (the "Loan Facility") secured by substantially all of its assets. The Loan Facility has
been amended many times during its term. The Loan Facility was amended in June 2016 (the "Twelfth Amendment") and
September 2016 (the "Thirteenth Amendment"). In connection with the Twelfth Amendment, the Company paid PNC a fee
of $100,000 and reimbursed it for the fees and expenses of its counsel. The Twelfth Amendment provides for a $33,000,000
revolving loan. In addition, in the Twelfth Amendment the four term loans (Term Loan A, Term Loan B, Term Loan C and Term
Loan D) then outstanding were consolidated into a single term loan with the initial principal amount of $7,387,854. Further,
in the Twelfth Amendment the Company acknowledged that there were then outstanding excess advances under the revolving loan
in the amount of $12,500,000.
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21
Under the terms of the
Loan Facility, as amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters
of one percent (1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent
(4.50%) with respect to LIBOR Rate Loans. The amount outstanding under the revolving loan, exclusive of the excess advance, was
$24,393,000 and $29,604,000, as of December 31, 2016 and 2015, respectively.
The Loan Facility was
further amended pursuant to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be the lesser
of (i) 75% of the eligible inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, an
increase from 85%, subject to the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper. In addition, in the
Thirteenth Amendment the lender waived any default resulting from the Company's obligation to comply with the minimum EBITDA
covenant for the period ended June 30, 2016, consented to the issuance of the Company's 12% Subordinated Convertible Notes
and the amendment to the Company's Articles of Incorporation to increase the authorized number of shares of Preferred Stock
and Series A Preferred Stock.
The repayment terms
of Term Loan A had been amended in April 2014, when the Company borrowed $2,676,000, representing an additional $1,328,000 to partially
fund the acquisition of Woodbine. Term Loan A, as amended in 2014, was to be repaid in monthly installments of $31,859 continuing
until November 2016. On October 1, 2014, the Company borrowed $3,500,000 under Term Loan B for the acquisition of AMK. Term Loan
B was to be repaid in sixty consecutive monthly principal installments of $58,333 continuing until November 2019.
Prior to the Twelfth
Amendment, Term Loans A and B bore interest at (a) the sum of the Alternate Base Rate plus one and three quarters of one percent
(1.75%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three percent (3.00%) with respect to LIBOR
Rate Loans.
On December 31, 2014,
the Company borrowed $2,500,000 under Term Loan C to refinance the Seller Note and Mortgage of $2,500,000 issued as part of the
acquisition of AMK. The maturity date of Term Loan C was the first business day of January 2021, and it was to be paid in seventy
two consecutive monthly principal installments, which commenced on the first business day of February 2015, and continued on the
first business day of each month thereafter. The first seventy-one of the installments were to be in the amount of $34,722 with
a seventy second and final payment of any unpaid principal and interest on the first business day of January 2021. Term Loan C
bore interest at (a) the sum of the Alternate Base Rate plus two percent (2.00%) with respect to Domestic Rate Loans and (b) the
sum of the LIBOR Rate plus three and one-quarter percent (3.25%) with respect to LIBOR Rate Loans.
On March 9, 2015, the
Company borrowed $3,500,000 under Term Loan D for the acquisition of Sterling. The repayment of Term Loan D consisted of twenty
consecutive monthly principal installments, the first nineteen in the amount of $62,847 which commenced on the first business day
of April 2015, and continued on the first business day of each month thereafter, with a twentieth and final payment of any unpaid
balance of principal and interest on the last business day of November 2016. Term Loan D bore interest at (a) the sum of the Alternate
Base Rate plus two and one quarter percent (2.25%) with respect to Domestic Rate Loans and (b) the sum of the LIBOR Rate plus three
and one-half percent (3.50%) with respect to LIBOR Rate Loans.
The repayment terms
of the Term Loan provided for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first
fifty-nine (59) of which shall be in the amount of $123,133 commencing on the first business day of July, 2016, and continuing
on the first business day of each month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal
and interest payable on the last business day of June, 2021. Under the terms of the Loan Facility, as amended, the revolving loan
now bears interest at (a) the sum of the Alternate Base Rate plus one and three-quarters of one percent (1.75%) with respect to
Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent (4.50%) with respect to LIBOR Rate
Loan.
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22
At the closing of the
Twelfth Amendment the Company paid $1,500,000 to reduce the outstanding excess under the revolving loan from $12,500,000 to $11,000,000.
It also agreed that the excess advances will be paid down by $100,000 each week commencing the second week after the closing of
the Twelfth Amendment.
To the extent that the
Company disposes of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws
on the credit facility in the amount equal to the net proceeds of such sale.
The terms of the Loan
Facility require that among other things, the Company maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA.
In addition, the Company is limited in the amount of Capital Expenditures it can make. The Company is also limited to the amount
of dividends it can pay its shareholders as defined in the Loan Facility. As of December 31, 2016, the Company was not in compliance
with the Fixed Charge Coverage Ratio covenant. The failure to maintain the requisite Fixed Charge Coverage Ratio constitutes a
default under the Loan Facility and PNC at its option may give notice to the Company that all amounts under the Loan Facility are
immediately due and payable. Consequently, all amounts due under the Term Loans are also classified as current. As of December
31, 2016, the Company was not in compliance with the minimum EBITDA requirement. The Company has requested a waiver from PNC for
the failure to meet the minimum EBITDA covenant. Because the revolving loans contain a subjective acceleration clause which could
permit PNC to require repayment prior to maturity, all of the loans outstanding with PNC are classified with the current portion
of notes and capital lease obligations.
As of December 31, 2016,
our debt to PNC in the amount of $31,042,000 consisted of the revolving credit note due to PNC in the amount of $24,393,000 and
the term loans due to PNC in the amount of $ 6,649,000.
Each day, the Company's
cash collections are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing
base formula. The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan
Facility). PNC may use some elements of subjective business judgment in determining whether a material adverse change has occurred
in the Company's condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of
the Loan Facility.
As of December 31, 2016 the future minimum principal payments
for the term loans are as follows:
For the year ending
Amount
December 31, 2017
$
1,478,000
December 31, 2018
1,478,000
December 31, 2019
1,478,000
December 31, 2020
1,478,000
December 31, 2021
737,000
Thereafter
—
PNC Term Loans payable
6,649,000
Less: Current portion
(6,649,000
)
Long-term portion
$
—
Interest expense related
to these credit facilities amounted to approximately $1,908,000 and $1,414,000 for the years ended December 31, 2016 and 2015,
respectively.
Capital Leases Payable Equipment
The Company is committed
under several capital leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at
the termination of each lease. Capital lease obligations totaled $4,215,000 and $5,025,000 as of December 31, 2016 and 2015, respectively,
with various interest rates ranging from approximately 4% to 14 %.
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23
As of December 31, 2016, the aggregate
future minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:
For the year ending
Amount
December 31, 2017
$
1,442,000
December 31, 2018
1,407,000
December 31, 2019
1,230,000
December 31, 2020
509,000
December 31, 2021
19,000
Thereafter
1,000
Total future minimum lease payments
4,608,000
Less: imputed interest
(393,000
)
Less: current portion
(1,244,000
)
Total Long Term Portion
$
2,971,000
Related Party Notes Payable
On September 8, 2015,
the Company issued a promissory note ("the Taglich Note A") to Michael Taglich in the principal amount of $350,000.
The Taglich Note A bore interest at the rate of 4% per annum. The Company's obligation under the Taglich Note A was subordinated
to its indebtedness to PNC.
On April 8, 2016, the
Company issued a promissory note ("the Taglich Note B") to Michael Taglich in the principal amount of $350,000. The
Taglich Note B bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note B was subordinated
to its indebtedness to PNC.
On April 8, 2016, the
Company issued a promissory note ("the Taglich Note C") to Robert Taglich in the principal amount of $350,000. The
Taglich Note C bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note C was subordinated
to its indebtedness to PNC.
On May 6, 2016, the
Company issued a promissory note ("the Taglich Note D") to Michael Taglich in the principal amount of $400,000. The
Taglich Note D bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note D was subordinated
to its indebtedness to PNC.
On May 6, 2016, the
Company issued a promissory note ("the Taglich Note E") to Robert Taglich in the principal amount of $300,000. The
Taglich Note E bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note E was subordinated
to its indebtedness to PNC.
On May 25, 2016, the
Company issued 110,000 and 65,000 shares of Series A Preferred Stock to Michael Taglich and Robert Taglich, respectively, upon
surrender of Taglich Notes A through E, in the aggregate principal of $1,100,000 and $650,000, respectively.
On August 1, 2016, the
Company issued a promissory note (the "Taglich Note F") to Michael Taglich, in the principal amount of $1,000,000.
The Taglich Note F bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note F was subordinated
to its indebtedness to PNC.
On August 4, 2016, the
Company issued a promissory note (the "Taglich Note G") to Michael Taglich, in the principal amount of $500,000. The
Taglich Note G bore interest at the rate of 7% per annum. The Company's obligation under the Taglich Note G was subordinated
to its indebtedness to PNC.
On August 19, 2016,
the Company issued to Michael Taglich its 12% Subordinated Convertible Notes due December 31, 2017 (the "12% Notes")
in the principal amount of $1,520,703, together with warrants to purchase 61,817 shares of common stock, upon surrender for cancellation
of Taglich Notes F & G in the aggregate principal amount of $1,500,000, together with accrued interest thereon and on notes
previously exchanged for Series A Preferred Stock of $20,703. In addition, the Company issued to Robert Taglich a 12% Note in the
principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness
of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.
Also see below regarding related party purchases of the 12%
and 8% subordinated convertible notes.
Interest expense related to the Taglich Notes was $264,000
for the year ended December 31, 2016.
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24
12% Subordinated Convertible Notes
On August 19, 2016,
the Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the "Placement Agent"),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $4,250,000 of the
Company's 12% Subordinated Convertible Notes due December 31, 2017 (the "12% Notes") to accredited investors
("the Offering"), together with five-year warrants to purchase 4,065 shares of common stock (the "Warrants")
for each $100,000 principal amount of 12% Notes purchased, in a private placement exempt from the registration requirements of
the Securities Act of 1933, as amended (the Securities Act ) .
The 12% Notes were convertible,
at the option of the holders, into shares of the Company's common stock at an initial conversion price of $4.92 per share,
subject to adjustment for certain events. The 12% Notes were automatically convertible into shares of the Company's Series
A Convertible Preferred Stock ("Series A Preferred Stock") at a price of $10.00 per share, the stated value of the
Series A Preferred Stock, upon the filing of a certificate of amendment to the Company's Articles of Incorporation increasing
the number of shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon conversion
of the 12% Notes and for issuance in lieu of payment of cash dividends (the "Certificate of Amendment") in accordance
with the provisions of the certificate of designation authorizing the issuance of the Series A Preferred Stock. The amendment was
subject to the approval of the Company's stockholders.
Under the terms of the
Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 7% of the gross proceeds of the offering,
five year warrants to purchase 8% of the number of shares of the Company's common stock issuable upon conversion of the 12%
Notes at an exercise price of $6.15 per share, equal to 125% of the initial conversion price per share of the 12% Notes, and reimbursement
for its actual out-of-pocket expenses not to exceed in the aggregate $25,000.
In August 2016, the
Company issued and sold a total of $2,720,000 principal amount of the 12% Notes, together with Warrants to purchase an aggregate
of 110,556 shares of common stock, yielding net proceeds to the Company of approximately $2,320,000, pursuant to a Securities Purchase
Agreements with accredited investors. The Company also issued to Michael Taglich a 12% Note in the principal amount of $1,520,703,
together with Warrants to purchase 61,817 shares of common stock at an initial exercise price of $6.15, subject to anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business
combinations, upon surrender for cancellation of Taglich Notes F and G in the aggregate principal amount of $1,500,000, together
with accrued interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,703. In addition, the Company
issued to Robert Taglich a 12% Note in the principal amount of $4,373, together with Warrants to purchase 177 shares of common
stock, in consideration of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock.
The Warrants including
those issued to the placement agent are classified within stockholders equity, pursuant to ASC 480, Distinguishing Liabilities
from Equity and ASC 815-40, Derivatives and Hedging: Contracts in Own Equity. The 12% Notes contained a contingent put that results
in early settlement of the 12% Notes upon the filing of a certificate of amendment to the Company's Articles of Incorporation,
increasing the number of shares of Series A Preferred Stock so that a sufficient number of shares are available for issuance upon
conversion of the 12% Notes. The embedded put feature is required to be separately measured at fair value with changes in value
recognized in the statement of operations, pursuant to ASC 815-15, Derivatives and Hedging: Embedded Derivatives, as the put feature
is not clearly and closely related to the convertible promissory note.
The proceeds received
upon issuing the 12% Notes and Warrants was allocated to each instrument on a relative fair value basis. The initial fair value
of the Warrants was determined using the Black Scholes Merton valuation model with the following assumptions: expected term of
5 years; risk free interest rate of 1.2%; and volatility of 90%. The allocated value of the 12% Notes was further reduced for the
initial fair value of the embedded put of approximately $755,000. The resulting discount to the 12% Notes, including the allocated
transactions costs, is amortized to interest expense using the effective interest method over the term of the Notes.
As compensation for
its services as placement agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400.
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25
On November 30, 2016,
the Company's stockholders approved the amendment to the Company's Articles of Incorporation, and consequently the
Company issued a total of 438,770 shares of its Series A Preferred Stock to holders of its 12% Notes upon the automatic conversion
of the principal amount of, and accrued interest on, the 12% Notes at the rate of $10.00 per share.
As of December 31, 2016,
we had outstanding 1,202,548 shares of series A Preferred Stock, including 62,684 shares issued in lieu of payment of cash dividends
on December 15, 2016. We issued an additional 46,010 shares of Series A Preferred Stock on March 15, 2017 in lieu of payment of
cash dividends.
8% Subordinated Convertible Notes
On November 23, 2016,
the Company issued sold an aggregate principal amount of $1,400,000 of its 8% Subordinated Convertible Notes due November 30, 2018
(the "2018 Notes"), together with warrants to purchase an aggregate of 124,444 shares of Common Stock for a total purchase
price of $1,400,000. The purchasers of the 2018 Notes and warrants included Michael Taglich and Robert Taglich, directors and stockholders
of the Company.
Interest on the 2018
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28,
2017, in cash, or at our option, in additional 2018 Notes. The outstanding principal amount plus accrued interest on the 2018 Notes
is convertible at the option of the holder into shares of Common Stock at an initial conversion price of $2.25, subject to certain
anti-dilution and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain
fundamental transactions such as mergers and other business combinations. The warrants issued to the purchasers of the 2018 Notes
are exercisable on or prior to November 30, 2021.
For acting as placement
agent of the 2018 Notes, we paid Taglich Brothers, Inc. $112,000 and issued to it five-year warrants to purchase 62,222 shares
of Common Stock.
The warrants issued
to the purchasers of the 2018 Notes and Taglich Brothers, Inc. have an exercise price of $3.00 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise.
On December 22, 2016,
the Company entered into a Placement Agency Agreement with Taglich Brothers, Inc., as placement agent (the "Placement Agent"),
pursuant to which the Placement Agent agreed to offer on behalf of the Company, on a best efforts basis, up to $1,300,000 of the
2018 Notes to accredited investors (the "Offering"), together with five-year warrants to purchase 20% of the number
of shares of Common Stock issuable upon immediate conversion of the 2018 Notes purchased (the "Warrants"), in a private
placement exempt from the registration requirements of the Securities Act.
Under the terms of the
Placement Agency Agreement, the Placement Agent is entitled to a placement agent fee equal to 8% of the gross proceeds of the Offering
and five year warrants to purchase 10% of the number of shares of the Company's Common Stock (the "Placement Agent
Warrant") issuable upon immediate conversion of the 2018 Notes at an exercise price of $3.00 per share.
Subscription Agreements
On December 22, 2016,
the Company entered into subscription agreements with ten accredited investors for the purchase of an aggregate of $ 1,175,000
principal amount of the 2018 Notes, together with Warrants to purchase a total of 89,359 shares of Common Stock, including 2018
Notes and Warrants to be issued to Michael Taglich and Robert Taglich, directors and principal stockholders of the Company and
principals of Taglich Brothers, Inc., who purchased an aggregate of $500,000 principal amount of the 2018 Notes and Warrants to
purchase a total of 38,024 shares of Common Stock in the offering.
