FICTIONAL EXAMPLE - FOR AUDIT TRAINING PURPOSES ONLY Minutes Board of Directors Meeting Apex Industrial Fabrication, Inc. Date: Wednesday, April 23, 2025 Time: 8:30 AM Central Time Location: Hybrid meeting, 1840 Foundry Road, Dayton, Ohio, and Microsoft Teams Present: I Eleanor Grant, Chair of the Board Marcus Lee, Chief Executive Officer and Director Priya Natarajan, Audit Committee Chair Daniel Ortiz, Compensation Committee Chair Linda Carver, Governance Committee Chair Robert Hale, Director Sofia Klein, Director Thomas Reilly, Director Angela Moore, Director Regrets: Calvin Brooks, Director Officers and Staff: James Whitaker, Chief Financial Officer Alicia Moreno, Chief Operating Officer Harold Chen, General Counsel and Corporate Secretary Bethany Pike, Vice President, Sales Karen Wu, Controller Eric Holloway, Vice President, Supply Chain Maya Fields, Vice President, Human Resources Nolan Price, Director of Information Technology Guests: Samantha Cho, Partner, Parkview & Lorne LLP, External Counsel Gregory Hart, Managing Director, Midwest Commercial Bank Recorder: Harold Chen, General Counsel and Corporate Secretary Call to Order: at 8:33 AM by presiding officer Eleanor Grant. The Chair confirmed that a quorum was present. The Chair reminded participants that the purpose of the meeting was to review operating results for the first quarter, approve financing and capital expenditure matters, review committee reports, and discuss strategic and operational risks affecting the Company. II Acceptance of Agenda Moved by: Priya Natarajan / Seconded by: Sofia Klein THAT the Board accepts the agenda for today's meeting. CARRIED III Board Meeting Minutes from February 26, 2025 The Corporate Secretary noted that draft minutes were circulated on March 5, 2025. One correction was proposed to clarify that the new robotic welding cells approved in February were expected to be placed in service in the fourth quarter of 2025, not the third quarter. Moved by: Robert Hale / Seconded by: Daniel Ortiz THAT the amended Board meeting minutes of February 26, 2025 are adopted. CARRIED IV Chief Executive Officer's Report - Marcus Lee reported that the Company recorded strong order activity in March from transportation, industrial equipment, and energy customers. Backlog at March 31, 2025 was approximately $118.4 million compared with $96.7 million at December 31, 2024. Management noted that two large customer programs contain customer acceptance provisions tied to final dimensional testing and field performance. The CEO stated that the sales team has been instructed not to promise delivery dates that manufacturing cannot meet. - The CEO reported that Falcon AgriSystems, the Company's largest customer, asked Apex to accelerate shipment of $7.8 million of chassis assemblies before June 30, 2025. Several directors asked whether all tooling, inspection, and acceptance requirements would be complete before shipment. Management responded that the commercial terms are still being negotiated, and that legal and finance will review the accounting implications before any shipments are billed. - Management discussed continuing pressure from imported components and electronic controls. One supplier in Taiwan missed March delivery commitments following port congestion and a quality hold at its plant. The Company used premium freight of approximately $420,000 during the quarter to meet customer delivery commitments. The COO indicated that not all such costs are expected to be recoverable from customers. - The CEO stated that Apex is in discussions with Steel Ridge Components, LLC, a privately held machining company located in Indiana. The potential acquisition would add CNC milling capacity and provide a second source for several high-margin product lines. The Board agreed that management may continue due diligence, but no binding offer may be submitted without further Board approval. The CEO noted that Steel Ridge has common ownership with a minority shareholder of Apex, and the Governance Committee will review potential conflict matters. - The CEO reported that morale at the Dayton plant has improved after the new shift premium was implemented, but overtime remains elevated. The Company continues to rely on temporary labor for finishing and packing. The COO noted that quality rework hours were higher than plan in March and that the Quality Department is preparing a root-cause report. V Financial Report - James Whitaker presented unaudited financial results for the quarter ended March 31, 2025. Net sales were $54.6 million, compared with $47.9 million in the prior-year quarter. Gross margin declined to 18.2% from 21.0%, primarily due to unfavorable steel usage variances, premium freight, warranty costs, and lower absorption at the Columbus finishing facility. - The CFO reported that accounts receivable at March 31, 2025 was $38.2 million, representing 63 days sales outstanding. Approximately $4.6 million was more than 90 days past due. The largest past due balance relates to Great Lakes Rail Equipment, which is disputing performance penalties on a December shipment. Management believes the customer will pay once replacement brackets are delivered, but the Controller noted that the reserve will be reassessed at April month-end. - Inventory increased to $61.3 million at March 31, 2025 from $52.8 million at December 31, 2024. The CFO attributed the increase to safety stock purchases, partially completed jobs for Falcon AgriSystems, and electronic control