NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. FORMATION AND BASIS
OF PRESENTATION
Organization
Air Industries Group is a Nevada
corporation (“AIRI”). As of and for the three and six months ended June 30, 2020 and 2019, the accompanying
condensed consolidated financial statements presented are those of AIRI, and its wholly-owned subsidiaries; Air Industries
Machining Corp. (“AIM”), Nassau Tool Works, Inc. (“NTW”), and the Sterling Engineering
Corporation (“Sterling”), (together, the “Company”). The results of Eur-Pac Corporation
(“EPC”) and Electronic Connection Corporation (“ECC”) are included in discontinued operations since
operations ceased on March 31, 2019. See Note 2 for details of discontinued operations.
Principal Business Activities
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. Sterling manufactures components and provides services for jet engines and ground-power turbines. The Company’s
customers consist mainly of publicly traded companies in the aerospace industry.
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 and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2019, as filed with the Securities and Exchange Commission, from which the accompanying condensed consolidated balance sheet dated
December 31, 2019 was derived.
Reclassifications
Certain account balances in 2019 have been reclassified to conform
to the current period presentation.
Impact of Covid-19
On March 11, 2020, the World Health Organization
announced that infections caused by the coronavirus disease of 2019 (“COVID-19”) had become pandemic, and on March
13, 2020, the U.S. President announced a national emergency relating to the disease. National, state and local authorities have
adopted various regulations and orders, including mandates on the number of people that may gather in one location and closing
non-essential businesses. To date, the Company has been deemed an essential business and has not curtailed its operations.
The measures adopted by various governments
and agencies, as well as the decision by many individuals and businesses to voluntarily shut down or self-quarantine, have and
are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.
The effectiveness of economic stabilization efforts adopted by governments is uncertain. The likely overall economic impact
of the COVID-19 pandemic will be highly negative to the general economy and has been particularly negative on the commercial travel
industry and commercial aerospace industries.
In accordance with the Department of Defense
guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, the Company’s
facilities have continued to operate in support of essential products and services required to meet national security commitments
to the U.S. government and the U.S. military, however, facility closures or work slowdowns or temporary stoppages could occur.
Although the Company’s facilities are open, it has been unable to operate at full capacity or achieve high levels of productivity
due to the implementation of enhanced safety procedures, increased employee absenteeism and intermittent closings of other businesses
that supply goods or services to the Company.
Financial impacts related to COVID-19,
including actions and costs in response to the pandemic, were not material to the Company’s first quarter 2020 financial
position, results of operations or cash flows. Beginning in April 2020, the COVID–19 crisis resulted in a reduction to 2020
revenue and operating margins in portions of its business. This negative effect continued in May 2020 and to a lesser extent in
June 2020. The decrease in revenue resulted from employee absenteeism, supplier disruption, changes in employee productivity,
and related program delays or challenges. The Company and its employees, suppliers, customers and its global community are facing
tremendous challenges and the Company cannot predict how this dynamic situation will evolve or the impact it will have on the
Company’s results of operations.
The Company has implemented procedures to
promote employee safety including more frequent and enhanced cleaning and adjusted schedules and work flows to support physical
distancing. These actions have resulted in increased operating costs. In addition, a number of the Company’s suppliers and
customers have intermittently suspended or otherwise reduced their operations, and the Company is experiencing some supply chain
challenges. Suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of COVID-19. During
the three months ended June 30, 2020, we had large numbers of employees working remotely. Beginning in June, and continuing into
July, that number has declined.
On March 27, 2020, the Coronavirus Aid,
Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides aid to small businesses
through programs administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things,
provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits
and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck
Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent,
and related costs.
In May 2020, AIM, NTW and Sterling (each a
“Borrower”) entered into government subsidized loans with Sterling National Bank (“SNB”) as the lender
in an aggregate principal amount of approximately $2.4 million (“SBA Loans”). Each SBA Loan is evidenced by a promissory
note. At least 60% of the proceeds of each Loan must be used for payroll and payroll-related costs, in accordance with the applicable
provisions of the federal statute authorizing the loan program administered by the SBA and the rules promulgated thereunder (the
“Loan Program”). The Borrower may apply to SNB for forgiveness of a portion of the SBA Loan in accordance with the
applicable provisions of the federal statute authorizing the Loan Program. See Note 6.
The Company has elected to defer the deposit
and payment of employer’s portion of Social Security taxes pursuant to Section 2302 of the CARES Act. These deferred amounts
must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of June 30, 2020, the Company has deferred
$199,000, which is classified as Other Liability on the accompanying Condensed Consolidated Balance Sheet.