On December 22, 2016,
the Company issued sold an aggregate principal amount of $1,175,000 of its 2018 Notes, together with Warrants to purchase an aggregate
of 89,359 shares of Common Stock for a total purchase price of $ 1,175,000 to ten accredited investors, including Michael Taglich
and Robert Taglich, directors and stockholders of the Company.
F-
26
Interest on the
2018 Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing
February 28, 2017, in cash, or if the Company is prohibited by applicable law or PNC Bank, National Association, its
principal lender under the PNC Loan Agreement from paying interest in cash, or otherwise elects to do so, the Company may pay
interest at the rate of twelve percent (12%) per annum in the form of additional notes having the same terms and conditions
as the 2018 Notes. The outstanding principal amount plus accrued interest on the 2018 Notes is convertible at the option of
the holder into shares of Common Stock at an initial conversion price of $2.63, subject to certain anti-dilution and other
adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain fundamental
transactions such as mergers and other business combinations. The Warrants are exercisable on or prior to November 30,
2021.
For acting as placement
agent of the 2018 Notes, we paid Taglich Brothers, Inc. $94,000 and issued to it five-year warrants to purchase 44,677 shares of
Common Stock.
The Warrants issued
to the purchasers of the 2018 Notes and Taglich Brothers, Inc. have an exercise price of $3.00 per share, subject to certain anti-dilution
and other adjustments, including stock splits, distributions in respect of the Common Stock and in the event of certain fundamental
transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares
depending upon prevailing market prices at the time of exercise.
Note 12. STOCKHOLDERS' EQUITY
Preferred Stock Offering
On May 25, 2016, the
Company, entered into a Placement Agency Agreement (the "Agreement") with Craig-Hallum Capital Group LLC and Taglich
Brothers, Inc., as placement agents (the "Placement Agents"), pursuant to which the Placement Agents agreed to offer
on behalf of the Company, on a best efforts basis, up to $7,000,000 of the Company's securities (the "Offering"),
in a private placement exempt from the registration requirements of the Securities Act.
Pursuant to the Agreement
on May 25, 2016, and June 1, 2016, the Company completed a private placement of 700,000 shares of its Series A Convertible Stock
(the "Series A Preferred Stock") from which it derived gross proceeds of $5,250,000, net of $1,750,000 of principal
amount of the Company's promissory notes exchanged by Michael Taglich and Robert Taglich for shares of Series A Preferred
Stock. The shares of Series A Preferred Stock have a stated value of $10.00 per share ("Stated Value") and are initially
convertible into shares of Common Stock at a price of $4.92 per share (subject to adjustment upon the occurrence of certain events)
.. In connection with the placement the Company incurred approximately $606,000 of direct offering costs and $57,000 in legal expenses
and granted to the Placement Agents warrants to purchase 8% of the number of shares of the Company's common stock (113,822)
issuable upon conversion of the Series A Preferred Stock sold in the offering (the "Placement Agent Warrants") .
The Placement Agent
Warrants are exercisable in whole or in part, at an initial exercise price per share of $6.15, and are exercisable for cash or
on a cashless basis for a period commencing on November 26, 2016 and expiring on May 26, 2021. The exercise price and number of
shares of common stock issuable upon the exercise of the Placement Agent Warrants are subject to adjustment for stock dividends,
splits, combinations and similar events.
Dividends on the Series
A Preferred Stock (the "Preferred Shares") are payable on a cumulative basis at an annual rate for the first two years
after the date the Preferred Shares were issued (the "Original Issue Date") of 12% of the Stated Value per share and
thereafter at the annual rate of 16% of the Stated Value per share. Dividends are payable on the fifteenth day of March, June,
September and December of each year, commencing on September 15, 2016. The Company may pay dividends in cash or in additional
Preferred Shares ("PIK Shares"). If during the first two years after the Original Issue Date the Company fails to
pay in respect of any dividend period a dividend at an annual rate of at least 8% of the Stated Value per share in cash, in addition
to paying a sufficient number of PIK Shares so that the sum of the cash dividends and PIK Shares paid equals 12% per annum the
Company will issue PIK Shares in an amount equal to the product of the proportion of the cash dividend not paid times 3% per annum.
Thereafter if the Company fails to pay in respect of any dividend period a dividend at an annual rate of at least 10% of the Stated
Value per share in cash, in addition to paying a sufficient number of PIK Shares so that the sum of the cash dividends and PIK
Shares paid equals 16% per annum, the Company will issue PIK Shares in an amount equal to the product of the proportion of the
cash dividend not paid times 3% per annum. If the Company pays any portion of the dividends payable during any dividend period
in PIK Shares, it will not be permitted to declare or pay any cash dividends on its common stock during that dividend period.
F-
27
Accordingly, we computed
earned but undeclared preferred dividends at the stated rate of 12.0% through September 15, 2016, when the form of the dividend
was announced and declared by our Board of Directors. Since the Board of Directors declared dividends in the form of PIK Shares
for the dividend payment period ended September 15, 2016, the earned dividend was increased to 15% (from the 12% cash rate), as
per the terms of the Series A Preferred Stock. The Company recognized the PIK dividend at the estimated fair value of the shares
issued.
The Company recorded
the issuance of 60,380 PIK Shares during the year ended December 31, 2016 as a preferred dividend, with a fair value of $ 501,000.
Accordingly, accumulated deficit and Additional Paid In Capital were increased by that amount during the year ended December 31,
2016. The fair value was determined using the closing market price of the Company's common stock of on the date of issuance of
the PIK Shares, taking into consideration that the Series A Preferred Shares were convertible into the common stock. For earning
per share purposes, for the year ended December 31, 2016, the fair value of the PIK Shares issued as a dividend was less than the
amounts previously earned by $40,000. At December 31, 2016 and 2015, the amounts of cumulative perpetual dividends earned and not
declared on the Series A Preferred Stock were $54,000 and $0, based on the stated cash dividend rate of 12%, or $0.05 and $0 per
Series A Preferred share, respectively.
Under Nevada law and
the terms of the Series A Preferred Stock, dividends are payable only when, as and if authorized and declared by the Company's
board of directors. After payment of all liabilities and outstanding debt obligations, holders of Series A Preferred Stock are
entitled to receive $10.00 plus accrued and unpaid dividends prior to the payment of amounts available for distribution to holders
of the Company's common stock upon the liquidation and dissolution of the Company.
Holders of Series A
Preferred Stock may elect at any time to convert their Preferred Shares into shares of common stock at the conversion rate of 2.0325
shares of common stock for each Preferred Share, equivalent to an initial conversion price of approximately $4.92 per share of
common stock. The conversion rate and the corresponding conversion price will be subject to certain anti-dilution and other adjustments,
including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions such
as mergers and other business combinations.
The Company may at its
option, at any time and from time to time after the market price of a share of common stock is in excess of $9.84 for 30 consecutive
trading days, cause all of the Preferred Shares to be converted into shares of common stock at the then-prevailing conversion rate,
subject to the certain conditions set forth in the certificate of designations.
Commencing May 26, 2018,
the Company may redeem all of the Preferred Shares for a redemption price of $10.00, plus accrued and unpaid dividends.
Holders of Preferred
Shares will vote on an as-converted basis, together with holders of common stock, as a single class, on the election of directors
and all other matters presented to stockholders, except for matters as to which under applicable law and the certificate of designation
a class vote of the holders of the Series A Preferred Stock is required. The Company may not, without the affirmative vote of the
record holders of a majority of the then outstanding shares of the Series A Preferred Stock voting together as a single class (a)
alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Certificate
of Designation authorizing the Series A Preferred Stock, (b) amend its articles of incorporation or other charter documents in
any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares of Series A Preferred
Stock, unless such increase is necessary to pay PIK Dividends, (d) authorize a new series of preferred stock with dividend, liquidation
or redemption rights senior or pari passu to the Series A Preferred Stock or (e) enter into any agreement with respect to any of
the foregoing.
Common Stock Issuances
During the year ended
December 31, 2015, the Company granted 52,000 shares of restricted common stock pursuant to an agreement in connection with the
acquisition of Sterling. During the year ended December 31, 2016, 42,000 shares of that restricted stock has vested and is included
in shares issued and outstanding. In addition, the Company issued an aggregate of 24,905 shares of common stock upon the exercise
of options by certain of its directors.
Dividends
On January 15, 2015
the Company paid a dividend equal to $0.15 per common share or $1,066,000 to all shareholders of record as of January 2, 2015.
F-
28
On April 24, 2015 the
Company paid a dividend equal to $ 0.15 per common share or $1,134,000 to all shareholders of record as of April 13, 2015.
On August 12, 2015,
the Company paid a dividend equal to $0.15 per common share or $1,134,000 to all shareholders of record as of August 3, 2015.
On December 1, 2015,
the Company paid a dividend equal to $0.15 per common share or $ 1,133,000 to all shareholders of record as of November 23, 2015.
Warrants Issued To Taglich Brothers
As discussed above,
the Company issued warrants to Taglich Brothers, Inc. Such warrants contain cashless exercise provisions. As a result, the value
of the warrants has to be recognized as a liability. In addition, the Company would be required to revalue the derivative liability
at the end of each reporting period with the change in value reported on the consolidated statement of operations. The Company
did not account for the derivative liability in its consolidated financial statements as it was determined to not be material.
Note 13. EMPLOYEE BENEFITS PLANS
The Company employs both union and non-union employees and maintains
several benefit plans.
Union
Substantially the entire
workforce at AIM is subject to a union contract with the United Service Workers Union TUJAT Local 355, EIN 11-1772919 (the "Union").
The contract expires on December 31, 2018.
Medical benefits for
union employees are provided through a policy with ADP during 2016 and Insperity during 2015, the costs of which are substantially
borne by the Company. In addition, the Company is obligated to make contributions for union dues and a security fund (defined contribution
plan) for the benefit of each union employee. Contributions to the security fund amounted to $263,000 and $247,000 for the years
ended December 31, 2016 and 2015, respectively.
The Company adopted
ASU No.2011-09, "Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's
Participation in a Multiemployer Plan" ("ASU 2011-09"). ASU 2011-09 requires additional disclosures about an
employer's participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions
made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. The Union's retirement
plan is a defined contribution plan. As such, the Company is not responsible for the obligations of other companies in the Union's
retirement plan and no further disclosures are required.
Others
All other Company employees, are covered under a co-employment
agreement with ADP.
The Company has two
defined contribution plans under Section 401(k) of the Internal Revenue Code (the "Plans"). Pursuant to the Plans,
qualified employees may contribute a percentage of their pre-tax eligible compensation to the Plan. The Company does not match
any contributions that employees may make to the Plans.
F-
29
Note 14. COMMITMENTS AND CONTINGENCIES
Real Estate Leases
The Company leases its
facilities under various operating lease agreements, which contain renewal options and escalation provisions. Rent expense was
$2,429,000 and $2,225,000 for the years ended December 31, 2016 and 2015, respectively. The Company is responsible for paying all
operating costs under the terms of the leases. As of December 31, 2016, the aggregate future minimum lease payments are as follows:
Plant Avenue
Fifth Avenue
Lamar Street
Motor
Parkway
Porter
Street
Clinton
Avenue
For the year ending
Annual Rent
Annual Rent
Annual Rent
Annual
Rent
Annual
Rent
Annual
Rent
Total Rents
December 31, 2017
$
543,000
$
746,000
$
360,000
$
106,000
$
115,000
$
77,000
$
1,947,000
December 31, 2018
559,000
769,000
300,000
110,000
115,000
20,000
1,873,000
December 31, 2019
576,000
792,000
—
113,000
48,000
—
1,529,000
December 31, 2020
593,000
817,000
—
116,000
—
—
1,526,000
December 31, 2021
611,000
842,000
—
103,000
—
—
1,556,000
Thereafter
2,661,000
4,367,000
—
—
—
—
7,028,000
Total Rents
$
5,543,000
$
8,333,000
$
660,000
$
548,000
$
278,000
$
97,000
$
15,459,000
The leases provide for
scheduled increases in base rent. Rent expense is charged to operations using the straight- line method over the term of the lease
which results in rent expense being charged to operations at inception of the lease in excess of required lease payments. This
excess is shown as deferred rent in the accompanying consolidated balance sheets.
On April 11, 2016, the
Company executed a Sale-Leaseback Arrangement, whereby the Company sold the building and real property located in South Windsor,
Connecticut (the "Property") for a purchase price of $1,700,000. The net proceeds from the sale of the property were
applied to the amounts owed to PNC Bank.
Simultaneous with the
closing of the sale of the Property, the Company entered into a 15- year lease (the "Lease") with the purchaser for
the property. Base annual rent was approximately $155,000 for the first year and increases approximately 3% per year each year
thereafter. The Lease granted the Company an option to renew the Lease for an additional period of five years. Pursuant to the
terms of the Lease, the Company was required to pay all of the costs associated with the operation of the facilities, including,
without limitation, insurance, taxes and maintenance. The Lease also contained representations, warranties, obligations, conditions
and indemnification provisions in favor of the purchaser and grants the purchaser remedied upon a breach of the Lease by the Company,
including the right to terminate the Lease and hold the Company liable for any deficiency in future rent.
On January 27, 2017,
the Company entered into an agreement to sell the stock of AMK. Included in this agreement, the capital lease obligation for the
building transferred to the purchaser of AMK. At December 31, 2016, the Company reclassified the capital asset and lease obligation
to Assets Held for Sale and Liabilities Held for Sale, respectively. See Note 1 Subsequent Events for additional discussion regarding
the sale of AMK. At December 31, 2016, the Company has excluded this lease commitment from the table above.
Loss Contingencies
During 2016, a number
of actions were commenced against the Company by vendors, landlords and former landlords, including a third party claim as a result
of an injury suffered on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts
included in accounts payable they are not specifically discussed herein.
Westbury Park Associates,
LLC commenced an action on or about January 11, 2017 against Air Industries Group in the NYS Supreme Court, County of Suffolk,
seeking the recovery of approximately $31,000 for past rent arrears, and for an unidentified sum representing all additional rent
due under a commercial lease through the end of its term, plus attorney's fees. The additional rent due through the end
of the term is approximately $105,000. The litigation is in the discovery stage and the Company believes there is a meritorious
defense to the claim or that the landlord can and will mitigate its future damages by finding a new tenant.
F-
30
On January 18, 2017,
REP B-2, LLC filed a petition for a warrant of eviction and a money judgment of approximately $56,000 against Air Industries Group
arising from rent arrears on commercial space. On January 18, 2017, 360 Motor Parkway, LLC filed a petition for a warrant of eviction
and a money judgment of approximately $12,000 against Air Industries Group arising from rent arrears on commercial space. Each
proceeding has resulted in a stipulation of settlement providing monthly repayment schedules to bring those rent arrears current,
the last of which are due on May 1, 2017, at which time the proceedings may be dismissed.
An employee of the Company
commenced an action against, among others, Rechler Equity B-2, LLC and Air Industries Group, in the Supreme Court State of New
York, Suffolk County, seeking compensation in an undetermined amount for injuries suffered while leaving the premises occupied
by Welding Metallurgy, Inc. Rechler Equity B-2, LLC, has served a Third Party Complaint in this action against Air Industries Group,
Inc., and Welding Metallurgy, Inc. The action remains in the early pleading stage. The Company believes it is not liable to the
employee and any amount it might have to pay would be covered by insurance.
