P&F INDUSTRIES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Forward-looking statement

The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides
a safe harbor for forward-looking statements made by or on behalf of P&F
Industries, Inc. and subsidiaries ("P&F", or the "Company"). P&F and its
representatives may, from time-to-time, make written or verbal forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and in its reports to shareholders.
Generally, the inclusion of the words "believe," "expect," "intend," "estimate,"
"anticipate," "will," "may," "would," "could," "should," and their opposites and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. Any
forward-looking statements contained herein, including those related to the
Company's future performance, are based upon the Company's historical
performance and on current plans, estimates and expectations. All
forward-looking statements involve risks and uncertainties. These risks and
uncertainties could cause the Company's actual results for all or part the 2022
fiscal year and beyond to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company for a number of
reasons including, but not limited to:

? Risks related to the global outbreak of COVID-19 and other public health risks

seizures;

? Risks associated with overseas sourcing;

? Disruption in global capital and credit markets;

 ? Importation delays;


 ? Customer concentration;

? Unforeseen inventory adjustments or changes in buying habits;

? Market acceptance of products;

 ? Competition;


 ? Price reductions;

? Exposure to fluctuations in energy prices;

? Exposure to fluctuations in the cost of raw materials;

? The strength of the retail economy in United States and abroad;

? Adverse changes in exchange rates;

? Interest rate;

? Debt and debt service requirements;

? Borrowing and compliance with covenants under our credit facility;

? Impairment of long-lived assets and goodwill;

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Management report and analysis of the financial situation and operating results – continued

? Retention of key personnel;

? acquisition of businesses;

? Regulatory environment;

? Litigation and insurance;

? The threat of terrorism and the resulting political and economic instability

uncertainty; and

? Business disruptions or other costs associated with information technology,

cyberattacks, system implementations, data privacy or catastrophic loss,


and those other risks and uncertainties described in its Annual Report on Form
10-K for the year ended December 31, 2021 ("2021 Form 10-K"), its Quarterly
Reports on Form 10-Q, and its other reports and statements filed by the Company
with the Securities and Exchange Commission. Forward-looking statements speak
only as of the date on which they are made. The Company undertakes no obligation
to update publicly or revise any forward-looking statement, whether as a result
of new information, future developments or otherwise. The Company cautions you
against relying on any of these forward-looking statements.

OVERVIEW

During the third quarter of 2022, the significant factors that impacted our results of operations were:

? The Jackson Gear Company business acquisition in early 2022.

? Low customer mix at Hy-Tech, which negatively impacted its gross margin.

? Recent economic uncertainty has negatively impacted earnings and revenues.

? Persistent global supply chain issues.

OUR BUSINESS

Florida Pneumatic

Florida Pneumatic directly, and through its wholly-owned subsidiaries Exhaust
Technologies Inc. ("ETI"), Universal Air Tool Company Limited ("UAT"), and Jiffy
Air Tool, Inc. ("Jiffy") imports, manufactures, and markets pneumatic hand tools
of its own design, primarily to the retail, industrial, automotive, and
aerospace markets. Its products include sanders, grinders, drills, saws, and
impact wrenches. These tools are similar in appearance and function to electric
hand tools, but are powered by compressed air, rather than by electricity or a
battery. Air tools, as they are more commonly referred to, generally offer
better performance, and weigh less than their electrical counterparts. Florida
Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand
tools, most of which are sold at prices ranging from $50 to $1,000, under the
names "Florida Pneumatic", "Universal Tool", "Jiffy Air Tool", AIRCAT, NITROCAT,
as well as under the trade names or trademarks of several private label
customers. These products are sold to retailers, distributors, manufacturers and
private label customers through in-house sales personnel and manufacturers'
representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold
primarily to the automotive service and repair market ("automotive market").
Users of Florida Pneumatic's hand tools include industrial maintenance and
production staffs, do-it-yourself mechanics, professional automobile mechanics
and auto body personnel. Jiffy manufactures and distributes pneumatic tools and
components primarily to aerospace manufacturers.

