Business Overview

We design and manufacture high-performance servo-valves (“servo-control business”) and are a strategic partner in the aerospace industry. Our servo-control valves play a key role in supporting the manufacturing of commercial airplanes, including narrowbody and widebody aircraft and business jets. We have long-term customer contracts resulting from being a trusted partner in safety-critical, high-temperature, and high-vibration environments. Our products are sold to the commercial aerospace, government, medical, and industrial markets.

The Company has organized its business into a single reportable segment, the servo-control business, which reflects the financial information and reports used by our management, specifically the Chief Executive Officer.

The commercial aerospace market, while still recovering from supply chain disruptions, has shown signs of progress and increased certainty of airframe manufacturers’ plane deliveries. The industry continues to benefit from strong demand for air travel, ongoing fleet modernization, and advances in aircraft design and production.

Our business development strategy focuses on expanding business in primary markets, such as commercial aviation, while exploring new opportunities in markets like energy and industrials as part of our growth strategy. We also aim to expand our services in the defense sector, strategically aligning with the increasing demand for modernizing and renewing military fleets.

Management’s Discussion and Analysis

The first quarter of 2025 marked a solid start to the year for the Company, reflecting improved industry conditions and the successful execution of our strategic initiatives. We experienced a notable increase in revenue, driven by robust demand in both commercial and defense sectors. Gross profit margins continued to improve, benefiting from enhanced operational efficiencies and a more favorable product mix. While Selling, General & Administrative (SG&A) expenses rose slightly due to expenses associated with the engagement of an investment bank to review strategic alternatives for the Company, as well as proxy solicitation costs, our disciplined operating cost management ensured that operating income expanded at a healthy rate. Net income also saw a substantial uptick, supported by improved operating performance and a stable interest rate environment.

Results of Operations

The following table compares the Company’s Consolidated Statements of Operations data for the three-month periods ended March 31, 2025, and 2024:

(dollars in thousands)	2025	% of Sales	2024	% of Sales	2025 vs 2024
	Dollars		Dollars		$ Change	% Change
Revenues	$11,703	100.0%	$10,446	100.0%	$1,257	12.0%
Costs of goods sold	9,343	79.8%	8,711	83.4%	632	7.3%
Gross profit	2,360	20.2%	1,735	16.6%	625	36.0%
Selling, general and administrative	2,118	18.1%	2,018	19.3%	100	5.0%
Operating income (loss)	242	2.1%	(283)	(2.7)%	525	185.5%
Interest & other expense, net	97	0.8%	83	0.8%	14	16.9%
Income (loss) before income taxes	145	1.2%	(366)	(3.5)%	511	139.6%
Income taxes	-	0.0%	-	0.0%	-	0.0%
Income (loss) from continuing operations	$145	1.2%	$(366)	(3.5)%	$511	139.6%

Revenue For the three-month period ended March 31, 2025, our revenue increased by approximately $1,257,000, or 12.0%, compared to the same period in 2024. This growth was driven by price increases of approximately $451,000 and volume increases of approximately $763,000, partially offset by unfavorable sales mix of approximately $32,000. Foreign sales reached approximately $3,460,000 for the three-month period ended March 31, 2025, compared to $2,660,000 for the same period in 2024, an increase of approximately $800,000, or 30.1%.

Gross Profit/Margin Gross profit increased approximately $625,000, or 36.0%, for the three-month period ended March 31, 2025, when compared to the same period in 2024, resulting in a gross margin of 20.2% compared to a margin of 16.6% for the same period in 2024. The gross profit growth was driven primarily by higher volume and price increases, while the gross margin improvement was driven by price and improved operational efficiencies, slightly offset by unfavorable product mix.

Selling, General and Administrative (“SG&A”) SG&A expenses for the three-month period ended March 31, 2025 of approximately $2,118,000 increased $100,000, or 5.0%, when compared to $2,018,000 during the same period in 2024. The increase was driven by higher professional and legal fees related to the incremental cost of investment bank advisory services for our review of strategic alternatives and increased legal and proxy solicitation costs associated with the 2025 annual meeting of shareholders.

Operating Income (Loss) Operating income of approximately $242,000 for the three-month period ended March 31, 2025 improved by approximately $525,000 when compared to an operating loss of ($283,000) during the same period in 2024. This improvement was primarily driven by the revenue and gross profit growth combined with gross margin improvement and cost management.

Interest and Other Expense For the three-month period ended March 31, 2025, other interest and other expense increased by approximately $14,000, or 16.9%, compared to the same period in 2024. The increase was driven by higher utilization of our asset-based line of credit to support working capital needs following lower sales volumes in the prior quarter.

Income (Loss) from Continuing Operations before Income Taxes For the three-month period ended March 31, 2025, income from continuing operations before income taxes was $145,000, an increase of approximately $511,000, or 139.6%, compared to a loss from continuing operations before income taxes of ($366,000) during the same period in 2024. This turnaround was primarily driven by higher revenue, stronger operating performance, and improved cost management.

Income Taxes There was no income tax expense recorded for the three-month periods ended March 31, 2025, and 2024, resulting in an effective tax rate of 0% for both three-month periods. The Company has recorded a full valuation allowance against deferred tax assets to the extent they are not able to be offset by future reversing temporary differences.

Income (Loss) from Continuing Operations net of Tax Income from continuing operations of $145,000 for the three-month period ended March 31, 2025 improved by approximately $511,000 when compared to a loss from continuing operations of ($366,000) for the same period in 2024 due to the reasons noted above.

Liquidity and Capital Resources

(in thousands)	2025	2024
CASH FLOW DATA:
Net Cash Flows from:
Operating Activities	$(1,589)	$413
Investing Activities	$(52)	$(152)
Financing Activities	$1,598	$(94)
Discontinued Operation Activities	$(31)	$(126)
FINANCIAL POSITION:
Working Capital	$21,078	$21,481
CAPITAL EXPENDITURES:	$(69)	$(152)

Operating Activities: Cash used by operating activities of ($1,589,000) for the three-month period ended March 31, 2025 represents a decrease in cash flow from operations of ($2,002,000) when compared to cash provided by operations of $413,000 during the same period in 2024. The use of cash in the current period is due primarily to the increase in accounts receivable offset by a slight decrease in inventories.

Investing Activities: We used approximately $(52,000) for investing activities during the three-month period ended March 31, 2025, and used approximately $(152,000) during the same period in 2024. The investing activities were used for capital expenditures (machinery and equipment and building improvements).

Financing Activities: Cash provided by financing activities of $1,598,000 was driven primarily by advances from our line of credit (net of payments) of approximately $1,598,000 during the three-month period ended March 31, 2025.

Discontinued Operation Activities: Cash used in discontinued operating activities of $31,000 for the three-month period ended March 31, 2025 primarily reflects operating losses related to maintenance costs and property taxes on a building held for sale.

Ongoing Liquidity Considerations: The significant improvement in operating results compared to the prior year and the availability of funding from our credit facility provide us with adequate working capital and sufficient liquidity to fund our operations. However, our ability to maintain sufficient liquidity is highly dependent upon achieving our expected operating results.

Management Summary Our first quarter results reflect the execution of our growth strategy, enhancing profitability, and building a stronger foundation for sustainable profitability going forward. We remain committed to executing our strategic initiatives that drive sustainable growth through operational execution, operational efficiencies, and financial discipline.

Looking ahead, as we continue to review strategic alternatives, we are optimistic about the continued growth prospects in the aerospace and defense sectors. Our strategic positioning and commitment to excellence position us well to capitalize on opportunities and deliver value to our stakeholders.