Note 15. INCOME TAXES
The provision for (benefit from) income taxes as of December
31, is set forth below:
2016
2015
Current
Federal
$
—
$
—
State
49,000
53,000
Prior year overaccruals
Federal
—
(123,000
)
State
—
—
Total Expense (Benefit)
49,000
(70,000
)
Deferred Tax Benefit
(4,962,000
)
(216,000
)
Valuation Allowance
7,025,000
—
Net Provision for (Benefit from) Income Taxes
$
2,112,000
$
(286,000
)
The following is a reconciliation of our
income tax rate computed using the federal statutory rate to our actual income tax rate as of December 31,
2016
2015
U. S. statutory income tax rate
34.00
%
-34.00
%
State taxes
1.50
%
4.70
%
Permanent differences, overaccruals and non-deductible items
0.08
%
3.00
%
Rate change and provision to return true-up
0.85
%
-40.20
%
Expired stock options
-0.15
%
40.80
%
Deferred tax valuation allowance
-51.64
%
—
Total
-15.36
%
-25.70
%
F-
31
The components of net deferred tax assets at December 31, 2016
and 2015 are set forth below:
December 31,
2016
December 31,
2015
Deferred tax assets
Current:
Net operating losses
$
4,754,000
$
462,000
Bad debts
413,000
336,000
Inventory - 263A adjustment
—
8,000
Accounts payable, accrued expenses and reserves
930,000
919,000
Total current deferred tax assets before valuation allowance
6,097,000
1,725,000
Valuation allowance
(6,097,000
)
—
Total current deferred tax assets after valuation allowance
—
1,725,000
Non-current:
Section 1231 loss carry forward
4,000
4,000
Stock based compensation - options and restricted stock
164,000
79,000
Capitalized engineering costs
431,000
432,000
Deferred rent
468,000
410,000
Amortization - NTW Transaction
1,324,000
789,000
Inventory reserves
1,157,000
680,000
Deferred gain on sale of real estate
121,000
126,000
Other
160,000
257,000
Total non-current deferred tax assets before valuation allowance
3,829,000
2,777,000
Valuation allowance
(928,000
)
(4,000
)
Total non-current deferred tax assets after valuation allowance
2,901,000
2,773,000
Deferred tax liabilities:
Property and equipment
(2,595,000
)
(2,091,000
)
Amortization - NTW Goodwill
(33,000
)
(13,000
)
Amortization - AMK Goodwill
—
(18,000
)
Amortization - Welding Transaction
(273,000
)
(313,000
)
Total non-current deferred tax liabilities
(2,901,000
)
(2,435,000
)
Net non current deferred tax asset
$
—
$
338,000
The Company had a capital
loss carry forward from the sale of Sigma Metals, Inc., a former subsidiary of the Company, of $2,719,000 which expired in fiscal
2015.
During the year ended
December 31, 2016, the Company recorded a valuation allowance equal to its net deferred tax assets. The Company determined that
due to a recent history of net losses, that at this time, sufficient uncertainty exists regarding the future realization of these
deferred tax assets through future taxable income. If, in the future, the Company believes that it is more likely than not that
these deferred tax benefits will be realized, the valuation allowances will be reduced or eliminated. With a full valuation allowance,
any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. At December
31, 2016 and 2015, the Company provided a valuation allowance on its deferred tax assets of $7,025,000 and $4,000, respectively.
At December 31, 2016
and 2015, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.
The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company
recognizes interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2016 and 2015, the
Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.
F-
32
In certain cases, the
Company's uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities.
The Company files federal and state income tax returns in jurisdictions with varying statutes of limitations. The 2013 through
2016 tax years generally remain subject to examination by federal and state tax authorities.
Note 16. STOCK OPTIONS AND WARRANTS
Stock-Based Compensation
Stock Options
On March 30, 2015, the
Board of Directors adopted the Company's 2015 Equity Incentive Plan ("2015 Plan") which was approved by affirmative
vote of the Company's stockholders on June 25, 2015. The Plan authorized the grant of rights with respect to up to 350,000
shares.
In June 2016, the Board
of Directors adopted the Company's 2016 Equity Incentive Plan ("2016 Plan") which authorized the grant of rights
with respect to up to 350,000 shares. The 2016 Plan was approved by affirmative vote of the Company's stockholders on November
30, 2016.
During the year ended
December 31, 2016, the Company granted options to purchase 100,000 shares of common stock to certain of its employees. The weighted
average fair value of the granted options was estimated using the Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 0.73% to 2.04%; expected volatility factors of 31% to 59%; expected dividend yield of 0%; and estimated
option term of 5 years.
During both of the years
ended December 31, 2016 and 2015, the Board of Directors approved the issuance of 18,000 options, to non -employee members of the
Company's Board of Directors. These options vested quarterly as to 25% of the shares subject to the options, commencing June
2, 2016.
The Company recorded
stock based compensation expense of $167,000 and $100,000 in its consolidated statement of operations for the years ended December
31, 2016 and 2015, respectively, and such amounts were included as a component of general and administrative expense.
The fair values of stock
options granted were estimated using the Black-Sholes option- pricing model with the following assumptions for the years ended
December 31:
2016
2015
Risk-free interest rates
0.73% - 2.04
%
1.31% - 1.49
%
Expected life (in years)
5
5-6
Expected volatility
31%-59
%
25
%
Dividend yield
0.0
%
5.9
%
Weighted-average grant date fair value per share
$
1.88
$
1.10
The expected life is
the number of years that the Company estimates, based upon history, that the options will be outstanding prior to exercise or
forfeiture. Expected life is determined using the simplified method permitted by Staff Accounting Bulletin No. 107. In addition
to the inputs referenced above regarding the option pricing model, the Company adjusts the stock-based compensation expense for
estimated forfeiture rates that are revised prospectively according to forfeiture experience. The stock volatility factor is based
on the New York Stock Exchange ARCA Defense Index. The Company did not use the volatility rate for its common stock as the Company
determined that its common stock is thinly traded.
F-
33
A summary of the status
of the Company's stock options as of December 31, 2016 and 2015, and changes during the two years then ended are presented below.
Options
Wtd. Avg.
Exercise Price
Balance, December 31, 2014
528,539
9.01
Granted during the period
99,000
10.20
Exercised during the period
(46,473
)
4.50
Terminated/Expired during the period
(16,724
)
84.78
Balance, December 31, 2015
564,342
7.35
Granted during the period
128,000
5.28
Exercised during the period
(24,905
)
2.95
Terminated/Expired during the period
(31,095
)
8.47
Balance, December 31, 2016
636,342
$
7.01
Exercisable at December 31, 2016
500,175
$
6.77
The following table summarizes information about stock options
at December 31, 2016:
Range of Exercise
Prices
Remaining
Number
Outstanding
Wtd. Avg.
Life
Wtd. Avg.
Exercise Price
$0.00 - $5.00
202,694
1.81 years
$
4.49
$5.01 - $20.00
433,648
2.90 years
8.19
$0.00 - $20.00
636,342
2.55 years
$
7.01
As of December 31, 2016,
there was $243,833 of unrecognized compensation cost related to non-vested stock option awards, which is to be recognized over
the remaining weighted average vesting period of three years.
The aggregate intrinsic
value at December 31, 2016 was based on the Company's closing stock price of $3.15 was $-0. The aggregate intrinsic value was calculated
based on the positive difference between the closing market price of the Company's Common Stock and the exercise price of
the underlying options. The total number of in-the- money options exercisable as of December 31, 2016 was -0-.
The weighted average
fair value of options granted during the years ended December 31, 2016 and 2015 was $1.88 and $1.10 per share, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2016 and 2015 was $34,050 and $169,626, respectively.
The total fair value of shares vested during the years ended December 31, 2016 and 2015 was $63,830 and $33,845, respectively.
Warrants
The following tables summarize the Company's
outstanding warrants as of December 31, 2016 and changes during the two years then ended:
Warrants
Wtd. Avg.
Exercise Price
Balance, December 31, 2014
164,585
7.85
Granted during the period
—
—
Exercised during the period
—
—
Terminated/Expired during the period
—
—
Balance, December 31, 2015
164,585
7.85
Granted during the period
675,691
1.07
Exercised during the period
—
—
Terminated/Expired during the period
—
—
Balance, December 31, 2016
840,276
$
5.13
Exercisable at December 31, 2016
165,618
$
4.49
F-
34
The fair values of warrants granted were
estimated using the Black-Sholes option-pricing model with the following assumption for the years ended December 31:
2016
2015
Risk-free interest rates
1.4%-2.04
%
n/a
Expected life (in years)
5
n/a
Expected volatility
33%-59
%
n/a
Dividend yield
0
n/a
Weighted-average grant date fair value per share
0.81-1.4
n/a
The following table summarizes information about warrants at
December 31, 2016:
Range of Exercise Prices
Warrants
Wtd. Avg.
Life
Wtd. Avg.
Exercise Price
$0-$3.00
320,703
4.90 years
$
3.00
$3.01-$5.00
110,556
4.60 years
$
5.00
$5.01 - $6.15
244,432
4.50 years
$
6.15
$6.30 - $11.25
164,585
1.14 years
$
7.85
$3.00-$11.25
840,276
4.01 years
$
5.13
F-
35
Note 17. RELATED PARTY TRANSACTIONS
Taglich Brothers, Inc.
is a corporation co-founded by two of the directors of the Company. In addition, a third director of the Company is a vice president
of Taglich Brothers, Inc.
As discussed in Notes
11 and 12, Taglich Brothers, Inc. has acted as placement agent for various debt and equity financing transactions and has received
cash and equity compensation for their services. In addition, as discussed in Note 9, the principals of Taglich Brothers, Inc.
have also invested in the Company through various debt and equity financings. Also see Note 1 under "Subsequent Events"
for additional related party transactions subsequent to December 31, 2016.
Note 18. SEGMENT REPORTING
In accordance with FASB
ASC 280, Segment Reporting ("ASC 280"), the Company discloses financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about which separate financial information is available
and regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company follows
ASC 280, which establishes standards for reporting information about operating segments in annual and interim financial statements,
and requires that companies report financial and descriptive information about their reportable segments based on a management
approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
The Company currently
divides its operations into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures & Electronics
which consists of WMI, WPI, MSI, Eur-Pac, ECC, and Compac beginning September 1, 2015 ; and Turbine Engine Components which consists
of AMK and Sterling, beginning March 2015. Along with our operating subsidiaries, the Company reports the results of its corporate
division as an independent segment.
The accounting policies
of each of the segments are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates
performance based on revenue, gross profit contribution and assets employed. Corporate level operating costs are allocated to
segments. These costs include corporate costs such as legal, audit, tax and other professional fees including those related to
being a public company.
F-
36
Year Ended December 31,
2016
2015
COMPLEX MACHINING
Net Sales
$
37,124,000
$
42,356,000
Gross Profit
4,382,000
10,412,000
Pre Tax Income (Loss)
(5,432,000
)
1,825,000
Assets
45,073,000
48,353,000
AEROSTRUCTURES & ELECTRONICS
Net Sales
18,818,000
27,134,000
Gross Profit
2,489,000
6,553,000
Pre Tax Income (Loss)
(3,985,000
)
386,000
Assets
19,843,000
20,229,000
TURBINE ENGINE COMPONENTS
Net Sales
10,973,000
10,952,000
Gross Profit
(151,000
)
316,000
Pre Tax Income (Loss)
(4,084,000
)
(3,329,000
)
Assets
17,235,000
19,076,000
CORPORATE
Net Sales
—
—
Gross Profit
—
—
Pre Tax Income (Loss)
(10,000
)
—
Assets
649,000
592,000
CONSOLIDATED
Net Sales
66,915,000
80,442,000
Gross Profit
6,720,000
17,281,000
Pre Tax Income (Loss)
(13,511,000
)
(1,118,000
)
Provision for (Benefit from ) Income Taxes
2,112,000
(286,000
)
Net (Loss) Income
(15,623,000
)
(832,000
)
Assets
82,800,000
88,250,000
F-
37
AIR INDUSTRIES GROUP
CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016 (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016
F-39
Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (Unaudited)
F-40
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)
F-41
Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2017 and 2016 (Unaudited)
F-42
F-
38
AIR INDUSTRIES GROUP
Condensed Consolidated Balance Sheets
March 31,
2017
December 31,
2016
Unaudited
ASSETS
Current Assets
Cash and Cash Equivalents
$
1,043,000
$
1,304,000
Accounts Receivable, Net of Allowance for Doubtful Accounts of $672,000 and $756,000, respectively
7,486,000
8,050,000
Inventory
38,132,000
39,851,000
Prepaid Expenses and Other Current Assets
659,000
557,000
Prepaid Taxes
231,000
409,000
Assets Held for Sale, Net
—
6,050,000
Total Current Assets
47,551,000
56,221,000
Property and Equipment, Net
11,580,000
12,219,000
Capitalized Engineering Costs - Net of Accumulated Amortization of $5,038,000 and $4,957,000, respectively
1,791,000
1,627,000
Deferred Financing Costs, Net, Deposits
1,372,000
1,096,000
Intangible Assets, Net
1,450,000
1,754,000
Goodwill
9,883,000
9,883,000
TOTAL ASSETS
$
73,627,000
$
82,800,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable and Capitalized Lease Obligations - Current Portion
$
26,496,000
$
32,913,000
Notes Payable - Related Party - Current Portion
1,846,000
1,086,000
Accounts Payable and Accrued Expenses
15,333,000
16,160,000
Deferred Gain on Sale - Current Portion
38,000
38,000
Deferred Revenue
722,000
946,000
Liabilities Directly Associated with Assets Held for Sale
—
2,155,000
Income Taxes Payable
20,000
20,000
Total Current Liabilities
44,455,000
53,318,000
Long Term Liabilities
Notes Payable and Capitalized Lease Obligations -
Net of Current Portion
2,644,000
2,971,000
Deferred Gain on Sale - Net of Current Portion
323,000
333,000
Deferred Rent
1,294,000
1,288,000
TOTAL LIABILITIES
$
48,716,000
$
57,910,000
Commitments and Contingencies
Stockholders' Equity
Preferred Stock - Par Value $.001 - Authorized 3,000,000 shares:
Shares Designated as Series A Convertible Preferred Stock, Par Value $.001, Authorized 2,000,000 shares, 1,247,654 shares and 1,202,548 shares Issued and Outstanding at March 31, 2017 and December 31, 2016, respectively, Aggregate liquidation preference $12,476,680 and $12,025,480, respectively
1,000
1,000
Common Stock - Par Value $. 001 - Authorized 25,000,000 Shares, 7,650,165 and 7,626,945 Shares Issued and Outstanding as of March 31, 2017 and December 31, 2016, respectively
7,000
7,000
Additional Paid-In Capital
57,038,000
55,862,000
Accumulated Deficit
(32,135,000
)
(30,980,000
)
TOTAL STOCKHOLDERS' EQUITY
24,911,000
24,890,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
73,627,000
$
82,800,000
See Notes to Condensed Consolidated Financial
Statements
F-
39
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
(Unaudited)
Three Months Ended March 31,
2017
2016
Net Sales
$
16,153,000
$
15,184,000
Cost of Sales
13,451,000
12,363,000
Gross Profit
2,702,000
2,821,000
Operating Expenses
3,221,000
4,412,000
Loss from Operations
(519,000
)
(1,591,000
)
Interest and Financing Costs
(893,000
)
(505,000
)
Gain on Sale of Subsidiary
451,000
—
Other (Expense) Income, Net
(193,000
)
10,000
Loss before Income Taxes
(1,154,000
)
(2,086,000
)
Benefit from Income Taxes
—
656,000
Net Loss
$
(1,154,000
)
$
(1,430,000
)
Loss per share - basic
$
(0.15
)
$
(0.19
)
Loss per share - diluted
$
(0.15
)
$
(0.19
)
Weighted average shares outstanding - basic
7,650,165
7,584,765
Weighted average shares outstanding - diluted
7,650,165
7,584,765
See Notes to Condensed Consolidated Financial
Statements
F-
40
AIR INDUSTRIES GROUP
Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31,
(Unaudited)
2017
2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss
$
(1,154,000
)
$
(1,430,000
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation of property and equipment
728,000
904,000
Amortization of intangible assets
304,000
320,000
Amortization of capitalized engineering costs
81,000
105,000
Bad debt recoveries
(14,000
)
—
Non-cash compensation expense/(forfeiture of unamortized stock compensation)
(73,000
)
27,000
Amortization of deferred financing costs
55,000
170,000
Deferred gain on sale of real estate
(10,000
)
(10,000
)
Gain on sale of subsidiary
(451,000
)
—
Deferred income taxes
—
(691,000
)
Amortization of convertible notes payable
176,000
—
Changes in Assets and Liabilities
(Increase) Decrease in Operating Assets:
Accounts receivable
578,000
3,850,000
Inventory
1,719,000
(3,826,000
)
Prepaid expenses and other current assets
(102,000
)
139,000
Prepaid taxes
178,000
—
Deposits and other assets
(276,000
)
35,000
Increase (Decrease) in Operating Liabilities:
Accounts payable and accrued expenses
(621,000
)
941,000
Deferred rent
6,000
3,000
Deferred revenue
(224,000
)
352,000
Income taxes payable
—
11,000
NET CASH PROVIDED BY OPERATING ACTIVITIES
900,000
900,000
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized engineering costs
(245,000
)
(212,000
)
Purchase of property and equipment
(89,000
)
(355,000
)
Proceeds from sale of subsidiary, net
4,260,000
—
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
3,926,000
(567,000
)
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable - revolver, net
(5,545,000
)
458,000
Payments of note payable - term loans
(2,069,000
)
(563,000
)
Capital lease obligations
(173,000
)
(313,000
)
Proceeds from notes payable issuances - related party
850,000
—
Proceeds from notes payable issuances
1,850,000
—
Deferred financing costs
—
(75,000
)
NET CASH USED IN FINANCING ACTIVITIES
(5,087,000
)
(493,000
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(261,000
)
(160,000
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
1,304,000
529,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
1,043,000
$
369,000
Supplemental cash flow information
Cash paid during the period for interest
$
643,000
$
505,000
Cash paid during the period for income taxes
$
—
$
13,000
Supplemental disclosure of non-cash transactions
Issuance of Convertible notes payable - related party
$
382,000
$
—
See Notes to Condensed Consolidated Financial
Statements
F-
41
AIR INDUSTRIES GROUPNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1.   FORMATION AND BASIS OF PRESENTATION
Organization
On August 30, 2013, Air Industries Group,
Inc. ("Air Industries Delaware") changed its state of incorporation from Delaware to Nevada as a result of a merger
with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation ("Air Industries Nevada"
or "AIRI") and the surviving entity, pursuant to an Agreement and Plan of Merger. The reincorporation was approved
by the stockholders of Air Industries Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Nevada is deemed to be
the successor.