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OUR BUSINESS - Continued

Hy-Tech

Hy-Tech designs, manufactures, and markets industrial tools, systems, gearing,
accessories and a wide variety of replacement parts under various brands
including ATP, NUMATX, and Thaxton. Hy-Tech produces and sells heavy-duty
pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters,
hydrostatic test plugs, impact sockets and custom gears, with prices ranging
from $300 to $42,000.

Hy-Tech’s “Engineered Solutions” products are sold directly to Original Equipment Manufacturers (“OEMs”) and industry-branded products are sold through an extensive network of specialist industrial distributors servicing production power, petrochemical, aerospace, construction, railroad, mining, shipbuilding and fabricated metal industries. Hy-Tech works directly with its industrial customers, designing and manufacturing products from finished components to complete turnkey systems for sale under their own brands.

Hy-Tech's Power Transmission Group, or PTG, is a custom gear, gearbox, and power
transmission system manufacturer. In addition to manufacturing a broad range of
standard and custom gears for manufacturers in a wide variety of industries, PTG
reverse engineers existing gears as well as designs new gears, utilizing
state-of-the-art technologies, including 3D imaging and Gleason Gear modeling
software.

Effective January 15, 2022, through a wholly-owned subsidiary of Hy-Tech, we
acquired substantially all the non-real estate assets comprising the business of
Jackson Gear Company ("JGC"), a Pennsylvania-based corporation that manufactures
and distributes custom gears and power transmission gear products. (See Note -2
for additional information). This business was consolidated into PTG. We believe
this acquisition will provide added market exposure into the larger gears
market.

ECONOMIC MEASURES

Much of our business is driven by the ebbs and flows of the general economic
conditions in both the United States and, to a lesser extent, abroad. We focus
on a wide array of customer types including, but not limited to, large
retailers, aerospace manufacturers, large and small resellers of pneumatic tools
and parts, and automotive related customers. We tend to track the general
economic conditions of the United States, industrial production, and general
retail sales.

A key economic measure relevant to us is the cost of the raw materials in our
products. Key materials include metals, especially various types of steel and
aluminum. Also important is the value of the United States Dollar ("USD") in
relation to the Taiwanese dollar ("TWD"), as we purchase a significant portion
of our products from Taiwan. Purchases from Chinese sources are made in USD;
however, if the Chinese currency, the Renminbi ("RMB"), were to be revalued
against the USD, there could be a negative impact on the cost of our products.
Additionally, we closely monitor the fluctuation in the Great British Pound
("GBP") to the USD, and the GBP to TWD, both of which can have an impact on the
consolidated results.

We consider tariffs a key economic measure, as a significant portion of products
imported by Florida Pneumatic and to a lesser degree, Hy-Tech, are subject to
these tariffs. Further, we monitor transportation costs, specifically ocean
freight rates, which since early 2021 have become a key area.

Lastly, the cost and availability of a quality labor pool in the countries where
products and components are manufactured, both overseas as well as in the United
States, could materially affect our overall results.

OPERATIONAL MEASURES

Key operating measures we use to manage our operations are orders; shipments;
development of new products; customer retention; inventory levels and
productivity. These measures are recorded and monitored at various intervals,
including daily, weekly and monthly. To the extent these measures are relevant,
they are discussed in the detailed sections below.

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FINANCIAL MEASURES

Key financial measures we use to evaluate the results of our business include
various revenue metrics; gross margin; selling, general and administrative
expenses; earnings before interest and taxes; earnings before interest, taxes,
depreciation and amortization; operating cash flows and capital expenditures;
return on sales; return on assets; days' sales outstanding and inventory turns.
These measures are reviewed at monthly, quarterly and annual intervals and
compared to historical periods as well as to established objectives. To the
extent that these measures are relevant, they are discussed in detail below.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America ("US GAAP").
Descriptions of these policies are discussed in the 2021 Form 10-K, and in the
notes to these consolidated financial statements. Certain of these accounting
policies require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities, revenues and expenses. On an
ongoing basis, we evaluate estimates, including, but not limited to those
related to bad debts, inventory reserves, goodwill and intangible assets,
warranty reserves, taxes and deferred taxes. We base our estimates on historical
data and experience, when available, and on various other assumptions that are
believed to be reasonable under the circumstances, the combined results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. As future events
and their effects cannot be determined with precision, actual results could
differ significantly from those estimates and assumptions. Significant changes,
if any, in those estimates resulting from continuing changes in the economic
environment will be reflected in the consolidated financial statements in future
periods.