units purchased before supplier price increases. Priya Natarajan asked whether the inventory reserve reflects slow-moving parts related to discontinued forklift programs. The Controller responded that the reserve methodology is being updated to incorporate current backlog and engineering change notices. - The CFO reported that management identified approximately $2.1 million of inventory assigned to legacy part numbers for the discontinued H-900 forklift program. Management is negotiating with a customer to use some of the parts for aftermarket service orders. The COO stated that scrap values would be significantly lower than recorded cost if no aftermarket demand materializes. - Cash and revolver availability at March 31, 2025 totaled $14.2 million. Management expects liquidity to tighten during the second quarter due to inventory purchases and the timing of collections from two large customers. The CFO stated that the Company is in compliance with its senior credit facility covenants as of March 31, 2025, but the fixed charge coverage ratio is expected to have limited cushion at June 30, 2025 unless operating cash flow improves. - Gregory Hart from Midwest Commercial Bank joined the meeting for this portion and summarized proposed amendments to the Company's credit agreement. The amendments would temporarily increase the borrowing base advance rate on eligible inventory from 50% to 55%, increase the annual capital expenditure basket by $3.0 million, and require monthly reporting of customer concentration, aged receivables, and inventory reserves. Directors asked whether the bank would require any additional collateral or owner guarantees. Mr. Hart stated that the bank does not currently require guarantees but will require quarterly field exams. Moved by: Priya Natarajan / Seconded by: Thomas Reilly THAT the Board authorizes management to negotiate and execute an amendment to the senior credit facility with Midwest Commercial Bank on terms substantially consistent with those presented, provided that final documents are reviewed by General Counsel and the Audit Committee Chair. CARRIED [Page 1 of 5] VI Financial Report, Continued - The CFO reported that the 2025 forecast has been revised. Management now expects full-year revenue of $232 million to $244 million and EBITDA of $19 million to $22 million. The prior forecast was $240 million to $252 million of revenue and EBITDA of $24 million to $27 million. The reduction reflects customer timing changes, quality rework, and premium logistics costs. - Management presented proposed changes to standard costs effective July 1, 2025. The Controller explained that the Company's current standard costs do not reflect recent supplier price increases, higher direct labor rates, and expected scrap rates. The Board discussed whether delaying the update until July could overstate margins during the second quarter. The CFO responded that variances are reviewed monthly and that the finance team will evaluate whether additional reserves or disclosures are required. - Priya Natarajan asked whether any material weaknesses or significant deficiencies have been identified by management. The Controller reported that the finance team experienced a delay in reconciling inventory subledger quantities to the general ledger after the March cycle count. Management attributed the delay to the new warehouse scanning process and an open interface issue in the ERP system. The CFO stated that no material misstatement had been identified, but additional manual reconciliations are being performed. - The CFO reported that the Company capitalized $1.9 million of costs related to the ERP stabilization project and the new welding automation cells during the quarter. The Audit Committee Chair asked management to provide a schedule separating internal labor, software configuration, training, maintenance, and repair costs before the next Audit Committee meeting. - The CFO stated that no goodwill impairment indicators were identified for the first quarter. Robert Hale asked whether the revised forecast and lower gross margins create any impairment indicators for the Columbus facility long-lived assets. Management responded that the matter will be evaluated in connection with the second quarter forecast update. VII Operations Report - Alicia Moreno presented operations results. Safety performance improved with a total recordable incident rate of 1.9, compared with 2.7 in the prior-year period. Two minor laceration incidents occurred in March. The COO reported that OSHA completed an unannounced inspection after an anonymous complaint regarding lockout/tagout procedures on press brake line 4. Management has not yet received a formal citation. External counsel advised the Board that any citation or proposed penalty should be assessed for disclosure and accrual matters when received. - The COO reported that the Columbus finishing facility continues to operate below target utilization due to customer engineering changes and labor shortages. Management is evaluating whether to consolidate certain powder-coating activities into the Dayton plant after the new line is installed. The Board requested a cost-benefit analysis, including severance, lease termination costs, asset transfer costs, and potential impairment matters. - Management presented the status of the robotic welding cell project approved in February. Total approved spending was $8.5 million. Commitments signed to date are $6.2 million. Management expects