The accompanying consolidated financial
statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries Machining Corp. ("AIM"),
Welding Metallurgy, Inc. ("WMI" or "Welding"), Miller Stuart, Inc. ("Miller Stuart"), Nassau
Tool Works, Inc. ("NTW"), Woodbine Products, Inc. ("Woodbine" or "WPI"), Decimal Industries,
Inc. ("Decimal"), Eur-Pac Corporation ("Eur-Pac" or "EPC"), Electronic Connection Corporation
("ECC"), AMK Welding, Inc. ("AMK"), until sold in January 2017, Air Realty Group, LLC ("Air Realty"),
The Sterling Engineering Corporation ("Sterling"), and Compac Development Corporation ("Compac"), (together,
the "Company").
Going Concern
The Company suffered net losses from operations
of $519,000 and $10,789,000 and a net loss of $1,154,000 and $15,623,000, respectively, for the three months ended March 31, 2017,
and the year ended December 31, 2016. The Company also had negative cash flows from operations for the year ended December 31,
2016. In addition, in 2015 the Company ceased paying dividends on its common stock and in 2016 it disposed of the real estate on
which one of its operating subsidiaries is located through a sale leaseback transaction, and in January 2017 sold of one of its
operating subsidiaries to raise funds for operations. During the year ended December 31, 2016, and subsequent thereto, the Company
has had to sell its debt and equity securities to secure funds to operate its business. Since September 2016 the Company has been
issuing additional shares of its Series A Convertible Preferred Stock in lieu of cash payment of accrued dividends on its outstanding
shares of Series A Convertible Preferred Stock and since February 2017 it has issued additional convertible notes in lieu of cash
payment of accrued interest on its outstanding convertible notes. Furthermore, as of March 31, 2017, the Company was not in compliance
with two financial covenants under the Company's loan facility with PNC Bank (the "Loan Facility").
The continuation of the Company's business
is dependent upon future issuances of equity or other financing to fund ongoing operations. Management of the Company plans to
obtain additional financing during the second quarter and the remainder of 2017 through the issuance of common or preferred stock,
securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on
terms that result in dilution to the Company's existing shareholders. Although no assurances can be given, management of the Company
believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide
the necessary funding for the Company to continue as a going concern. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim
financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December
31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December
31, 2016, as filed with the Securities and Exchange Commission.
Reclassifications
Certain account balances in 2016 have been reclassified to
conform to the current period presentation.
F-
42
AIR INDUSTRIES GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2.   SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principal Business Activity
The Company through its AIM subsidiary
is primarily engaged in manufacturing aircraft structural parts, and assemblies for prime defense contractors in the aerospace
industry in the United States. NTW is a manufacturer of aerospace components, principally landing gear for F-16 and F-18 fighter
aircraft. Welding is a specialty welding and products provider whose significant customers include the world's largest aircraft
manufacturers, subcontractors, and original equipment manufacturers and upon the merger of Miller-Stuart into Welding, is a manufacturer
of aerospace components specializing in electromechanical systems, harness and cable assemblies, electronic equipment and printed
circuit boards. Woodbine is a manufacturer of aerospace components whose customers include major aircraft component suppliers.
Decimal is a manufacturer of aerospace components specializing in welded and brazed chassis structures housing electronics in aircraft
whose customers include major aircraft component suppliers. Eur-Pac specializes in military packaging and supplies. Eur-Pac's
primary business is "kitting" of supplies for all branches of the United States Defense Department including ordnance
parts, hose assemblies, hydraulic, mechanical and electrical assemblies. Sterling manufactures components for aircraft and ground
turbine engines. Compac specializes in the manufacture of RFI/EMI (Radio Frequency Interference – Electro-Magnetic Interference)
shielded enclosures for electronic components. The Company's customers are primarily publicly traded companies in the aerospace
and other industries.
Inventory Valuation
The Company does not take physical inventories
at interim quarterly reporting periods. Approximately 85% of the inventory value at March 31, 2017 has been estimated using a gross
profit percentage based on sales of previous periods to the net sales of the current period, as management believes that the gross
profit percentage on these items are materially consistent from period to period. The remainder of the inventory value at March
31, 2017 is estimated based on the Company's standard cost perpetual inventory system, as management believes the perpetual system
computed value for these items provides a better estimate of value for that inventory. Adjustments to reconcile the annual physical
inventory to the Company's books are treated as changes in accounting estimates and are recorded in the fourth quarter. The
Company valued inventory at December 31, 2016 at the lower of cost on a first-in-first-out basis or market.
March 31,
2017
December 31,
2016
(Unaudited)
Raw Materials
$
7,358,000
$
7,031,000
Work in Process
20,939,000
25,635,000
Finished Goods
14,454,000
11,751,000
Inventory Reserve
(4,619,000
)
(4,566,000
)
Total Inventory
$
38,132,000
$
39,851,000
Credit and Concentration Risks
There were four customers that represented
60.5% and 58.4% of total sales for the three months ended March 31, 2017 and 2016, respectively. This is set forth in the table
below.
Customer
Percentage of Sales
2017
2016
(Unaudited)
(Unaudited)
1
16.6
23.2
2
17.1
12.7
3
14.1
11.9
4
12.7
10.6
F-
43
There were three customers that represented
41.8% of gross accounts receivable and one customer that represented 19.9% of gross accounts receivable at March 31, 2017 and December
31, 2016, respectively. This is set forth in the table below.
Customer
Percentage of Receivables
March
2017
December
2016
(Unaudited)
1
19.1
19.9
2
12.1
*
3
10.6
*
4
*
*
*
Customer was less than 10% of Gross Accounts Receivable at March 31, 2017 and December 31, 2016.
During the three months ended March 31,
2017 and 2016, the Company had occasionally maintained balances in its bank accounts that were in excess of the FDIC limit. The
Company has not experienced any losses on these accounts.
The Company has several key sole-source
suppliers of various parts that are important for one or more of its products. These suppliers are its only source for such parts
and, therefore, in the event any of them were to go out of business or be unable to provide parts for any reason, its business
could be severely harmed.
Earnings Per Share
Basic earnings per share is computed by
dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding
for the period. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share calculations
for all periods when the effect of their inclusion is dilutive.
The following is a reconciliation of the denominators of basic
and diluted earnings per share computations:
Three Months Ended
March 31,
2017
March 31,
2016
(Unaudited)
(Unaudited)
Weighted average shares outstanding used to compute basic earnings per share
7,650,165
7,584,765
Effect of dilutive stock options and warrants
—
—
Weighted average shares outstanding and dilutive securities used to compute dilutive earnings per share
7,650,165
7,584,765
The following table sets forth securities
which were excluded from the diluted per share calculation because the conversion price or the exercise price was greater than
the average market price of the common shares:
Three Months Ended
March 31,
2017
March 31,
2016
(Unaudited)
(Unaudited)
Convertible Preferred Stock
2,517,013
—
Stock Options
513,342
252,000
Warrants
653,540
56,800
3,683,895
308,800
F-
44
The following table sets forth securities
which were excluded from the diluted per share calculation for the three months ended March 31, 2017 even though the exercise price
was less than the average market price of the common shares and unvested restricted stock because the effect of including these
potential shares was anti-dilutive due to the net loss incurred during that period:
March 31,
2017
March 31,
2016
(Unaudited)
(Unaudited)
Stock Options
3,000
312,342
Warrants
432,917
107,785
Unvested Restricted Stock
—
27,000
435,917
447,127
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with FASB ASC 718, "Compensation – Stock Compensation." Under the fair value recognition provision
of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates
the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model. Stock based compensation
amounted to $(73,000) and $27,000 for the three months ended March 31, 2017 and 2016, respectively, and was included in operating
expenses on the accompanying Condensed Consolidated Statements of Operations.
Goodwill
Goodwill represents the excess of the acquisition
cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $9,883,000 at March 31,
2017 and December 31, 2016 relates to the acquisitions of Welding ($291,000), NTW ($162,000), Woodbine ($2,565,000), Eur-Pac ($1,656,000),
ECC ($109,000), Sterling ($4,540,000) and Compac ($560,000). Goodwill is not amortized, but is tested annually for impairment,
or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount.
The Company has determined that there has been no impairment
of goodwill at March 31, 2017.
Debt Issuance Costs
Effective January 1, 2016, the Company
adopted FASB ASU 2015-15 "Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt
Issuance Costs Associated with Line-of-Credit Arrangements, Amendments to SEC Paragraphs Pursuant to Staff Announcement at June
18, 2015 EITF Meeting". The amendments to the SEC paragraphs in this update state that given the absence of authoritative
guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an
entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably
over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. The adoption of this amended guidance did not have a significant impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01,
"Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)" ("ASU 2016-01").The
main objective of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements
with more decision-useful information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The Company does not expect the adoption of ASU 2016-01 to have a significant impact on its consolidated
financial statements.
In February 2016, the FASB issued ASU
2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The main objective of ASU 2016-02 is to increase transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification
and creating Topic 842, Leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company does not expect the adoption of ASU 2016-02 to have a significant impact on its
consolidated financial statements.
F-
45
In March 2016, the FASB issued ASU 2016-09,
"Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment" ("ASU 2016-09").
ASU 2016-09 is part of the FASB Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate,
and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or
improving the usefulness of the information provided to users of financial statements. ASU 2016-09 will affect all entities that
issue share-based payment awards to their employees. The areas for simplification involve several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016,
and interim periods within those annual periods. The Company adopted this ASU during the first quarter of 2017, and the adoption
did not materially impact its consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10
"Revenue from Contracts with Customers (Topic 606)" ("ASU 2016-10"). The core principle of the guidance
in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
amendments in ASU 2016-10 affect the guidance in ASU 2014-09, "Revenue from Contracts with Customers", which is not
yet effective. The effective date and transition requirements of ASU 2016-10 are the same as the effective date and transition
requirements of ASU 2014-09. They are effective prospectively for reporting periods beginning after December 15, 2017 and early
adoption is not permitted. The Company is currently assessing the impact of the adoption of these amendments on its consolidated
financial statements.
In May 2016, the FASB issued Accounting
Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in
certain arrow areas and add some practical expedients. These amendments are effective at the same date that Topic 606 is effective.
Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting
periods therein (i.e., January 1, 2018, for a calendar year entity). Topic 606 is effective for nonpublic entities one year later.
The Company is currently assessing the impact of the adoption of the amendments to Topic 606 and these amendments on its consolidated
financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement
of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the beginning
and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted
cash or restricted cash equivalents are presented in more than one-line item within the statement of financial position, an entity
shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows.
Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal years beginning
after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently in
the process of evaluating the impact of the adoption of this standard on our financial statements.
In January 2017, the FASB issued ASU 2017-01
("ASU 2017-01"), Business Combinations, which clarifies the definition of a business, particularly when evaluating
whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. The first part of the guidance
provides a screen to determine when a set is not a business; the second part of the guidance provides a framework to evaluate whether
both an input and a substantive process are present. The guidance will be effective after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019. Early adoption is permitted for transactions that have not been reported
in issued financial statements. The Company is currently assessing the impact of this update on the presentation of these financial
statements.
In January 2017, FASB issued ASU No.
2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step 2 of the
goodwill impairment test, which requires determining the implied fair value of goodwill and comparing it with its carrying
amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of a reporting unit
with its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires entities
having one or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting
units, (2) the amount of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU
No. 2017-04 is effective as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the
impact of the adoption of this standard on our financial statements.
F-
46
The Company does not believe that any other
recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying
consolidated financial statements.
Subsequent Events
Management has evaluated subsequent events through the date
of this filing.
On May 2, and May 10, 2017, we borrowed
an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. The two loans totaled $1,500,000.
On May 12, 2017, we issued and sold to
seven accredited investors, including Michael Taglich and Robert Taglich, an aggregate of $3,089,186 principal amount of our Subordinated
Convertible Notes due May 12, 2018, together with warrants to purchase a total of 372,191 shares of common stock, for a total purchase
price of $2,999,198, resulting in gross proceeds of $1,495,870, net of the cancellation of $1,503,328 of indebtedness we owed to
Michael Taglich and Robert Taglich for working capital advances made on May 2 and 10, 2017 together with accrued interest.
On May 19, 2017 we issued and sold to ten
accredited investors, including a partnership in which Michael Taglich and Robert Taglich are partners, an aggregate of $1,069,438
principal amount of our Subordinated Convertible Notes due May 12, 2018, together with warrants to purchase a total of 128,848
shares of common stock, for a total purchase price of $1,038,286. The Subordinated Convertible Notes due May 12, 2018 sold on May
19 2017 and warrants are identical to those sold by the Company on May 12, 2017, except for the date of issuance.
Our Subordinated Convertible Notes due
May 12, 2018 (the "May 2018 Notes") and related warrants were issued for a purchase price equal to 97% of the principal
amount of the May 2018 Notes purchased. The principal amount of each May 2018 Note will be increased by 2% for each 30 days it
remains outstanding commencing August 1, 2017. Upon the occurrence of, and during the continuance of an Event of Default (as defined
in the May 2018 Notes), the May 2018 Notes will accrue late interest at the rate of 10% per annum. Payment of the principal and
accrued interest, if any, on the May 2018 Notes is junior and subordinate in right of payment to the Company's indebtedness
under the Loan Facility.
The principal amount, together with accrued
interest, if any (together, the "Conversion Amount"), of the May 2018 Notes are convertible into shares of common stock
until November 12, 2017 at an initial conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock
splits and certain fundamental transactions, including recapitalizations, mergers and other business combination transactions (the
"Fixed Conversion Price"), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5) Weighted
Average Prices (as defined in the May 2018 Notes) of the common stock during the five consecutive trading day period ending on
the trading immediately preceding the day of a request by the holder for conversion of the May 2018 Notes. The Company has the
right to redeem all, or a portion of (on a pro rata basis), the May 2018 Notes upon written notice to the holders not less than
three trading days prior to the applicable redemption date. Subject to the subordination provisions of the May 2018 Notes, holders
of the May 2018 Notes have the right to request the redemption of their Notes at any time, and following an Event of Default or
in advance of a Change of Control (as defined in the May 2018 Notes).
The warrants are exercisable at an initial
exercise price of $2.49 per share until May 12, 2022, and may be exercised on a cashless basis for a lesser number of shares based
upon prevailing market prices when exercised. The exercise price of the warrants is subject to anti-dilution and other adjustments,
including stock splits, and in the event of certain fundamental transactions such as recapitalizations, mergers and other business
combination transactions. In addition, the exercise price of the warrants will be reset, (x) to the public offering price of the
shares of common stock sold in a public offering of the Company's common stock, if lower than the exercise price then in
effect, provided the Company receives gross process of at least $3,000,000 from the sale of the shares of common stock sold in
that offering, or (y) the Weighted Average Price (as defined in the 2018 Notes) of the common stock on the first date on which
none of the 2018 Notes are outstanding, if lower than the exercise price then in effect, whichever event first occurs.
The Company has paid or agreed to pay
a fee of $191,155 to Taglich Brothers, Inc. and another third party entity for acting as placement agents for with the sale of
the May 2018 Notes and warrants.