TRENDS AND UNCERTAINTIES

BOEING
The Federal Aviation Administration ("FAA") and the European Union Aviation
Safety Agency ("EASA") have lifted the grounding of the 737 MAX, however, China,
which is a large market for Boeing, has not lifted the grounding on the 737 MAX
aircraft. Boeing is currently holding completed 737 MAX aircraft destined for
Chinese carriers. As a result of the aforementioned, and airline companies
limiting deliveries of new aircraft, we believe production at Boeing of its 737
MAX aircraft is likely to remain below the production levels that existed prior
to the grounding of certain Boeing aircraft and the COVID-19 pandemic.

INTERNATIONAL SUPPLY CHAIN

During the third and fourth quarters of 2021, and early 2022, we encountered
severe delays in receiving inventory from our Asian suppliers, which led to
intermittent shortages of inventory. It should be noted however that the
international supply chain crisis has, as of late, begun to ease somewhat.
Lastly, our ocean freight costs, which increased in some cases five-fold during
the latter half of 2021 and for much of 2022, have begun to decline, but still
well in excess of pre-pandemic levels. This trend of higher costs and delayed
deliveries has continued for most of 2022. We believe the major factors driving
the above include:

 ? Increased price of fuel;

? Shortage of shipping containers;

? Congestion in the ports of Asia and United States; and

? Shortage of truck drivers in United States.

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INTERNATIONAL SUPPLY CHAIN ​​- Continued

At the present time, we believe the above-mentioned supply chain disruptions
will likely continue during the remainder of 2022. While we believe that most of
these related costs associated with the items above have been, or will be,
passed on to our customers throughout 2022, there is no assurance that any
additional cost increases can be passed on in the future.

DOMESTIC TRANSPORT COSTS

Due to the shortage of truckers in the U.S., there has been both difficulty in
moving goods from the ports to our facilities as well as arranging for pickups
to deliver to our customers. In addition, we have seen an increase in the costs
for these transportation services. It is unclear when or if this situation will
abate. As such, these issues will affect the Company for the foreseeable future
impacting our overall margins and possibly depressing sales.

IMPACT OF INFLATION/GEOPOLITICAL ISSUES

Increasing prices, most notably in freight/transportation, the cost of raw
materials and labor had a material effect on our results of operations during
the three and nine-month periods ended September 30, 2022. We believe that the
current and projected significant levels of inflation will continue to adversely
impact our operating costs. As such, at the present time, we are unable to
reasonably estimate the impact these issues will have on our results of
operations for the remainder of 2022 and beyond.

During the three and nine month periods ended September 30, 2022we do not believe we have been directly impacted materially by RussiaUkraine conflict.

TECHNOLOGIES

We believe that over time, several newer technologies, and features will have a
greater effect on the market for our traditional pneumatic tool offerings. So
far, the greatest impact has been on the automotive aftermarket with the advent
of advanced cordless operated tools. Currently, we do not offer a cordless tool
to the automotive aftermarket. However, with respect to the industrial market,
we have developed for one of our largest OEM customers a tool mechanism that is
incorporated into a major line of their cordless power tools.  These tools have
been in full production with our supplied system for several years and our sales
of this product have continued to grow over that time.  We continue to analyze
the practicality of developing or incorporating newer technologies in our tool
platforms for other markets as well.  This includes adding our internally
developed mechanisms to existing cordless power sources as well as producing
complete cordless tool systems.

Other than the aforementioned, or matters that may be discussed below, there are
no major trends or uncertainties that had, or we could have reasonably expected
to have a material impact on our revenue, nor was there any unusual or
infrequent event, transaction or any significant economic change that materially
affected our results of operations.