total spending to be $9.3 million due to foundation reinforcement and electrical service upgrades. The CFO stated that the project remains eligible for the existing capital expenditure basket only if the credit agreement amendment is approved. Several directors expressed concern that scope changes were authorized before full Board approval. Moved by: Robert Hale / Seconded by: Angela Moore THAT the Board approves an increase in the robotic welding cell project budget from $8.5 million to a maximum of $9.3 million, subject to monthly reporting to the Operations Committee and confirmation by the CFO that the amended credit facility permits such spending. CARRIED - The COO reported that the Company expects to launch production for the Orion Power Systems enclosure program in July 2025. The contract requires Apex to purchase dedicated fixtures and customer-specific tooling. The customer will reimburse up to $1.4 million of tooling costs if launch milestones are met. Management is reviewing whether tooling reimbursements should be recorded as revenue, reduction of cost, or deferred income. - The COO discussed excess scrap on the aluminum enclosure line. Scrap expense was approximately $690,000 above budget in the first quarter. Management has hired an outside engineering consultant to assess cutting tolerances and supplier specifications. The Board asked management to determine whether any supplier recovery or customer claim is available. VIII Sales and Customer Matters - Bethany Pike reported that sales concentration remains elevated. The top five customers represented approximately 62% of first-quarter revenue. Falcon AgriSystems and Orion Power Systems represented 19% and 14%, respectively. Directors discussed the risk of production scheduling pressure from the Falcon program and potential dependence on customer forecasts. - The VP Sales reported that Great Lakes Rail Equipment has withheld payment on three invoices totaling $3.2 million, claiming that brackets delivered in December did not meet vibration tolerances. Management disagrees with the customer's position but has shipped replacement brackets for field testing. General Counsel stated that the sales agreement contains limitation-of-liability language, but the customer has threatened to offset alleged field repair costs against future purchases. - The VP Sales reported that the Company issued $1.1 million of sales credits during the quarter, including $640,000 related to late delivery penalties and $310,000 related to dimensional defects. The Controller stated that the revenue team is reviewing whether additional variable consideration should be constrained for open customer claims. [Page 2 of 5] IX Audit Committee Report - Priya Natarajan reported that the Audit Committee met on April 15, 2025 with management, internal audit, and the external auditors. The Committee reviewed the first-quarter close timeline, liquidity forecast, open accounting matters, and the external audit plan for the 2025 fiscal year. - The Audit Committee discussed revenue recognition for contracts with customer acceptance clauses, tooling reimbursements, late delivery penalties, and volume rebates. The Committee asked management to prepare a contract review matrix for the Falcon AgriSystems, Orion Power Systems, and Great Lakes Rail Equipment arrangements. - The Committee reviewed management's update on cybersecurity. Nolan Price reported that a phishing incident in February resulted in one purchasing employee entering credentials into a fraudulent website. Management disabled the account within two hours and found no evidence of data exfiltration. The IT Director noted that the incident exposed weaknesses in multi-factor authentication for remote supplier portals. Management is accelerating the implementation of privileged access monitoring and periodic access reviews. - Internal audit reported that purchase order approval thresholds were not consistently enforced for emergency maintenance and premium freight purchases. Three sample items exceeded approval limits but were approved after receipt of goods or services. Management stated that revised workflows will be implemented in the ERP system during May. - The Audit Committee Chair reported that the external auditors requested minutes from Board and committee meetings, signed bank amendments, the updated inventory reserve analysis, the Great Lakes customer correspondence, and management's documentation of the Steel Ridge potential acquisition. The Committee directed management to provide requested materials on a timely basis. - The Committee discussed the Company's whistleblower hotline. Two calls were received since January 1, 2025. One concerned alleged favoritism in overtime assignments and was closed by Human Resources. The second alleged that a production supervisor instructed employees to record rework hours to new jobs instead of warranty jobs to protect departmental metrics. Management is investigating the allegation and will report findings to the Audit Committee. - The Committee reviewed the proposed appointment of Parkview & Lorne LLP as special counsel for the OSHA matter and potential acquisition due diligence. Moved by: Priya Natarajan / Seconded by: Linda Carver THAT the Board ratifies the Audit Committee's engagement of Parkview & Lorne LLP as special counsel for regulatory and transaction matters, with fees not to exceed $275,000 without further approval. CARRIED X Governance Committee Report - Linda Carver reported