F-
47
Note 3.   PROPERTY AND EQUIPMENT
The components of property and equipment
at March 31, 2017 and December 31, 2016 consisted of the following:
March 31,
2017
December 31,
2016
(Unaudited)
Land
$
300,000
$
300,000
Buildings and Improvements
1,672,000
1,650,000
31.5 years
Machinery and Equipment
14,062,000
14,032,000
5 - 8 years
Capital Lease Machinery and Equipment
5,573,000
5,573,000
3 - 5 years
Tools and Instruments
7,554,000
7,520,000
1.5 - 7 years
Automotive Equipment
195,000
195,000
5 years
Furniture and Fixtures
438,000
438,000
5 - 8 years
Leasehold Improvements
969,000
966,000
Term of Lease
Computers and Software
519,000
519,000
4 - 6 years
Total Property and Equipment
31,282,000
31,193,000
Less: Accumulated Depreciation
(19,702,000
)
(18,974,000
)
Property and Equipment, net
$
11,580,000
$
12,219,000
Depreciation expense for the three months
ended March 31, 2017 and 2016 was approximately $728,000 and $904,000, respectively.
Assets held under capitalized lease obligations
are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 2017 and 2016. Accumulated depreciation on these assets was approximately
$2,630,000 and $2,320,000 as of March 31, 2017 and December 31, 2016, respectively.
Note 4. INTANGIBLE ASSETS
The components of intangibles assets consisted of the following:
March 31,
2017
December 31,
2016
(Unaudited)
Customer Relationships
6,115,000
$
6,115,000
5 to 14 years
Trade Names
970,000
970,000
15 to 20 years
Technical Know-how
660,000
660,000
10 years
Non-Compete
150,000
150,000
5 years
Professional Certifications
15,000
15,000
.25 to 2 years
Total Intangible Assets
7,910,000
7,910,000
Less: Accumulated Amortization
(6,460,000
)
(6,156,000
)
Intangible Assets, net
$
1,450,000
$
1,754,000
Amortization expense for the three months
ended March 31, 2017 and 2016 was approximately $304,000 and $320,000, respectively.
F-
48
Note 5.   NOTES PAYABLE AND CAPITAL LEASE
OBLIGATIONS
Notes payable and capital lease obligations consist of the following:
March 31,
2017
December 31,
2016
(Unaudited)
Revolving credit note payable to PNC Bank N.A. ("PNC")
$
18,847,000
$
24,393,000
Term loans, PNC
4,580,000
6,649,000
Capital lease obligations
3,902,000
4,215,000
Related party note payable, net of debt discount
1,846,000
1,086,000
Notes Payable (private placement), net of debt discount
1,811,000
627,000
Subtotal
30,986,000
36,970,000
Less: Current portion of notes and capital obligations
(28,342,000
)
(33,999,000
)
$
2,644,000
$
2,971,000
PNC Bank N.A. ("PNC")
The Company has a Loan Facility with PNC
secured by substantially all of its assets. The Loan Facility has been amended many times during its term. The Loan Facility was
amended in June 2016 (the "Twelfth Amendment") and September 2016 (the "Thirteenth Amendment"). In connection
with the Twelfth Amendment, the Company paid PNC a fee of $100,000 and reimbursed it for the fees and expenses of its counsel.
The Twelfth Amendment provides for a $33,000,000 revolving loan. In addition, in the Twelfth Amendment the four term loans (Term
Loan A, Term Loan B, Term Loan C and Term Loan D) then outstanding were consolidated into a single term loan with the initial principal
amount of $7,387,854. Further, in the Twelfth Amendment the Company acknowledged that there were then outstanding excess advances
under the revolving loan in the amount of $12,500,000.
Under the terms of the Loan Facility, as
amended, the revolving loan now bears interest at (a) the sum of the Alternate Base Rate plus one and three- quarters of one percent
(1.75%) with respect to Domestic Rate Loans; and (b) the sum of the LIBOR Rate plus four and one-half of one percent (4.50%) with
respect to LIBOR Rate Loans. The amount outstanding under the revolving loan, exclusive of the excess advance, was $18,847,000
and $24,393,000, as of March 31, 2017 and December 31, 2016, respectively.
The Loan Facility was further amended pursuant
to the Thirteenth Amendment, to modify the advance rate with respect to our inventory to be the lesser of (i) 75% of the eligible
inventory, an increase from 50%, and (ii) 90% of the liquidation value of the eligible inventory, an increase from 85%, subject
to the inventory sublimit of $12,500,000 and such reserves as PNC may deem proper. In addition, in the Thirteenth Amendment the
lender waived any default resulting from the Company's obligation to comply with the minimum EBITDA covenant for the period
ended June 30, 2016, consented to the issuance of the Company's 12% Subordinated Convertible Notes and the amendment to the
Company's Articles of Incorporation to increase the authorized number of shares of Preferred Stock and Series A Preferred
Stock.
The repayment terms of the Term Loan provided
for in the Twelfth Amendment consist of sixty (60) consecutive monthly principal installments, the first fifty-nine (59) of which
shall be in the amount of $123,133 commencing on the first business day of July, 2016, and continuing on the first business day
of each month thereafter, with a sixtieth (60th) and final payment of any unpaid balance of principal and interest payable on the
last business day of June, 2021.
At the closing of the Twelfth Amendment,
the Company paid $1,500,000 to reduce the outstanding excess under the revolving loan from $12,500,000 to $11,000,000. It also
agreed that the excess advances will be paid down by $100,000 each week commencing the second week after the closing of the Twelfth
Amendment.
To the extent that the Company disposes
of collateral used to secure the Loan Facility, other than inventory, the Company must promptly repay the draws on the credit facility
in the amount equal to the net proceeds of such sale.
The terms of the Loan Facility
require that among other things, the Company maintain a specified Fixed Charge Coverage Ratio and maintain a minimum EBITDA.
In addition, the Company is limited in the amount of capital expenditures it can make. The Company also is limited as to the
amount of dividends it can pay its shareholders, as defined in the Loan Facility. As of March 31, 2017, the Company was not
in compliance with the Fixed Charge Coverage Ratio covenant or minimum EBITDA covenant. The failure to maintain the requisite
Fixed Charge Coverage Ratio and minimum EBITDA constitutes a default under the Loan Facility and PNC at its option may give
notice to the Company that all amounts under the Loan Facility are immediately due and payable. Consequently, all amounts due
under the term loan are also classified as current. The Company has requested a waiver from PNC for the failure to meet the
specified Fixed Charge Coverage Ratio and minimum EBITDA covenant. Because the revolving loans contain a subjective
acceleration clause which could permit PNC to require repayment prior to maturity, all of the loans outstanding with PNC are
classified with the current portion of notes and capital lease obligations.
F-
49
As of March 31, 2017, our debt to PNC in
the amount of $23,427,000 consisted of the revolving credit loan in the amount of $18,847,000 and the term loan in the amount of
$4,580,000. As of December 31, 2016, our debt to PNC in the amount of $31,042,000 consisted of the revolving credit note due to
PNC in the amount of $24,393,000 and the term loan due to PNC in the amount of $6,649,000.
Each day, the Company's cash collections
are swept directly by the bank to reduce the revolving loans and the Company then borrows according to a borrowing base formula.
The Company's receivables are payable directly into a lockbox controlled by PNC (subject to the terms of the Loan Facility). PNC
may use some elements of subjective business judgment in determining whether a material adverse change has occurred in the Company's
condition, results of operations, assets, business, properties or prospects allowing it to demand repayment of the Loan Facility.
As of March 31, 2017, the scheduled future
minimum principal payments for the term loan are as follows, however as discussed above, the balance of the term loan has been
classified as current:
For the twelve months ending
Amount
March 31, 2018
$
1,478,000
March 31, 2019
1,478,000
March 31, 2020
1,478,000
March 31, 2021
146,000
March 31, 2022
4,580,000
Thereafter
(4,580,000
)
Long-term portion
$
—
Interest expense related to these credit
facilities amounted to approximately $720,000 and $435,000 for the three months ended March 31, 2017 and 2016, respectively.
Capital Leases Payable – Equipment
The Company is committed under several
capital leases for manufacturing and computer equipment. All leases have bargain purchase options exercisable at the termination
of each lease. Capital lease obligations totaled $3,902,000 and $4,215,000 as of March 31, 2017 and December 31, 2016, respectively,
with various interest rates ranging from approximately 4% to 14%.
As of March 31, 2017, the aggregate future
minimum lease payments, including imputed interest, with remaining terms of greater than one year are as follows:
For the twelve months ending
Amount
March 31, 2018
$
1,442,000
March 31, 2019
1,359,000
March 31, 2020
1,160,000
March 31, 2021
282,000
March 31, 2022
—
Thereafter
—
Total future minimum lease payments
4,243,000
Less: imputed interest
(337,000
)
Less: current portion
(1,262,000
)
Total Long Term Portion
$
2,644,000
F-
50
Related Party Notes Payable
On March 17, 2017, the Company borrowed
$200,000 and $300,000 from each of Michael Taglich and Robert Taglich, respectively, directors and principal stockholders of our
company, and issued promissory notes in the principal amounts of $200,000 and $300,000 to Michael Taglich and Robert Taglich, respectively,
to evidence our obligation to repay that indebtedness. The notes bear interest at the rate of 7% per annum and are payable on September
17, 2017. Michael and Robert Taglich have the option to convert the unpaid principal amount and accrued interest on the promissory
notes into shares of common stock or other securities of the company which the Company may offer and sell in any public or private
financing (each a "Financing"), on the same terms and conditions as are offered to purchasers in such Financing, or,
if more favorable to us, on such other terms as may be required under the rules of the NYSE MKT, which option they must exercise
by notice to the Company within three business days following the completion of such Financing. Upon completion of any Financing,
upon notice to Michael and Robert Taglich, the Company has the right to convert the unpaid principal amount of those promissory
notes and accrued interest thereon into shares of common stock or other of our securities sold in the Financing on the same terms
and conditions as are offered to purchasers in the Financing, or if more favorable to the Company, on such other terms as may be
required under the rules of the NYSE MKT, which right the Company must exercise within three business days following the completion
of such Financing.
Related Party Notes Payable – Subsequent Events
On May 2, and May 10, 2017, the Company
borrowed an aggregate of $750,000 from each of Michael Taglich and Robert Taglich. This indebtedness, together with accrued interest,
were converted into May 2018 Notes on May 12, 2017.
Private Placements of 8% Subordinated Convertible Notes
From November 23, 2016 through March 21,
2017, the Company received gross proceeds of $4,775,000 from the sale of an equal principal amount of our 8% Subordinated Convertible
Notes (the 8% Notes"), together with warrants to purchase a total of 383,032 shares of our common stock, in private placement
transactions with accredited investors (the "8% Note Offerings"). In connection with the offering of the 8% Notes,
the Company issued 8% Notes in the aggregate principal amount of $382,000 to Taglich Brothers, Inc., placement agent for the 8%
Note Offerings, in lieu of payment of cash compensation for sales commissions, together with warrants to purchase a total of 180,977
shares of our common stock. Of the $5,147,000 principal amount of 8% Notes issued in connection with the offerings of the 8% Notes,
$2,781,000 principal amount is due November 30, 2018 (the "2018 Notes") and $2,366,000 principal amount is due January
31, 2019 (the "2019 Notes"). Payment of the principal and accrued interest on the 8% Notes are junior and subordinate
in right of payment to our indebtedness under the Loan Facility.
Interest on the 2018 Notes is payable on
the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in cash, or
at our option, in additional 2018 Notes, provided that if accrued interest payable on $1,269,000 principal amount of the 2018 Notes
issued in December 2016 is paid in additional 2018 Notes, interest for that quarterly interest payment shall be calculated at the
rate of 12% per annum. Upon the occurrence and continuation of an event of default, interest shall accrue at the rate of 12% per
annum.
On February 28, 2017, the Company issued
an additional $61,596 principal amount of 2018 Notes in payment of accrued interest. As of March 1, 2017, the Company had $5,262,596
principal amount of 8% Notes outstanding, consisting of $2,842,596 principal amount of 2018 Notes and $2,420,000 principal amount
of 2019 Notes.
The outstanding principal amount plus accrued
interest on the 8% Notes is convertible at the option of the holder into shares of common stock conversion prices ranging from
$2.25 to $4.45 per share, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations.
An event of default under the 8%
Notes will occur (i) if the Company fails to make any payment under the 8% Notes within ten (10) days after the date first
due, or (ii) if the Company files a petition in bankruptcy or under any similar insolvency law, makes an assignment for the
benefit of its creditors, or if any voluntary petition in bankruptcy or under any similar insolvency law is filed against the
Company and such petition is not dismissed within sixty (60) days after the filing thereof. Upon the occurrence and
continuation of an event of default, holders of a majority of the outstanding principal amount of the 8% Notes then
outstanding, upon notice to the Company and the holders of the Senior Indebtedness (as defined in the 8% Notes), may demand
immediate payment of the unpaid principal amount of the 8% Notes, together with accrued interest thereon and all other
amounts payable under the 8% Notes, subject to the subordination provisions of the 8% Notes.
F-
51
The exercise price of the warrants issued
in connection with the 8% Note Offerings ranges from $3.00 to $4.53 per share, subject to certain anti-dilution and other adjustments,
including stock splits, distributions in respect of the common stock and in the event of certain fundamental transactions such
as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon
prevailing market prices at the time of exercise. Of these warrants, 320,702 warrants may be exercised until November 30, 2021
and 243,307 warrants may be exercised until January 31, 2022.
Note 6.   STOCKHOLDERS' EQUITY
Issuance of Series A Preferred Stock and Related Financings
On May 25, 2016, and June 1, 2016, the
Company completed a private placement of 700,000 shares of our Series A Preferred Stock for $10.00 per share and received gross
cash proceeds of $5,250,000, net of $1,750,000 principal amount of our promissory notes exchanged by Michael Taglich and Robert
Taglich, two of our principal stockholders, for shares of Series A Preferred Stock. The Company had issued the promissory notes
to Michael Taglich and Robert Taglich for amounts borrowed from September 2015 through May 2016. The September 2015 loan bore interest
at the rate of 4% per annum and was to be paid on September 7, 2016. The other loans bore interest at the rate of 7% per annum
and were to be repaid on June 30, 2016, or, if earlier, upon the sale of the Company's equity from which it derived proceeds
of $1,800,000 or $2,000,000 depending upon the promissory notes issued.
Preferred Stock
The shares of Series A Preferred Stock
have a stated value of $10.00 per share and are initially convertible into shares of common stock at a price of $4.92 per share
(subject to adjustment upon the occurrence of certain events). The dividend rate on the Series A Preferred Stock is 12% per annum,
payable quarterly. The dividend rate increases to 15% per annum if we issue PIK Shares in lieu of payment of cash dividends payable
until June 15, 2018. The number of outstanding shares of Series A Preferred Stock as of June 15, 2018 would increase from 700,000
shares to approximately 1,500,000 shares if we elected to pay all dividends due on the Series A Preferred Stock by issuing PIK
Shares. The dividend rate on the Series A Preferred Stock increases to 16% per annum after June 2018, 19% per annum to the extent
dividends are paid in PIK Shares.
Dividends payable in respect of the Series
A Preferred Stock will reduce the amount of net income, if any, or increase the amount of net loss attributable to holders of common
stock. While the issuance of PIK Shares in payment of all or a portion of the dividends payable in respect of any dividend period
preserves our cash, the increase in the rate of dividend which must be paid when we choose to issue PIK Shares in lieu of cash
dividends further reduces the amount of net income, if any, or increases the amount of net loss attributable to holders of common
stock. In addition, the issuance of PIK Shares will dilute the interests of our common stockholders. Although holders of Series
A Preferred Stock may convert their shares into common stock they are unlikely to convert if the Company is unable to pay cash
dividends and the price of the common stock does not increase significantly above $4.92 per share, the conversion price, for a
sustained period. The Company has the right to redeem the Series A Preferred Stock after May 26, 2018 for a redemption price of
$10.00, plus accrued and unpaid dividends; however, the Company may not have sufficient cash available to effect such redemption.
In connection with the placement we incurred
approximately $606,000 of direct offering costs and $57,000 in legal expenses and granted to the placement agents warrants to purchase
8% of the number of shares of our common stock (113,820 shares) issuable upon conversion of the Series A Preferred Stock sold in
the offering. The warrants are exercisable in whole or in part, at an initial exercise price per share of $6.15, and are exercisable
for cash or on a cashless basis commencing on November 26, 2016 and expiring on May 26, 2021. The exercise price and number of
shares of common stock issuable under the warrants are subject to adjustments for stock dividends, splits, combinations and similar
events.
Of the proceeds generated by the sale of
our shares of Series A Preferred Stock, $1,500,000 was paid to PNC to reduce the amount outstanding under our Loan Facility.