Unless otherwise stated elsewhere in the MD&A, we believe that our relationships with our major customers and suppliers remain satisfactory.

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RESULTS OF OPERATIONS

REVENUE

The tables below provide an analysis of our net revenues for the three and nine month periods ended September 30, 2022 and 2021:

Consolidated

                              Three months ended September 30,
                                                          Increase
                         2022            2021             $          %
Florida Pneumatic    $  9,906,000    $  9,607,000    $   299,000     3.1 %
Hy-Tech                 4,610,000       3,378,000      1,232,000    36.5
Consolidated         $ 14,516,000    $ 12,985,000    $ 1,531,000    11.8 %


                               Nine months ended September 30,
                                                          Increase
                         2022            2021             $          %
Florida Pneumatic    $ 32,853,000    $ 31,221,000    $ 1,632,000     5.2 %
Hy-Tech                13,494,000       9,299,000      4,195,000    45.1
Consolidated         $ 46,347,000    $ 40,520,000    $ 5,827,000    14.4 %


Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within
the pneumatic tool market; Automotive, Retail, Aerospace and Industrial. It also
generates revenue from its Berkley products line, as well as a line of air
filters and other OEM parts ("Other").

                                      Three months ended September 30,
                         2022                         2021                Increase (decrease)
                             Percent of                    Percent of
                Revenue        revenue        Revenue        revenue          $            %
Automotive    $ 3,110,000           31.4 %  $ 3,168,000          33.0 %  $   (58,000)     (1.8) %
Retail          2,779,000           28.0      3,222,000          33.5       (443,000)    (13.7)
Industrial      1,305,000           13.2      1,257,000          13.1          48,000       3.8
Aerospace       2,538,000           25.6      1,832,000          19.1         706,000      38.5
Other             174,000            1.8        128,000           1.3          46,000      35.9
Total         $ 9,906,000          100.0 %  $ 9,607,000         100.0 %  $    299,000       3.1 %


                                        Nine months ended September 30,
                         2022                           2021                 Increase (decrease)
                              Percent of                     Percent of
                Revenue         revenue        Revenue         revenue           $             %
Automotive    $ 10,845,000           33.0 %  $ 11,053,000          35.4 %  $    (208,000)    (1.9) %
Retail          10,625,000           32.3      10,775,000          34.5         (150,000)    (1.4)
Industrial       4,416,000           13.5       3,919,000          12.6           497,000     12.7
Aerospace        6,531,000           19.9       5,094,000          16.3         1,437,000     28.2
Other              436,000            1.3         380,000           1.2    

56,000 14.7 Total $32,853,000 100.0% $31,221,000 100.0% $1,632,000 5.2%

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RESULTS OF OPERATIONS – (Continued)

REVENUES – Continued

Florida Pneumatic

When comparing the three-month periods ended September 30, 2022, and 2021, the
most significant change in Florida Pneumatic's revenue occurred within its
stronger gross margin Aerospace product line, which had a 38.5% increase this
quarter over the same three-month period in 2021.  This improvement is in both
commercial aircraft and defense-related customers.  We believe the primary cause
for the decline in Retail revenue is the result of recent economic conditions,
which has slowed end user demand at the retail level, causing our customer to
lower its purchases during the third quarter. Our Automotive revenue declined
1.8% compared to the same period a year ago, due to changes in both economic and
competitive factors. Lastly, we believe the automotive sector will continue to
be adversely affected by the current sluggish economic market conditions.

The 28.2%, or $1,437,000 increase in Florida Pneumatic's Aerospace revenue
during the nine-month period ended September 30, 2022, compared to the same
period in the prior year, is the most significant factor in analyzing the
overall improvement in Florida Pneumatic's year-to-date revenue.  This
improvement was being driven by increased orders from both the commercial and
military markets. Its Industrial revenue for the nine-month period ended
September 30, 2022, grew 12.7% over the same period in 2021, due primarily to
slightly improved supply chain conditions, price increases, and better
economic/sector conditions, which occurred during the early part of this year.
Our nine-month 2022 Automotive revenue is down slightly, compared to the same
period in 2021. As noted above, we believe this sector will continue to be
adversely affected by the current sluggish economic market conditions.