that the Governance Committee reviewed director independence and conflict disclosures. The Committee noted that Steel Ridge Components, LLC has indirect common ownership with Apex minority shareholder Wexford Capital Partners. Wexford has a Board observer seat but is not represented as a voting director. The Committee recommended that any transaction with Steel Ridge be reviewed by disinterested directors and supported by independent valuation work. - General Counsel stated that the Company has not yet completed annual related-party questionnaires for all officers and directors. The Chair directed management to complete the questionnaires by May 9, 2025 and present a summary to the Governance Committee. - The Committee recommended updates to the delegation-of-authority policy. The current policy allows the COO to approve emergency operating expenditures up to $500,000 without prior Board approval. Given the recent capital project scope changes and premium freight spending, the Committee recommended adding reporting requirements for cumulative emergency spending above $1.0 million per quarter. Moved by: Linda Carver / Seconded by: Angela Moore THAT the Board approves the updated delegation-of-authority policy as presented, including quarterly reporting of emergency spending and required preapproval for cumulative project scope changes exceeding 10% of the original approved budget. CARRIED XI Legal and Compliance Report - Harold Chen reported that the Company is defending two product warranty claims relating to hydraulic lift assemblies sold during 2023 and 2024. One claim has been submitted to the Company's insurer subject to a $500,000 deductible. External counsel stated that the matter is at an early stage and that management should continue to reassess potential loss exposure as information develops. - General Counsel reported that the Ohio Environmental Protection Agency issued a notice of violation to the Dayton plant regarding wastewater discharge testing. Management believes the matter resulted from a calibration error in a third-party testing device. The Company has retained an environmental consultant and submitted a corrective action plan. Possible penalties are not yet known. - General Counsel reported that one former sales manager filed a claim alleging unpaid commissions on contracts signed before termination. The claimed amount is approximately $380,000 plus legal fees. Management disputes the claim because certain shipments were delayed or cancelled after termination. - The Board discussed document preservation protocols for the Great Lakes Rail Equipment dispute, the OSHA matter, the environmental notice, and the former employee commission claim. External counsel reminded management not to delete email, inspection records, test results, production logs, or customer correspondence related to these matters. [Page 3 of 5] XII Human Resources and Compensation Committee Report - Daniel Ortiz reported that the Compensation Committee reviewed management's proposed 2025 incentive plan. The plan includes targets for EBITDA, free cash flow, safety, on-time delivery, and quality. Directors discussed whether the plan could unintentionally encourage shipment of products before customer acceptance or deferral of needed warranty charges. Management agreed to revise the plan to include a financial reporting quality modifier that permits the Committee to reduce awards for control failures, restatements, or significant customer claim reserves. - The VP Human Resources reported that turnover among welders and machine operators remains above plan. Management is expanding apprenticeship partnerships with local technical schools. The Company used approximately 31,000 hours of temporary labor during the first quarter, compared with 18,000 hours in the prior-year quarter. Several directors asked whether temporary labor affects quality and warranty risk. Management stated that additional supervision and training controls are being implemented. - The Committee discussed health plan costs. Claims experience is running above forecast due to several large claims. The CFO reported that the Company is partially self-insured and that the health plan reserve will be reviewed with the third-party administrator before the second-quarter close. Moved by: Daniel Ortiz / Seconded by: Sofia Klein THAT the Board approves the 2025 management incentive plan subject to the addition of the financial reporting quality modifier discussed at the meeting. CARRIED XIII Information Technology and ERP Update - Nolan Price reported that the ERP stabilization project remains behind schedule. The inventory scanning module was implemented at Dayton in March, but the Columbus location continues to use manual receiving logs pending completion of wireless network upgrades. Management expects full deployment by August 2025. - The IT Director reported that certain user access rights from the pre-implementation environment have not yet been fully remediated. The Controller stated that finance users are performing additional supervisory reviews of manual journal entries and inventory adjustments until the access rights review is complete. - Directors asked whether the ERP delays affect the timing or accuracy of financial reporting. The CFO stated that manual procedures are sufficient for the first-quarter close but increase the risk of error and delay. The Audit Committee requested a written remediation plan with owners, target dates, and testing procedures. - The