F-
52
In August 2016, the Company
completed the private placement of $2,720,000 principal amount of our 12% Subordinated Convertible Notes due December 31,
2017 (the "12% Notes"), together with warrants to purchase an aggregate of 110,658 shares of common stock, for a
total purchase price of $2,720,000, from which we derived net proceeds of approximately $2,319,800, which was used to pay
down the Company's indebtedness under the Loan Facility and for working capital. The Company also issued to Michael
Taglich a 12% Note in the principal amount of $1,520,713, together with warrants to purchase 61,817 shares of common stock,
upon surrender for cancellation of promissory notes in the aggregate principal amount of $1,500,000, together with accrued
interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,713. The Company had issued the
promissory notes to Michael Taglich for amounts borrowed in August 2016. The promissory notes bore interest at the rate of 7%
per annum and were to be repaid on December 31, 2016, or, if earlier, upon the sale of our equity securities from which we
derived proceeds of $2,000,000. In addition, the Company issued to Robert Taglich a 12% Note in the principal amount of
$4,373, together with warrants to purchase 177 shares of common stock, in consideration of the forgiveness of interest of
$4,373 accrued on notes previously exchanged for Series A Preferred Stock.
The 12% Notes provided for the automatic
conversion of the principal and accrued interest of the 12% Notes into shares of Series A Preferred Stock at a price of $10.00
per share, the stated value of the Series A Preferred Stock, upon the filing of an amendment to the Company's Articles of
Incorporation increasing the number of shares of preferred stock we are authorized to issue from 1,000,000 shares to 3,000,000
shares, including 2,000,000 shares of Series A Preferred Stock (the "Charter Amendment"). The Company issued 438,770
shares of Series A Preferred Stock to the holders of the 12% Notes on November 30, 2016, the date the Company's stockholders
approved the Charter Amendment and the Company filed the certificate of amendment effecting the Charter Amendment with the Office
of the Secretary of State of Nevada. As a result of the automatic conversion of the 12% Notes into shares of Series A Preferred
Stock, no 12% Notes are outstanding.
As compensation for its services as placement
agent for the offering of the 12% Notes, the Company paid Taglich Brothers, Inc. a fee of $295,400 and issued to Taglich Brothers,
Inc. five-year warrants to purchase 68,617 shares of common stock at an initial exercise price of $6.15, subject to certain anti-dilution
and other adjustments, including stock splits, and in the event of certain fundamental transactions such as mergers and other business
combinations.
As of December 31, 2016, the Company had
outstanding 1,202,548 shares of Series A Preferred Stock, including 62,684 shares issued in lieu of payment of cash dividends on
December 15, 2016. We issued an additional 45,106 shares of Series A Preferred Stock on March 15, 2017 in lieu of payment of cash
dividends.
Note 7.   INCOME TAXES
The Company recorded no income tax for
the three months ended March 31, 2017 because the estimated annual effective tax rate was zero. In determining the estimated annual
effective income tax rate, the Company analyzes various factors, including projections of our annual earnings and taxing jurisdictions
in which the earnings will be generated, the impact of state and local income taxes, their ability to use tax credits and net operating
loss carry forwards, and available tax planning alternatives. As of March 31, 2017 and December 31, 2016, the Company provided
a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred
tax assets will not be realized.
The benefit from income taxes for the three months ended March
31, 2016 is set forth below:
2016
(Unaudited)
Current
Federal
$
—
State
22,000
Prior Year Under Accrual
Federal
13,000
Total Current Expense
35,000
Deferred Tax (Benefit)
(691,000
)
Net (Benefit from) Provision for Income Taxes
$
(656,000
)
Note 8.   SALE OF AMK
On January 27, 2017, the Company
sold all of the outstanding shares of AMK to Meyer Tool, Inc. pursuant to a Stock Purchase Agreement dated January 27, 2017
for a purchase price of $4,500,000, net of a working capital adjustment of $(240,000), plus additional quarterly payments,
not to exceed $ 1,500,000, equal to five percent (5%) of Net Revenues of AMK commencing April 1, 2017. The Company recorded a
$451,000 gain on the sale of AMK.
F-
53
Note 9.   LOSS CONTINGENCIES
During 2016, a number of actions were commenced
against the Company by vendors, landlords and former landlords, including a third party claim as a result of an injury suffered
on a portion of a leased property not occupied by the Company. As certain of these claims represent amounts included in accounts
payable they are not specifically discussed herein.
Westbury Park Associates, LLC commenced
an action on or about January 11, 2017 against Air Industries Group in the NYS Supreme Court, County of Suffolk, seeking the recovery
of approximately $31,000 for past rent arrears, and for an unidentified sum representing all additional rent due under a commercial
lease through the end of its term, plus attorney's fees. The additional rent due through the end of the term is approximately
$105,000. The litigation is in the discovery stage and the Company believes there is a meritorious defense to the claim or that
the landlord can and will mitigate its future damages by finding a new tenant.
On January 18, 2017, REP B-2, LLC filed
a petition for a warrant of eviction and a money judgment of approximately $56,000 against Air Industries Group arising from rent
arrears on commercial space. On January 18, 2017, 360 Motor Parkway, LLC filed a petition for a warrant of eviction and a money
judgment of approximately $12,000 against Air Industries Group arising from rent arrears on commercial space. Each proceeding has
resulted in a stipulation of settlement providing monthly repayment schedules to bring those rent arrears current, the last of
which are due on May 1, 2017, at which time the proceedings may be dismissed.
An employee of the Company commenced an
action against, among others, Rechler Equity B-2, LLC and Air Industries Group, in the Supreme Court State of New York, Suffolk
County, seeking compensation in an undetermined amount for injuries suffered while leaving the premises occupied by Welding Metallurgy,
Inc. Rechler Equity B-2, LLC, has served a Third Party Complaint in this action against Air Industries Group, Inc. and Welding
Metallurgy, Inc. The action remains in the early pleading stage. The Company believes it is not liable to the employee and any
amount it might have to pay would be covered by insurance.
Note 10.   SEGMENT REPORTING
In accordance with FASB ASC 280, "Segment
Reporting" ("ASC 280"), the Company discloses financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company follows ASC 280, which establishes
standards for reporting information about operating segments in annual and interim financial statements, and requires that companies
report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes
standards for related disclosures about products and services, geographic areas and major customers.
The Company currently divides its operations
into three operating segments: Complex Machining which consists of AIM and NTW; Aerostructures and Electronics which consists of
WMI, WPI, Miller Stuart (until merged into WMI in May 2017), Eur-Pac, ECC and Compac; and Turbine Engine Components which consists
of Sterling and for the period January 1, 2016, to January 27, 2017, AMK.
The accounting policies of each segment
are the same as those described in the Summary of Significant Accounting Policies. The Company evaluates performance based on
revenue, gross profit contribution and assets employed.
F-
54
Financial information about the Company's
operating segments for the three months ended March 31, 2017 and 2016 are as follows:
Three Months Ended March 31,
2017
2016
(Unaudited)
(Unaudited)
COMPLEX MACHINING
Net Sales
$
9,891,000
$
7,467,000
Gross Profit
2,901,000
1,858,000
Pre Tax (Loss) Income
1,085,000
(400,000
)
Assets
41,940,000
51,076,000
AEROSTRUCTURES & ELECTRONICS
Net Sales
4,320,000
5,160,000
Gross Profit
26,000
948,000
Pre Tax (Loss) Income
(1,279,000
)
(772,000
)
Assets
19,669,000
19,263,000
TURBINE ENGINE COMPONENTS
Net Sales
1,942,000
2,557,000
Gross Profit
(225,000
)
15,000
Pre Tax (Loss) Income
(827,000
)
(914,000
)
Assets
11,233,000
17,247,000
CORPORATE
Net Sales
—
—
Gross Profit
—
—
Pre Tax (Loss) Income
(133,000
)
—
Assets
785,000
534,000
CONSOLIDATED
Net Sales
16,153,000
15,184,000
Gross Profit
2,702,000
2,821,000
Pre Tax (Loss) Income
(1,154,000
)
(2,086,000
)
Benefit from Income Taxes
—
656,000
Net (Loss) Income
(1,154,000
)
(1,430,000
)
Assets
$
73,627,000
$
88,120,000
F-
55
1,293,938
Shares of Common Stock
PROSPECTUS
______ __, 2017
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13.   OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION.
The following table
sets forth the estimated costs and expenses to be incurred by the Registrant in connection with the issuance and distribution of
the securities registered under this Registration Statement. All amounts are estimates except the Securities and Exchange Commission
registration fee.
SEC registration fee
$
212.95
Legal fees and expenses
10,000.00
Accounting fees and expenses
2,500.00
NYSE MKT listing fees
1,500.00
Transfer agent fees and expenses
2,000.00
Printing expenses
2,000.00
Miscellaneous expenses
5,000.00
Total
$
1,787.05
ITEM 14.   INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
Section 78.138 of the
NRS provides that a director or officer will not be individually liable unless it is proven that (i) the director's or officer's
acts or omissions constituted a breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud
or a knowing violation of the law.
Article 9 of our Articles of Incorporation ("Limitation
on Liability") provides as follows:
"Unless otherwise
provided by law, a director or officer is not individually liable to the Corporation or its stockholders or creditors for any damages
as a result of any act or failure to act in his individual capacity as a director or officer unless it is proven that his act or
failure to act constituted a breach of his fiduciary duties as a director or officer and his breach of those duties involved intentional
misconduct, fraud, or a knowing violation of law. If the NRS is amended to further eliminate or limit or authorize corporate action
to further eliminate or limit the liability of directors or officers, the liability of directors and officers of the Corporation
shall be eliminated or limited to the fullest extent permitted by the NRS as so amended from time to time. Neither any amendment
nor repeal of this Article, nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article,
shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director or officer of the
Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision."
Section 78.7502 of the
Nevada Revised Statutes ("NRS") permits a company to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action,
suit or proceeding if the officer or director (i) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner
the officer or director reasonably believed to be in or not opposed to the best interests of the corporation and, if a criminal
action or proceeding, had no reasonable cause to believe the conduct of the officer or director was unlawful.
Section 78.751 of NRS
permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending a civil or criminal
action, suit or proceeding as they are incurred and in advance of final disposition thereof, upon receipt of an undertaking by
or on behalf of the officer or director to repay the amount advanced if it is ultimately determined by a court of competent jurisdiction
that such officer or director is not entitled to be indemnified by the company. Section 78.751 of NRS further permits the company
to grant its directors and officers additional rights of indemnification under its articles of incorporation or bylaws or otherwise.
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1
Section 78.752 of
NRS provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of any
person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the
company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise,
for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer,
employee or agent, or arising out of his status as such, whether or not the company has the authority to indemnify him
against such liability and expenses.
Article 10 of our Articles of Incorporation ("Indemnification")
provides as follows:
"Every person
who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she, or a person with whom he or she is a legal representative,
is or was a director or officer of the Corporation, or who is serving at the request of the Corporation as a director or officer
of another corporation, or is a representative in a partnership, joint venture, trust or other enterprise, shall be indemnified
and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all
expenses, liability and loss (including attorneys' fees, judgments, fines, and amounts paid or to be paid in a settlement)
reasonably incurred or suffered by him or her in connection therewith. The right of indemnification shall be a contract right which
may be enforced in any manner desired by such person. The expenses of officers and directors incurred in defending a civil suit
or proceeding must be paid by the Corporation as incurred and in advance of the final disposition of the action, suit, or proceeding,
under receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by
a court of competent jurisdiction that he or she is not entitled to be indemnified by the Corporation. Such right of indemnification
shall not be exclusive of any other right such directors, officers or representatives may have or hereafter acquire, and, without
limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw,
agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this article.
Without limiting the
application of the foregoing, the Board of Directors may adopt bylaws from time to time with respect to indemnification, to provide
at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the Corporation to purchase
or maintain insurance on behalf of any person who is or was a director or officer of the corporation or who is serving at the request
of the Corporation as an officer, director or representative of any other entity or other enterprise against any liability asserted
against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have
the power to indemnify such person.
Any repeal or modification
of the above provisions of this Article 10, approved by the stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the liability of a director or officer of the Corporation existing as of the time of such
repeal or modification. In the event of any conflict between the above indemnification provisions, and any other Article of the
Articles, the terms and provisions of this Article shall control."
The Company maintains
a director and officer insurance policy on behalf of any person who is or was a director or officer of the Company. Under such
insurance policy, the directors and officers of the Company are insured, within the limits and subject to the limitations of the
policy, against certain expenses in connection with the defense of certain claims, actions, suits or proceedings, and certain liabilities
which might be imposed as a result of such claims, actions, suits or proceedings, which may be brought against them by reason of
being or having been such directors or officers.
Insofar as indemnification
by us for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling the Company
pursuant to provisions of our articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the
SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification by such director, officer or controlling person of us in the successful defense of any action,
suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered,
we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
ITEM 15.   RECENT SALES OF UNREGISTERED SECURITIES.
During the past three
years, the registrant has sold the following securities which were not registered under the Securities Act of 1933, as amended.
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In connection with a
Capital Market Advisory Agreement dated January 1, 2014 pursuant to which Taglich Brothers provides us, on a nonexclusive basis,
business advisory services, we issued to Taglich Brothers warrants to purchase 10,000 shares of Common Stock at an exercise price
of $8.72 per share. The warrants are exercisable at any time prior to May 1, 2021. The issuance of the warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), under Section 4(2)
of the Securities Act. The warrants were endorsed with a legend restricting their transfer except in accordance with the registration
requirements of the Securities Act or an exemption therefrom.
In June 2014 we issued
to Taglich Brothers, placement agent in our public offering of 1,170,000 shares of our common stock completed on June 3, 2014,
warrants to purchase 46,800 shares of common stock. The warrants may be exercised for cash or on a cashless basis at a per share
exercise price equal to $11.25, commencing June 2, 2015 and expiring May 28, 2019. The issuance of the warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), under Section 4(2)
of the Securities Act. The warrants were endorsed with a legend restricting their transfer except in accordance with the registration
requirements of the Securities Act or an exemption therefrom.
On June 4, 2014, we
issued 20,000 shares of common stock to Richard Rand and Peter Rand, the shareholders of Eur-Pac Corporation, in connection with
the acquisition of Eur-Pac Corporation. The issuance and sale of the shares was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), under Section 4 (a)(2) of the Securities Act. The certificates
evidencing the shares were endorsed with a legend restricting their transfer except in accordance with the registration requirements
of the Securities Act or an exemption therefrom.
On March 1, 2015, we
issued 425,005 shares of common stock to the stockholders of The Sterling Engineering Corporation in connection with the acquisition
of Sterling in a merger transaction. The common stock was valued at $9.89 per share, which was the closing share price on February
27, 2015. We also granted 52,000 shares of restricted common stock to two of the principals of Sterling in connection with employment
and non-compete agreements entered into with these two individuals. The issuance of these shares was exempt from the registration
requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The certificates evidencing the shares were endorsed
with a legend restricting their transfer except in accordance with the registration requirements of the Securities Act or an exemption
therefrom.
On May 26, 2016, we
issued and sold a total of 452,250 shares of Series A Preferred Stock to accredited investors pursuant to a Securities Purchase
Agreement dated May 26, 2016 for a purchase price of $10.00 per share. The Company also issued 110,000 shares of Series A Preferred
Stock to Michael N. Taglich and 65,000 shares of Series A Preferred Stock to Robert F. Taglich upon surrender of promissory notes
payable to each of them in the aggregate principal amount of $1,100,000 and $650,000, respectively. Michael N. Taglich and Robert
F. Taglich are directors of the Company and principals of Taglich Brothers We paid the Craig-Hallum Capital Group LLC and Taglich
Brothers, placement agents for the offering of the Series A Preferred Stock, a sales commission of $439,075 and in addition paid
Craig-Hallum Capital Group LLC $113,370 in reimbursement of expenses incurred, including legal fees.
On May 26, 2016, we
issued five-year warrants to purchase 50,996 shares of common stock at an initial exercise price of $6.15 per share to each of
Craig-Hallum Capital Group LLC and Taglich Brothers, placement agents for the offering of the Series A Preferred Stock.
The issuance and sale
of the shares of Series A Preferred Stock were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the shares of Series A Preferred Stock
issued in the Offering are endorsed with a customary Securities Act restrictive legend.
On June 1, 2016, we
issued and sold an additional 72,750 shares of Series A Convertible Preferred Stock to accredited investors, for a purchase price
of $10.00 per share, pursuant to a Securities Purchase Agreement dated May 25, 2016. We paid the placement agents $50,925 in sales
commissions in connection with the sales of the shares.