Hy Tech

Hy-Tech designs, manufactures, and sells a wide range of industrial products
including tools, parts, accessories and sockets which are categorized as ATP for
reporting purposes. In addition to Engineered Solutions, products and components
manufactured for other companies under their brands are included in the OEM
category in the table below. PTG revenue is comprised of products manufactured
and sold by Hy-Tech's gear business. NUMATX, Thaxton and other peripheral
product lines, such as general machining, are reported as Other.

                                 Three months ended September 30,
                   2022                         2021                Increase (decrease)
                        Percent of                   Percent of
           Revenue       revenue        Revenue       revenue           $            %
OEM      $ 2,187,000          47.4 %  $ 1,668,000          49.4 %  $    519,000      31.1 %
ATP          490,000          10.6        751,000          22.2       (261,000)    (34.8)
PTG        1,693,000          36.8        882,000          26.1         811,000      92.0
Other        240,000           5.2         77,000           2.3         163,000     211.7
Total    $ 4,610,000         100.0 %  $ 3,378,000         100.0 %  $  1,232,000      36.5 %


                                  Nine months ended September 30,
                    2022                         2021                 Increase (decrease)
                         Percent of                   Percent of
           Revenue        revenue        Revenue       revenue            $             %
OEM      $  6,693,000          49.6 %  $ 4,688,000          50.4 %  $    2,005,000     42.8 %
ATP         2,178,000          16.1      2,242,000          24.1          (64,000)    (2.9)
PTG         4,216,000          31.3      2,132,000          22.9         2,084,000     97.7
Other         407,000           3.0        237,000           2.6           170,000     71.7
Total    $ 13,494,000         100.0 %  $ 9,299,000         100.0 %  $    4,195,000     45.1 %


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RESULTS OF OPERATIONS – (Continued)

REVENUES – Continued

Hy-Tech – Continued

A key factor driving the 36.5% increase in Hy-Tech's total fiscal third quarter
of 2022, compared to the same period in the prior year was the acquisition of
the JGC business that occurred in early 2022, which, contributed significantly
to the PTG revenue improvement of $811,000. (See Note 2- Acquisition, for
further discussion related to this acquisition).  Additionally, Hy-Tech's OEM
revenue continued to strengthen, recording a net 31.1% increase over the prior
year. This improvement is due primarily to increased shipments to a major OEM
customer.  Further, during this quarter, other revenue increased due to a large
one-time order for its Thaxton products. Partially offsetting the above its ATP
product sales declined. As noted in prior filings, we believe that its ATP
products continue to be price-challenged by off-shore suppliers.

Hy-Tech's nine-month, year-over-year growth essentially tracks its third quarter
results.  The JGC business acquisition resulted in PTG revenue growth.
Additionally, continued revenue growth in the OEM line was primarily the result
of expanded sales opportunities with a major customer. As noted above, the key
component to Hy-Tech's other revenue was due to a large one-time order for
its
Thaxton products.

GROSS MARGIN/PROFIT

                                          Three months ended September 30,           Increase (decrease)
                                             2022                  2021             Amount              %
Florida Pneumatic                      $       4,113,000     $       3,381,000    $   732,000           21.7 %
As percent of respective revenue                    41.5 %                35.2 %          6.3 %  pts
Hy-Tech                                $         734,000     $         593,000    $   141,000           23.8
As percent of respective revenue                    15.9 %                17.6 %        (1.7) %  pts
Total                                  $       4,847,000     $       3,974,000    $   873,000           22.0 %
As percent of respective revenue                    33.4 %                

30.6% 2.8% points


The 6.3 percentage point improvement in Florida Pneumatic's gross margin was due
to price increases, which were put in place to partially offset rising material,
labor and other costs, as well as an increase in its higher margin Aerospace
revenue. Additionally, a decline in ocean freight costs during the third quarter
of 2022 and a stronger U.S. Dollar to the TWD contributed to Florida Pneumatic's
gross margin improvement this quarter, compared to the same period in 2021.