IT Director stated that the Company is negotiating a settlement with the ERP implementation vendor for missed milestones. The vendor has offered service credits of $300,000. General Counsel noted that accepting credits may require releasing other claims. The Board directed management to evaluate whether any settlement should be recorded in the period received or otherwise reflected in project cost accounting. XIV Strategic Projects and Acquisition Activity - The CEO provided an update on Steel Ridge Components, LLC. Management's preliminary assessment indicates purchase consideration in the range of $14 million to $18 million, excluding potential working capital adjustments. Steel Ridge's unaudited 2024 revenue was approximately $21 million. Management has not yet received audited financial statements from Steel Ridge. The Board emphasized that due diligence must include quality of earnings, tax, environmental, customer concentration, related-party transactions, and equipment condition. - The CFO stated that acquiring Steel Ridge before year-end could require additional financing. The Board asked management to model the acquisition under downside scenarios, including lower customer demand and higher interest rates. The Audit Committee Chair asked management to evaluate whether any nonbinding letter of intent would require disclosure to lenders. - The CEO reported that Apex has been approached by a private equity firm regarding a minority investment. The Board agreed not to proceed with discussions until management provides a three-year operating plan and liquidity forecast. XV New Business - The Chair asked management to prepare a formal risk register for the June Board meeting. The risk register should include financial reporting, liquidity, customer concentration, supply chain, quality, safety, cybersecurity, legal, environmental, and acquisition risks. - The Board discussed the need for a stronger monthly reporting package. Directors requested a dashboard showing order intake, backlog, revenue by product line, gross margin by plant, rework hours, warranty claims, scrap, premium freight, aged receivables, inventory turns, covenant calculations, and cash availability. - The Board requested that future minutes identify whether key materials were reviewed before or during the meeting and whether directors with conflicts abstained from discussion or voting. - Priya Natarajan requested that management schedule a separate executive session with the external auditors before the June Audit Committee meeting. - The CEO requested approval to hire a Vice President of Quality and Continuous Improvement. The position would report to the COO and would focus on warranty reduction, plant quality systems, supplier quality, and customer corrective action requests. Moved by: Thomas Reilly / Seconded by: Robert Hale THAT the Board authorizes management to open and fill the position of Vice President of Quality and Continuous Improvement, with total annual cash compensation not to exceed $310,000. CARRIED [Page 4 of 5] XVI Executive Session - At 11:48 AM, the Board entered executive session without members of management other than the Corporate Secretary present for recordkeeping. The Board discussed management succession planning, the status of the Great Lakes Rail Equipment dispute, and the need for timely escalation of control matters. - The Board discussed the importance of maintaining discipline around revenue recognition, inventory reserves, and warranty accruals during periods of pressure to meet lender and shareholder expectations. The Chair stated that management should not prioritize short-term EBITDA targets over accurate reporting, customer quality, or safety. - The Board directed the Audit Committee Chair to meet with the CFO and Controller before the next meeting to review the close process, manual journal entry controls, inventory reconciliation status, and support for significant estimates. XVII Summary of Action Items - Management will provide the Audit Committee with a contract review matrix for Falcon AgriSystems, Orion Power Systems, and Great Lakes Rail Equipment. - Management will update the inventory reserve methodology to incorporate current backlog, discontinued programs, engineering change notices, and expected scrap values. - The CFO will provide a schedule of capitalized ERP and automation costs, separating internal labor, software configuration, training, maintenance, repair, and implementation costs. - Management will complete related-party questionnaires for all officers and directors by May 9, 2025. - General Counsel will preserve documents related to the Great Lakes dispute, OSHA inspection, environmental notice, and former employee commission claim. - The IT Director will provide an ERP access-rights and remediation plan to the Audit Committee. - Management will prepare a formal risk register and enhanced monthly reporting dashboard for the June Board meeting. - Management will obtain disinterested director review and independent valuation support before any binding proposal involving Steel Ridge Components, LLC. XVIII Adjournment There being no further business, the meeting was adjourned at 12:09 PM Central Time. Next Board meeting to be scheduled on Wednesday, June 18, 2025 at 8:30 AM Central Time at the Dayton headquarters and by Microsoft Teams. Submitted by: Harold Chen General Counsel and Corporate Secretary Approved by the Board of Directors on: ____________________ ***** [Page 5 of 5]