On June 1, 2016, we
issued to each of Craig-Hallum Capital Group LLC and Taglich Brothers, placement agents for the offering of the Series A Preferred
Stock, five-year warrants to purchase 5,915 shares of common stock at an initial exercise price of $6.15 per share.
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The issuance and sale
of the shares of Series A Preferred Stock and the issuance of the warrants were exempt from registration under Section 4(a)(2)
of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the
shares of Series A Preferred Stock and the warrants were endorsed with the customary Securities Act restrictive legend.
In August 2016, we issued
two promissory notes to Michael N. Taglich in principal amounts of $500,000 and $1,000,000, respectively. The notes bore interest
at the rate of 7% per annum. The principal and interest were payable on December 31, 2016, or earlier upon our receipt of proceeds
from the sale of our equity securities in the aggregate amount of $2,000,000. Michael N. Taglich, a director of our company, is
an accredited investor. The issuance and sale of the notes were exempt from registration under Section 4(a)(2) of the Securities
Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The notes were endorsed with a customary Securities
Act restrictive legend.
In August and September
2016, we issued and sold $4,245,086 aggregate principal amount of our 12% Notes, together with five-year warrants to purchase a
total of 69,025 shares of common stock, to 32 accredited investors for a total purchase price of $4,245,086. We also issued to
Michael N. Taglich a 12% Note in the principal amount of $1,520,703, together with warrants to purchase 61,817 shares of common
stock, upon surrender for cancellation of promissory notes in the aggregate principal amount of $1,500,000, together with accrued
interest thereon and on notes previously exchanged for Series A Preferred Stock of $20,703. In addition, we issued to Robert F.
Taglich a 12% Note in the principal amount of $4,373, together with warrants to purchase 177 shares of common stock, in consideration
of the forgiveness of interest of $4,373 accrued on notes previously exchanged for Series A Preferred Stock. The outstanding principal
amount plus accrued interest on the 12% Notes were convertible at the option of the holder into shares of common stock at an initial
conversion price of $4.92, and were automatically convertible into shares of Series A Preferred Stock at a price equal to $10.00
per share of Series A Preferred Stock upon the filing of a certificate of amendment to our Articles of Incorporation increasing
the number of authorized shares of our Series A Preferred Stock from 900,000 to 2,000,000. The warrants are exercisable until July
31, 2021 at an exercise price of $5.00 per share. We paid Taglich Brothers, placement agent for the offering, a sales commission
of $295,400. In addition, we issued to Taglich Brothers five-year placement agent warrants to purchase a total of 69,025 shares
of common stock at an exercise price of $6.15 per share. The issuance and sale of the 12% Notes and the warrants were exempt from
registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The 12% Notes and
the warrants were endorsed with the customary Securities Act restrictive legend.
On September 15, 2016,
we issued 32,297 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on the 700,000 shares of Series
A Preferred Stock sold in our private placement of Series A Preferred Stock completed in June 2016 for the dividend period ended
September 15, 2016. The issuance of the shares was exempt from registration under Section 4(a)(2) of the Securities Act and Rule
506 of Regulation D promulgated thereunder. The certificates evidencing the shares were endorsed with the customary Securities
Act restrictive legend.
On November 23, 2016,
we issued and sold to Michael N. Taglich, Robert F. Taglich and another accredited investor our 8% Subordinated Convertible Notes
due November 30, 2018 (the "2018 Notes") in the principal amounts of $1,000,000, $100,000, and $300,000, respectively,
together with five-year warrants to purchase a total of 124,444 shares of Common Stock, for a purchase price of $1,000,000, $100,000
and $300,000, respectively. The 2018 Notes have a conversion price of $2.25 per share and the warrants have an exercise price of
$3.00 per share, each of which is subject to certain anti-dilution and other adjustments, including stock splits, and in the event
of certain fundamental transactions such as mergers and other business combinations. The warrants may be exercised until November
30, 2021 and on a cashless basis for a lesser number of shares depending upon prevailing market prices at the time of exercise.
As compensation for
its services as placement agent for the private placement in November 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $112,000. We also issued to Taglich Brothers
a five-year warrant to purchase 62,222 shares of Common Stock. The warrants may be exercised until November 30, 2021, have an
exercise price of $3.00, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain
fundamental transactions such as mergers and other business combinations, and may be exercised on a cashless basis for a lesser
number of shares depending upon prevailing market prices at the time of exercise.
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The issuance and sale
of the 2018 Notes and warrants issued to the purchasers of the 2018 Notes and the placement agent in the November 2016 private
placement of the 2018 Notes were exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation
D promulgated thereunder. The 2018 Notes and the warrants were endorsed with the customary Securities Act restrictive legend.
On November 30, 2016,
we issued a total of 438,770 shares of Series A Convertible Preferred Stock to holders of our 12% Notes upon the automatic conversion
of the principal amount of, and accrued interest on, the 12% Notes at the rate of $10.00 per share. The issuance of the shares
was exempt from registration under Section 3(a)(9) of the Securities Act. The certificates evidencing the shares are endorsed with
the customary Securities Act restrictive legend.
On December 15, 2016,
we issued 31,478 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on our outstanding shares
of series A Preferred Stock for the dividend period ended December 15, 2016. The issuance of the shares was exempt from registration
under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the
shares were endorsed with the customary Securities Act restrictive legend.
On December 22, 2016,
we issued and sold an aggregate principal amount of $1,175,000 of 2018 Notes, together with warrants to purchase an aggregate of
89,359 shares of Common Stock for a total purchase price of $1,175,000 to ten accredited investors, including Michael N. Taglich
and Robert F. Taglich, directors and principal stockholders of our company. Interest on the 2018 Notes is payable on the outstanding
principal amount thereof at the annual rate of 8%, payable quarterly commencing February 28, 2017, in cash, or if we are prohibited
by applicable law or PNC Bank, National Association, our principal lender under our Loan Facility, from paying interest in cash,
or we otherwise elect to do so, we may pay interest at the rate of twelve percent (12%) per annum in the form of additional notes
having the same terms and conditions as the 2018 Notes. The outstanding principal amount plus accrued interest on the 2018 Notes
are convertible at the option of the holder into shares of Common Stock at a conversion price of $2.63 per share. The warrants
are exercisable until November 30, 2021, have an exercise price of $3.00 per share and may be exercised on a cashless basis for
a lesser number of shares depending upon prevailing market prices at the time of exercise.
As compensation for
its services as placement agent for the private placement in December 2016 of the 2018 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2018 Notes in the principal amount of $94,000. We also issued to Taglich Brothers five-year
placement agent warrants to purchase 44,677 shares of Common Stock at an exercise price of $3.00 per share and having the same
terms as the warrants issued to purchasers of the 2018 Notes in the December 2016 private placement.
The 2018 Notes, as well
as the warrants issued to the purchasers of the 2018 Notes and the placement agent in the December 2016 private placement of the
2018 Notes, were issued pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder, and were endorsed with the customary Securities Act legend.
On February 7, 2017
and February 17, 2017, we issued sold an aggregate principal amount of $1,000,000 of our 8% Subordinated Convertible Notes due
January 31, 2019 (the "2019 Notes"), together with warrants to purchase an aggregate of 76,929 shares of Common Stock
for a total purchase price of $1,000,000 to nine accredited investors, including Robert F. Taglich, a director and principal stockholder
of our Company.
Interest on 2019 Notes
is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017, in
cash, or if we are prohibited by applicable law or PNC Bank, National Association, our principal lender under our Loan Facility
from paying interest in cash, or we otherwise elect to do so, we may pay interest at the rate of twelve percent (12%) per annum
in the form of additional notes having the same terms and conditions as the 2019 Notes. The outstanding principal amount plus
accrued interest on the 2019 Notes are convertible at the option of the holder into shares of Common Stock at an initial conversion
price of $3.25, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as mergers and other business combinations, except that the initial conversion price of the Notes issued to
Robert F. Taglich is $3.71. The warrants are exercisable until January 31, 2022, have an exercise price of $4.45 per share, subject
to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such
as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon
prevailing market prices at the time of exercise.
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As compensation for
its services as placement agent for the private placement in February 2017 of the 2019 Notes, we issued to Taglich Brothers, in
lieu of cash payment of sales commissions, 2019 Notes in the principal amount of $80,000 (of which a 2019 Note in the principal
amount of $20,000 has a conversion price of $3.71 per share and a 2019 Note in the principal amount of $60,000 has a conversion
price of $4.45 per share). We also issued to Taglich Brothers five-year placement agent warrants to purchase 29,816 shares of Common
Stock at an exercise price of $4.45 per share having the same terms as the warrants issued to purchasers of the 2019 Notes in the
February 2019 private placement.
The 2019 Notes, as well
as the warrants issued to the purchasers of the 2019 Notes and the placement agent in the February 2017 private placement of the
2019 Notes, were issued pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder, and are endorsed with the customary Securities Act legend.
On February 28, 2017,
we issued 2018 Notes in the aggregate principal amount of $61,264 in lieu of cash payment of accrued interest for the period then
ended. The issuance of the shares was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation
D promulgated thereunder. The certificates evidencing the shares were endorsed with the customary Securities Act restrictive legend.
On March 8, 2017, we
issued 25,000 shares of common stock to Eaton & Van Winkle LLP, our attorneys, in satisfaction of indebtedness having a value
of $111,750 based upon the closing market price of our common stock on February 21, 2017, $4.47, the trading date immediately preceding
the date we agreed to issue the shares in payment of said indebtedness. The shares were issued pursuant to an exemption from registration
afforded by Section 4(a)(2) of the Securities Act, and were endorsed with the customary Securities Act legend.
On March 8, 2017, March
15, 2017 and March 21, 2017, we issued and sold an aggregate principal amount of $1,200,000 of our 2019 Notes, together with warrants
to purchase an aggregate of 92,300 shares of Common Stock for a total purchase price of $1,200,000 to 23 accredited investors,
including Robert F. Taglich, a director and principal stockholder of our company.
Interest on the 2019
Notes is payable on the outstanding principal amount thereof at the annual rate of 8%, payable quarterly commencing May 31, 2017,
in cash, or if we are prohibited by applicable law or PNC Bank, National Association, our principal lender under our Loan Facility,
from paying interest in cash, or we otherwise elect to do so, we may pay interest at the rate of twelve percent (12%) per annum
in the form of additional notes having the same terms and conditions as the 2019 Notes. The outstanding principal amount plus accrued
interest on the 2019 Notes are convertible at the option of the holder into shares of Common Stock at an initial conversion price
of $3.25, subject to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as mergers and other business combinations, except that the initial conversion price of the Notes issued to Robert
F. Taglich is $3.30. The warrants issued to the purchasers of the 2019 Notes have an exercise price of $3.30 per share, subject
to certain anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental transactions such
as mergers and other business combinations, and may be exercised on a cashless basis for a lesser number of shares depending upon
prevailing market prices at the time of exercise. The warrants may be exercised until January 31, 2022.
As compensation for
its services as placement agent for the private placement in March 2017 of the 2019 Notes, we issued to Taglich Brothers, in lieu
of cash payment of sales commissions, 2019 Notes in the principal amount of $96,000 (of which a 2019 Note in the principal amount
of $44,400 has a conversion price of $3.30 per share, a 2019 Note in the principal amount of $43,600 has a conversion price of
$3.78 per share and a 2019 Note in the principal amount of $8,000 has a conversion price of $3.25 per share) and five-year warrants
to purchase a total of 7,386 shares of Common Stock (of which warrants to purchase 3,416 shares have an exercise price of $3.30
per share, warrants to purchase 3,354 shares have an exercise price of $3.78 and warrants to purchase 616 shares have an exercise
price of $4.00). We also issued to Taglich Brothers placement agent warrants to purchase a total of 36,877 shares of Common Stock,
of which warrants to purchase 17,030 shares have an exercise price of $3.30 per share, warrants to purchase 16,770 shares have
an exercise price of $3.78 and warrants to purchase 3,077 shares have an exercise price of $4.00, and having the same terms as
the warrants issued to purchasers of the 2019 Notes in the March 2019 private placement.
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6
The 2019 Notes, as well
as the warrants issued to the purchasers of the 2019 Notes and the placement agent in the March 2017 private placement of the 2019
Notes, were issued pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder, and are endorsed with the customary Securities Act legend.
On March 15, 2017, we
issued 46,010 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on our outstanding shares of
Series A Preferred Stock for the dividend period ended March 15, 2017. The issuance of the shares was exempt from registration
under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the
shares were endorsed with the customary Securities Act restrictive legend.
On March 17, 2017,
we borrowed $200,000 and $300,000 from each of Michael N. Taglich and Robert F. Taglich, respectively, and issued our promissory
notes in the principal amounts of $200,000 and $300,000 to Michael N. Taglich and Robert F. Taglich, respectively, to evidence
our obligation to repay that indebtedness. The notes bear interest at the rate of 7% per annum and are payable on March 17, 2017.
The notes have been amended to provide for the automatic conversion of the indebtedness evidenced thereby into shares of common
stock at a conversion price of $1.50 per share following the stockholder vote upon the Restructuring Transactions at our 2017
Annual Meeting of Stockholders.
Michael N. Taglich and
Robert F. Taglich, directors of our company, are accredited investors. The issuance and sale of the notes were exempt from registration
under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The notes
were endorsed with a customary Securities Act restrictive legend.
On May 12, 2017, we
issued and sold to seven accredited investors, including Michael N. Taglich and Robert F. Taglich, an aggregate of $3,089,186
principal amount of our May 2018 Notes, together with warrants to purchase a total of 372,191 shares of our common stock, for
a total purchase price of $2,999,198, resulting in gross proceeds of $1,495,870, net of the cancellation of $1,503,328 of indebtedness
owed to Michael N. Taglich and Robert F. Taglich for working capital advances made on May 2 and 10, 2017. On May 19, 2017 we issued
and sold to ten accredited investors, including a partnership in which Michael N. Taglich and Robert F. Taglich are partners,
an aggregate of $1,069,438 principal amount of May 2018 Notes, together with warrants to purchase a total of 128,848 shares of
common stock, for a total purchase price of $1,038,286. The principal amount, together with accrued interest, if any (together,
the "Conversion Amount"), of the May 2018 Notes, when issued, were convertible into shares of our common stock until
November 12, 2017 at an initial conversion price of $2.49 per share, subject to anti-dilution and other adjustments for stock
splits and certain fundamental transactions, including recapitalizations, mergers and other business combination transactions
(the "Fixed Conversion Price"), and thereafter at the lower of the Fixed Conversion Price and 75% of the five (5)
Weighted Average Prices (as defined in the May 2018 Notes) of the common stock during the five consecutive trading day period
ending on the trading immediately preceding the day of a request by the holder for conversion of the May 2018 Note. In connection
with the Public Offering, we agreed to amend the terms of the outstanding May 2018 Notes to reduce the conversion price to $1.50
per share. The warrants, when issued, were exercisable at an initial exercise price of $2.49 per share until May 12, 2022, and
may be exercised on a cashless basis for a lesser number of shares based upon prevailing market prices when exercised. The exercise
price of the warrants is subject to anti-dilution and other adjustments, including stock splits, and in the event of certain fundamental
transactions such as recapitalizations, mergers and other business combination transactions. In accordance with terms of the warrants,
the exercise price was reset to $1.50 per share, the public offering price of the shares of common stock sold in the Public Offering.
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7
We paid Roth Capital
Partners LLC $15,000 and have agreed to pay Taglich Brothers $176,155 as sales commissions in connection with the May 2018 Notes
financing. The issuance and sale of the May 2018 Notes and warrants were exempt from registration under Section 4(a)(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The May 2018 Notes and warrants were endorsed
with a customary Securities Act restrictive legend.
On May 31, 2017, we
issued 2018 Notes and 2019 Notes in the aggregate principal amount of $68,539 and $28,285, respectively, in lieu of cash payment
of accrued interest for the period then ended. The issuance of the shares was exempt from registration under Section 4(a)(2) of
the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the shares were endorsed with
the customary Securities Act restrictive legend.
On June 15, 2017, we
issued 46,787 shares of Series A Convertible Preferred Stock in lieu of payment of cash dividends on our outstanding shares of
Series A Preferred Stock for the dividend period ended June 15, 2017. The issuance of the shares was exempt from registration under
Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The certificates evidencing the shares
were endorsed with the customary Securities Act restrictive legend.
On July 12, 2017, we
issued a total of 1,240,605 shares of common stock upon conversion of $1,780,908 aggregate principal amount of May 2018 Notes at
a conversion price of $1.50 per share. The issuance of the shares was exempt from registration under Section 3(a)(9) of the Securities
Act. The certificates evidencing the shares are endorsed with the customary Securities Act restrictive legend.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits
are included as part of this Form S-1. References to "the Company" in this Exhibit List mean Air Industries Group,
a Nevada corporation.