The

a stronger gross margin led to a 21.7% increase in its quarterly gross profit.

Hy-Tech's gross profit declined 1.7 percentage points this quarter, compared to
the same three-month period in 2021, due primarily to increased revenue
attributable to low margin customers and product mix during the third quarter of
2022. Additionally, its PTG product line under absorbed its manufacturing
overhead costs during the third quarter of 2022, as it is going through the
process of integrating the JGC acquisition and its customer base.

                                          Nine months ended September 30,          Increase (decrease)
                                             2022                 2021            Amount              %
Florida Pneumatic                      $     12,834,000     $     11,746,000    $ 1,088,000            9.3 %
As percent of respective revenue                   39.1 %               37.6 %          1.5 %  pts
Hy-Tech                                $      2,160,000     $      1,712,000    $   448,000           26.2
As percent of respective revenue                   16.0 %               18.4 %        (2.4) %  pts
Total                                  $     14,994,000     $     13,458,000    $ 1,536,000           11.4 %
As percent of respective revenue                   32.4 %               33.2 %        (0.8) %  pts


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RESULTS OF OPERATIONS – Continued

GROSS MARGIN/PROFIT – Continued

Florida Pneumatic's gross margin strengthened by 1.5 percentage points and its
gross profit increased nearly $1.1 million, when comparing the nine-month
periods ended September 30, 2022 and 2021.  Factors affecting these nine-month
results were primarily customer and product mix.

Similar to the discussion above, the primary causes for the decline in Hy-Tech's
nine-month period ended September 30, 2022, as compared to the gross margin for
the same period in the prior year include under-absorption of PTG manufacturing
overhead and customer/product mix.  In an effort to improve the current year's
gross margin, we have increased selling prices, wherever possible, particularly
for products that were most significantly impacted by raw material and freight
costs that Hy-Tech was forced to absorb throughout the year.  Additionally, we
are in the process of completing the integration of the JGC business acquisition
that occurred during the first quarter of this year.  The integration is taking
longer than expected and will continue well into 2023.  We believe the
completion of the integration of the JGC business into the facility in
Punxsutawney, PA will result in improved manufacturing productivity. Lastly,
combined with recent price increases, we believe Hy-Tech's overall gross margin
will begin to improve in 2023.

SELLING, GENERAL AND ADMINISTRATIVE FEES

Selling, general and administrative expenses ("SG&A") include salaries and
related costs, commissions, travel, administrative facilities costs,
communications costs and promotional expenses for our direct sales and marketing
staff, administrative and executive salaries and related benefits, legal,
accounting, and other professional fees as well as general corporate overhead
and certain engineering expenses.

During the third quarter of 2022, our general and administrative expenses were $5,084,000compared to
$4,734,000 incurred during the same three-month period in 2021. The main components of the net increase are as follows:

Our compensation expense has increased $373,000. Compensation expense is made up of

base salaries and wages, accrued performance-based incentive bonuses and

payroll taxes and associated benefits. Several factors have contributed

i) to this increase, of which the staff added within the framework of the JGC

acquisition, salary increase mainly related to retention incentives and

annual salary adjustments and a net increase in company-wide salaries

cumulative bonuses/incentives/performance.

ii) We experienced increases this quarter, compared to the same quarter in 2021 in

professional fees of $69,000.

Our variable expenses, which include, among other things, commissions,

iii) transport, advertising and travel and entertainment costs have decreased

$95,000.

Our total nine-month 2022 SG&A was $15,736,000compared to $15,183,000 incurred during the same period of the previous year. The key elements of net change are:

Compensation expenses increased $597,000. Compensation expense includes

base salaries and wages, performance-based incentive bonuses and

payroll taxes and associated benefits. Several factors have contributed

i) to this increase, of which the staff added within the framework of the JGC

acquisition, salary increase mainly related to retention incentives and

    annual wage adjustments and increases in companywide
    bonus/incentive/performance accruals.


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Management report and analysis of the financial situation and operating results – continued

RESULTS OF OPERATIONS – Continued

SELLING, GENERAL AND ADMINISTRATIVE FEES – Continued

Professional fees and expenses have increased $350,000mainly for legal reasons,

accounting and other costs incurred in connection with the acquisition of JGC.

ii) Other expenses contributing to the increase in professional fees included

ongoing cybersecurity/prevention costs, recruitment costs and legal fees

associated with regulatory initiatives.

Our variable expenses have decreased $352,000. The drivers of this decline were

 iii) significantly lower advertising costs at Florida Pneumatic, caused by a
      change in a distribution channel strategy.


     Our computer-related expenses declined $293,000, when comparing the

nine-month periods ended September 30, 2022 and 2021. During the second

iv) quarter of 2021, we have committed approximately $288,000 costs related to

May 2021 ransomware attack in our subsidiary Florida Pneumatic, where no

costs were incurred in the second quarter of 2022.

v) Finally, temporary labor and stock-based compensation expenses increased $50,000

and $37,000respectively.

OTHER EXPENSES (INCOME)

Other expense (income) consists primarily of adjustments to the fair value of
certain assets, partially offset by the gain recognized during the three-month
period ended September 30, 2022, as the result of the early termination of a
real property lease. (See Note 1).

On April 20, 2020, we received a Paycheck Protection Program ("PPP") loan, in
the amount of $2,929,000. Under the terms of the Coronavirus Aid, Relief, and
Economic Security Act, ("CARES Act"), as amended, we were eligible to apply for
forgiveness for all or a portion of the PPP loan.  In February 2021, we filed an
application for forgiveness with the lender, who approved this submission and
submitted the application for forgiveness to the SBA. On June 9, 2021, we were
advised that the SBA had approved our PPP loan forgiveness application and as
such, the PPP loan and interest were forgiven in its entirety.  Accordingly, the
lender applied the funds and paid off PPP loan principal in its entirety and
interest in full. In accordance with current accounting guidance this
forgiveness of debt and related accrued interest was accounted for as Other
Income in 2021.

INTEREST EXPENSE (INCOME)

                                                     Three months ended September 31,           Increase
                                                        2022                  2021           Amount       %
Interest expense attributable to:
Short-term borrowings                             $         102,000      $        10,000    $ 92,000    920.0 %
Amortization expense of debt issue costs                      4,000        
       4,000           -        -
Total                                             $         106,000      $        14,000    $ 92,000    657.1 %


                                                     Nine months ended September 30,         Increase (decrease)
                                                       2022                  2021             Amount          %
Interest expense attributable to:
Short-term borrowings                             $       239,000      $          28,000    $   211,000      753.6 %
PPP loan                                                        -               (19,000)         19,000      100.0
Amortization expense of debt issue costs                   12,000          
      12,000              -         NA
Other                                                     (7,000)                      -        (7,000)         NA
Total                                             $       244,000      $          21,000    $   223,000    1,061.9 %


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Management report and analysis of the financial situation and operating results – continued

RESULTS OF OPERATIONS – Continued

INTEREST EXPENSES (INCOME) – Continued

Our average short-term borrowings during the three and nine-month periods ended
September 30, 2022, increased significantly, when compared to the same periods
in 2021. This increase was due primarily to our decision to increase safety
stock levels of inventory, due primarily to delays and other supply chain
issues, and the purchase and related costs associated with the acquisition in
the first quarter of 2022 of the JGC business. Further, our borrowings increased
to support the working capital needs as a result of significant revenue growth.
Additionally, the Applicable Margins, as defined in the Credit Agreement with
Capital One bank, NA, also increased. See Note 9-Debt for further discussion.

As previously reported, during the second quarter of 2021, we applied for and were granted forgiveness of the PPP loan. Accordingly, we have recorded the reversal of related interest expense.

Loan issue costs are linked to an amendment to the Credit Agreement.

No depreciable loan issue costs were incurred with Amendment No. 9 or Amendment No. 10 to the Credit Agreement.

Other interest relates to interest recognized in respect of federal income tax refunds received during the second quarter of 2022.