Exhibit No.
Description
1.1
Form of Underwriting Agreement.
2.1
Agreement and Plan of Merger dated July 29, 2013 between Air Industries Group, Inc. and Air Industries Group (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed August 30, 2013).
2.2
Articles of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 28, 2013 (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed August 30, 2013).
2.3
Certificate of Merger between Air Industries Group and Air Industries Group, Inc. filed with the Secretary of State of Nevada on August 29, 2013 (incorporated herein by reference to Exhibit 3.3 to the Company's Current Report on Form 8-K filed August 30, 2013).
3.1
Articles of Incorporation of Air Industries Group (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed August 30, 2013).
3.2
Certificate of Designation authorizing the issuance of the Series A Preferred Stock (incorporated herein by reference to exhibit 3.1 to the Company's Current Report on Form 8-K filed on June 1, 2016).
3.3
Certificate of Amendment to Certificate of Designation increasing number of authorized shares of preferred stock and Series A Preferred Stock (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2016 filed on May 1, 2017).
3.4
Certificate of Amendment to Certificate of Designation providing for the automatic conversion of the outstanding shares of Series A Preferred Stock upon completion of Public Offering, subject to stockholder approval in accordance with the applicable rule of the NYSE MKT, and eliminating liquidation preference and preferential dividend payable to holders of the Series A Stock filed with the Secretary of state of Nevada on July 12, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed July 13, 2017).
3.5
Amended and Restated By-Laws of the Registrant (incorporated herein by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q/A for the period ended March 31, 2017 filed on June 2, 2017).
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Exhibit No.
Description
4.1
Form of specimen common stock certificate (incorporated herein by reference to exhibit 4.1 to the registrant's Registration Statement on Form S-3 (Registration No. 333-191748) filed on August 26, 2014 and declared effective on August 26, 2014).
4.2
Form of Placement Agent's Warrant Agreement (incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed May 29, 2014).
4.3
Form of Warrant issued to Taglich Brothers in connection with Capital Market Advisory Agreement dated as of January 1, 2014 (incorporated herein by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).
4.4
Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 1, 2016).
4.5
Placement Agent Warrant issued to Taglich Brothers in connection with first closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on June 1, 2016).
4.6
Placement Agent Warrant issued to Craig-Hallum Capital Group LLC in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on June 3, 2016).
4.7
Placement Agent Warrant issued to Taglich Brothers in connection with second closing of Series A Preferred Stock Offering (incorporated herein by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed on June 3, 2016).
4.8
Form of Warrant issued to purchasers of 12% Notes in connection with 12% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on August 22, 2016).
4.9
Placement Agent Warrant issued to Taglich Brothers in connection with 12% Note Offering (incorporated herein by reference to Exhibit 10.9 to the Company's Quarterly Report On Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).
4.10
Form of 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 23, 2016).
4.11
Form of Warrant issued to purchasers of the 2018 Notes in connection with 8% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 23, 2016).
4.12
Placement Agent Warrant issued to Taglich Brothers in connection with the 2019 Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on February 16, 2017).
4.13
Form of 8% Subordinated Convertible Note due January 31, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 16, 2017).
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Exhibit No.
Description
4.14
Form of Warrant issued to purchasers of 2019 Notes in connection with the 8% Note Offering (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on February 16, 2017).
4.15
Form of Placement Agent Warrant issued to Taglich Brothers in connection with the 2019 Note Offering (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on February 16, 2017).
4.16
Form of warrant issued to purchasers of the Company's Subordinated Convertible Notes due May 12, 2018 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May 15, 2017).
5.1
Opinion of Eaton & Van Winkle LLP.
Agreements Relating to PNC Loan Facility
10.1
Amended and Restated Revolving Credit, Term Loan and Security Agreement (the "PNC Loan Agreement") dated June 27, 2013 by and among PNC Bank, National Association, as Lender and Agent, and Air Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc. and Air Industries Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 27, 2013).
10.2
Guarantor's Ratification by Air Industries Group, Inc. under PNC Agreement (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed June 27, 2013).
10.3
First Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K").
10.4
Second Amendment to PNC Loan Agreement (incorporated herein by reference from Exhibit 10.23 to the Company's 2013 Form 10-K).
10.5
Amended and Restated Revolving Credit Note issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.24 to the Company's 2013 Form 10-K).
10.6
Second Amendment to Term Note in the principal amount of $1,947,603.50 issued under the PNC Loan Agreement (incorporated herein by reference from Exhibit 10.25 to the Company's 2013 Form 10-K).
10.7
Third Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 2, 2014).
10.8
Sixth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed October 2, 2014).
10.9
Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed October 2, 2014).
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Exhibit No.
Description
10.10
Eighth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 10, 2015).
10.11
Term Note in the principal amount of $3,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed March 10, 2015).
10.12
Tenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 23, 2015).
10.13
Fifth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed November 23, 2015).
10.14
Eleventh Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 12, 2016).
10.15
Sixth Amended and Restated Revolving Credit Note (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed February 12, 2016).
10.16
Twelfth Amendment to PNC Loan Agreement (incorporated herein by reference to exhibit 10.4 to the Company's Current Report on Form 8-K filed on June 1, 2016).
10.17
Term Loan in the principal amount of $7,388,000 (incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed on June 1, 2016).
10.18
Thirteenth Amendment to PNC Loan Agreement (incorporated herein by reference to exhibit 10.4 to the Company's Current Report on Form 8-K filed on September 21, 2016).
10.19
Fourteenth Amendment to PNC Loan Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed January 30, 2017.
10.20
Fifteenth Amendment to PNC Loan Agreement (incorporated herein by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 333-217582) filed on June 19, 2017).
Agreements Relating to Acquisitions
10.21
Stock Purchase Agreement dated as of April 1, 2014 by and among WMI and the shareholders of Woodbine Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 2, 2014).
10.22
Stock Purchase Agreement dated as of June 4, 2014, by and among the Registrant and the shareholders of Eur-Pac Corporation (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 4, 2014).
10.23
Stock Purchase Agreement dated as of October 1, 2014, between the Company and Dynamic Materials Corporation (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed (October 2, 2014).
10.24
Promissory Note of Registrant payable to AMK Welding, Inc. in the principal amount of $2,500,000 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 2, 2014).
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Exhibit No.
Description
10.25
Mortgage and Security Agreement in favor of Dynamic Materials Corporation (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed October 2, 2014).
10.26
Agreement and Plan of Merger dated as of February 27, 2015, by and among the Registrant, SEC Acquisition Corp., The Sterling Engineering Corporation ("Old Sterling") and the shareholders of Old Sterling (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 5, 2015).
10.27
Open End Mortgage Deed and Security Agreement with respect to South Windsor, Connecticut premises (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed March 10, 2015).
10.28
Collateral Assignment of Rents, Leases and Profits with respect to South Windsor, Connecticut premises (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed March 10, 2015).
10.29
Open End Mortgage Deed and Security Agreement with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed March 10, 2015).
10.30
Collateral Assignment of Rents, Leases and Profits with respect to Barkhamsted, Connecticut premises (incorporated herein by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed March 10, 2015).
10.31
Asset Purchase Agreement dated as of August 31, 2013 between the Company, on the one hand, and Compaq Development Corporation, Peter C. Rao and Vito Valenti, the shareholders of Compaq Development Corporation, on the other hand (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 1, 2015).
10.32
Stock Purchase Agreement dated as of January 27, 2017, between Air Industries Group, AMK Welding, Inc., Air Industries Group Poland, LLC and Meyer Tool, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 30, 2017).
Agreements Relating to Real Property
10.33
Contract of Sale, dated as of November 7, 2005, by and between KPK Realty Corp. and Gales Industries Incorporated for the purchase of the property known as 1460 North Fifth Avenue and 1479 North Clinton Avenue, Bay Shore, NY (incorporated herein by reference to Exhibit 10.6 of the Company's Current Report on Form 8-K filed December 6, 2005).
10.34
Real Estate Purchase and Sale Contract dated as of December 7, 2015 for the sale of 283 Sullivan Avenue, South Windsor, CT ("South Windsor Contract") (filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
10.35
First Amendment to South Windsor Contract dated as of January 26, 2016 (filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
10.36
Second Amendment to South Windsor Contract dated as of February 24, 2016 (filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
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Exhibit No.
Description
10.37
Third Amendment to South Windsor Contract dated as of April 7, 2016 (incorporated herein by reference to Exhibit 10.50 to the Company's Current Report on Form 8-K filed on April 13, 2016).
10.38
Lease dated April 11, 2016 for the premises located at 283 Sullivan Avenue, South Windsor, CT (incorporated herein by reference to Exhibit 10.50 to the Company's Current Report on Form 8-K filed on April 13, 2016).
10.39
Real Estate Purchase and Sale Agreement, dated as of December 7, 2015 (incorporated herein by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
10.40
First Amendment to Real Estate Purchase and Sale Agreement dated as of January 26, 2016 (incorporated herein by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
10.41
Second Amendment to Real Estate Purchase and Sale Agreement dated as of February 24, 2016 (incorporated herein by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on April 4, 2016).
10.42
Third Amendment to Real Estate Purchase and Sale Agreement dated as of April 6, 2016 (incorporated herein by reference to Exhibit 10.49 to the Company's Current Report on Form 8-K filed on April, 2016).
10.43
Lease dated April 11, 2016 for the premises located at 283 Sullivan Avenue, South Windsor, CT (incorporated herein by reference to Exhibit 10.50 to the Company's Current Report on Form 8-K filed on April 14, 2016).
Agreements With Officers, Directors and Related Persons
10.44
Capital Market Advisory Agreement dated as of January 1, 2014 between the Registrant and Taglich Brothers (incorporated herein by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).
10.45
Offer Letter to Daniel R. Godin (incorporated herein by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 31, 2015).
10.46
Promissory Note dated as of September 8, 2015 payable to Michael N. Taglich in the principal amount of $350,000 (incorporated herein by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 4, 2016).
10.47
Promissory note dated April 8, 2016 in the principal amount of $350,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.51 to the Company's Current Report on Form 8-K filed on April 13, 2016).
10.48
Promissory note dated April 8, 2016 in the principal amount of $350,000 payable to Robert F. Taglich (incorporated herein by reference to Exhibit 10.52 to the Company's Current Report on Form 8-K filed on April 13, 2016).
10.49
Promissory note in the principal amount of $350,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 10, 2016).
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Exhibit No.
Description
10.50
Promissory note in the principal amount of $350,000 payable to Robert F. Taglich (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 10, 2016).
10.51
Promissory note in the principal amount of $500,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 5, 2016).
10.52
Promissory note in the principal amount of $1,000,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on August 5, 2016).
10.53
Promissory note in the principal amount of $1,000,000 payable to Michael N. Taglich (incorporated herein by reference to Exhibit 10.52 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).
10.54
Amended promissory note in the principal amount of $200,000
payable to Michael N. Taglich.
10.55
Amended promissory note in the principal amount of $300,000 payable
to Robert F. Taglich.
10.56
Form of lock-up agreement with directors, officers and principal
stockholders (see Exhibit A to Exhibit 1.1).
Agreements Relating to Issuance of Securities
10.57
Form of Subscription Agreement, dated as of May 28, 2014 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 29, 2014).
10.58
Placement Agent Agreement, dated as of May 28, 2014, between the Company and Taglich Brothers (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed May 29, 2014).
10.59
Placement Agency Agreement dated May 25, 2016 between the Company, Craig-Hallum Capital Group LLC and Taglich Brothers (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2016).
10.60
Securities Purchase Agreement dated as of May 25, 2016 by and among Air Industries Group and the purchasers named therein (incorporated herein by reference to Exhibit A included in Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2016).
10.61
Registration Rights Agreement (incorporated herein by reference to Exhibit B included in Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 1, 2016).
10.62
Placement Agency Agreement dated August 19, 2016 between the Company and Taglich Brothers (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 22, 2016).
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Exhibit No.
Description
10.63
Securities Purchase Agreement by and among the Company and the purchasers named therein (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on August 22, 2016).
10.64
The Company's 12% Subordinated Convertible Note due December 31, 2017(incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on August 22, 2016).
10.65
Joinder Agreement among the purchasers of the Notes and the Company (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on August 22, 2016).
10.66
Amendment to Registration Rights Agreement (incorporated herein by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed on August 22, 2016).
10.67
The Company's 8% Subordinated Convertible Note due November 30, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 23, 2016).
10.68
Placement Agency Agreement with Taglich Brothers for the offering of the 2018 Notes (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on December 23, 2016).
10.69
Form of Subscription Agreement for the 2019 Notes (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on February 16, 2017).
10.70
Placement Agency Agreement with Taglich Brothers for the offering of the 2019 Notes issued in February 2017 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February 16, 2017).
10.71
Form of Subscription Agreement for the 2019 Notes (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on February 16, 2017).
10.72
Placement Agency Agreement with Taglich Brothers for the offering of the 2019 Notes issued in March 2017 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 22, 2017).
10.73
Securities Purchase Agreement dated May 12, 2017 by and among the Company and the Buyers of the Company's Subordinated Convertible Notes due May 10, 2017 and Warrants (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 15, 2017).
10.74
Form of Subordinated Convertible Note due May 12, 2017(incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 15, 2017).
10.75
Form of lock-up agreement with Selling Stockholders.
Equity Incentive Plans
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Exhibit No.
Description
10.76
2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-191560) filed on October 4, 2013).
10.77
2015 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-206341) filed on August 13, 2015).
10.78
10.79
2016 Equity Incentive Plan (incorporated herein by reference
        to Exhibit 10.9 to the Company's Quarterly Report On Form 10-Q for the quarterly period ended September 30, 2016 filed on
        November 14, 2016).
2017 Equity Incentive Plan.
14.1
Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the Company's Registration Statement on Form SB-2 (Registration No. 333-144561) filed July 13, 2009 and declared effective July 27, 2009).
21.1
Subsidiaries (incorporated herein by reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 19, 2017).
23.1
Consent of Eaton & Van Winkle LLP (included in Exhibit 5.1)
23.2
Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C.
24.1
Power of Attorney (included in signature page)
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That, for the purpose
of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) To remove from registration
by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(3) For determining
liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser
and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary
prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing
prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The portion of
any other free writing prospectus relating to the offering containing material information about the undersigned registrant or
its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.
(4) The undersigned registrant hereby
undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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(5) Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a
claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(6) For purposes of
determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared
effective.
For the purpose of determining
any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(7) Each prospectus
filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first
use.
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SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hauppauge, New York, on this 26th day of July, 2017.
AIR INDUSTRIES GROUP
By:
/s/ Peter D. Rettaliata
Peter D. Rettaliata
Acting President and Chief Executive Officer (Principal Executive Officer)
By:
/s/ Michael Recca
Michael Recca
Chief Financial Officer (Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned
officers and directors of Air Industries Group., a Delaware corporation, do hereby constitute and appoint Peter D. Rettaliata and
Michael Recca, and each of them, his true and lawful attorney-in-fact and agent with full power and authority to do any and all
acts and things and to execute any and all instruments which said attorney and agent, determine may be necessary or advisable or
required to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules or regulations or requirements
of the Securities and Exchange Commission in connection with this Registration Statement. Without limiting the generality of the
foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers
and directors in the capacities indicated below to this Registration Statement, and to any and all instruments or documents filed
as part of or in conjunction with this Registration Statement or amendments or supplements thereof, including post-effective amendments,
to this Registration Statement or any registration statement relating to this offering to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and each of the undersigned hereby ratifies and confirms that said attorney
and agent, shall do or cause to be done by virtue thereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF,
each of the undersigned has executed this Power of Attorney. In accordance with the requirements of the Securities Act of 1933,
as amended, this registration statement was signed by the following persons on July 26, 2017 in the capacities indicated.
Signature
Capacity
/s/ Peter D. Rettaliata
Peter D. Rettaliata
Acting President, CEO  and a Director
/s/ Michael Recca
Michael Recca
Chief Financial Officer
/s/ Michael N. Taglich
Michael N. Taglich
Chairman of the Board
/s/ Seymour G. Siegel
Seymour G. Siegel
Director
/s/ Robert F. Taglich
Robert F. Taglich
Director
/s/ David  J. Buonanno
David  J. Buonanno
Director
/s/ Robert Schroeder
Robert Schroeder
Director
/s/ Michael Brand
Michael Brand
Director