INCOME TAXES

At the end of each interim reporting period, we compute an effective tax rate
based upon our estimated full year results. This estimate is used to determine
the income tax provision or benefit on a year-to-date basis and may change in
subsequent interim periods. Accordingly, the effective tax rates for the three
and nine-month periods ended September 30, 2022, were an income tax benefit of
31.5%, and 12.8%, respectively, compared to a tax benefit of 12.8% and of 23.9%
for the same three and nine-month periods in 2021. The effective tax rates for
all periods presented were impacted primarily by state taxes, and non-deductible
expenses. Impacting 2021's effective tax benefit was the enactment of the CARES
Act.  Under the terms of the CARES Act, we applied for and were approved to
treat the gain on the forgiveness of the PPP loan as non-taxable income.
Accordingly, the gain resulting from the forgiveness of the PPP loan was not
included in the computation of the 2021 effective tax rate.

CASH AND CAPITAL RESOURCES

We monitor such metrics as days' sales outstanding, inventory requirements,
inventory turns, estimated future purchasing requirements and capital
expenditures to project liquidity needs, as well as evaluate return on assets.
Our primary sources of funds are operating cash flows, existing working capital
and our Revolver Loan ("Revolver") with our Bank.

We assess our liquidity and financial stability through various measures, some of which are presented in the following table:

                         September 30, 2022      December 31, 2021
Working capital         $         22,125,000    $        24,598,000
Current ratio                      2.47 to 1              3.04 to 1
Shareholders' equity    $         42,525,000    $        43,840,000


Credit facility

Our Credit Facility is discussed in detail in Note 9 to our Consolidated
Financial Statements. Discussed therein, we and the Bank entered into an
amendment that, among other things, increased the Revolver borrowing commitment
by $2,000,000 to $18,000,000 through June 30, 2022.  We believe the return to
the $16,000,000 maximum Revolver borrowing amount will not impact future
operations.

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Management report and analysis of the financial situation and operating results – continued

RESULTS OF OPERATIONS – Continued

CASH AND CAPITAL RESOURCES – Continued

To September 30, 2022there was $7,200,000 available to us as part of our Revolver arrangement.

Should the need arise whereby the current Credit Agreement is insufficient; we
believe that the current Agreement could be expanded, and/or we could obtain
additional funds based on the value of our real property.

Cash flow

For the nine-month period ended September 30, 2022, cash provided by operating
activities was $1,305,000, compared to cash used by operating activities during
the nine-month period ended September 30, 2021, of $1,610,000.  At September 30,
2022, our consolidated cash balance was $410,000, compared to $539,000 at
December 31, 2021. We operate under the terms and conditions of the Credit
Agreement.  As a result, all domestic cash receipts are remitted to Capital One
lockboxes and therefore does not represent cash on hand.

Our total debt to total book capitalization (total debt divided by total debt
plus equity) on September 30, 2022, was 16%, compared to 11.6% on December 31,
2021.

During the nine-month period ended September 30, 2022, we completed the JGC
acquisition, with a purchase price of $2,300,000, plus acquisition expenses that
included among other things, legal, accounting, and relocation expenses. (See
Note 2).

During the nine-month period ended September 30, 2022, we used $1,222,000 for
capital expenditures, compared to $428,000 during the same period in the prior
year.  Capital expenditures currently planned for the remainder of 2022 are
approximately $1,000,000, which we expect will be financed through the Credit

Ease.

The bulk of these planned capital expenditures will be for new metal cutting equipment, tooling and information technology hardware and software.

Our liquidity and capital comes primarily from our credit facility, described in Note 9 – Debt, to our consolidated financial statements, and cash from operations.

Customer concentration

Refer to Note 1 – Business and Summary of Accounting Policies – Customer Concentration for a detailed discussion.

NEW ACCOUNTING PRONOUNCEMENTS

No new accounting standards or pronouncements were issued during the three and nine month periods ended September 30, 2022that applied to us.

We do not believe that any recently issued, but not yet effective accounting
standard, if adopted, will have a material effect on our consolidated financial
statements.

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