In addition, as a result of the passage
of the CARES Act, the Company received $1,416,000 from the filing of a net operating loss carryback claim. See Note 10.
The Company believes that based on
its confirmed orders, funds generated from operations, amounts received under government subsidized loan programs and amounts
available under its credit facility, it will have sufficient cash on hand to support its activities through
September 1, 2021.
Subsequent Events
Management has evaluated subsequent events
through the date of this filing.
Note 2. DISCONTINUED OPERATIONS
As discussed in Note 1, the Company disposed
of its EPC and ECC subsidiaries in March 2019. As required, the Company has retrospectively recast its condensed consolidated statements
of operations for the 2019 period presented. As such, these businesses are reported as discontinued operations for the three and
six months ended June 30, 2019. The Company has not segregated the cash flows of these businesses in the condensed consolidated
statements of cash flows. Management was also required to make certain assumptions and apply judgment to determine historical expenses
related to the discontinued operations presented in prior periods. Unless noted otherwise, discussion in the Notes to Condensed
Consolidated Financial Statements refers to the Company’s continuing operations.
The following table presents the results
of discontinued operations presented separately in the condensed consolidated statement of operations for the three and six months
ended June 30, 2019:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net revenue
|
|
$
|
-
|
|
|
$
|
132,000
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
105,000
|
|
Gross profit
|
|
|
-
|
|
|
|
27,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
96,000
|
|
Gain on impairment of assets
|
|
|
-
|
|
|
|
41,000
|
|
Total operating loss
|
|
|
-
|
|
|
|
(28,000
|
)
|
Interest expense
|
|
|
-
|
|
|
|
(1,000
|
)
|
Other income
|
|
|
-
|
|
|
|
101,000
|
|
Income from discontinued operations before income taxes
|
|
|
-
|
|
|
|
72,000
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Income from discontinued operations, net of income tax
|
|
$
|
-
|
|
|
$
|
72,000
|
|
Non-cash operating amounts for discontinued
operations for the three and six months ended June 30, 2019 include depreciation and amortization of $0 and $6,000, respectively.
There were no capital expenditures for discontinued operations for both the three and six months ended June 30, 2019. There were
no other significant non-cash operating amounts or investing items of the discontinued operations for the period.
Note 3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Inventory Valuation
For annual periods, the Company values
inventory at the lower of cost on a first-in-first-out basis or estimated net realizable value. The Company does not take physical
inventories at interim quarterly reporting periods. Historically, substantially all of the inventory value has been estimated using
a gross profit percentage based on gross profit percentages of previous periods as applied to the net sales of the current period.
During the three months ended June 30, 2020, the Company determined that its gross profits by segment were below its 2019 gross
profit percentages and has adjusted margins accordingly. 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.
Credit and Concentration Risks
There were two customers that represented
71.9% and three customers that represented 75.6% of total net sales for the three months ended June 30, 2020 and 2019, respectively.
This is set forth in the table below.
Customer
|
|
Percentage of Sales
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
1
|
|
|
38.6
|
|
|
|
30.0
|
|
2
|
|
|
33.3
|
|
|
|
35.1
|
|
3
|
|
|
*
|
|
|
|
10.5
|
|
|
*
|
Customer was less than 10% of total net sales for the three months ended June 30, 2020.
|
There were two customers that represented
69.3% and three customers that represented 74.7% of total net sales for the six months ended June 30, 2020 and 2019, respectively.
This is set forth in the table below.
Customer
|
|
Percentage of Sales
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
1
|
|
|
37.1
|
|
|
|
29.4
|
|
2
|
|
|
32.2
|
|
|
|
33.2
|
|
3
|
|
|
*
|
|
|
|
12.1
|
|
|
*
|
Customer was less than 10% of total net sales for the six months ended June 30, 2020.
|
There was one customer that represented 49.7% of gross accounts
receivable at June 30, 2020 and three customers that represented 67.8% of gross accounts receivable at December 31, 2019, respectively.
This is set forth in the table below.
Customer
|
|
Percentage of Receivables
|
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
1
|
|
|
49.7
|
|
|
|
32.7
|
|
2
|
|
|
*
|
|
|
|
25.1
|
|
3
|
|
|
*
|
|
|
|
10.0
|
|
|
*
|
Customer was less than 10% of Gross Accounts Receivable at June 30, 2020.
|
Cash and Cash Equivalents
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.
Major Suppliers
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.
Leases
The Company accounts for leases under ASC
842, “Leases.” All leases are required to be recorded on the balance sheet and are classified as either operating leases
or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are
recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of- use asset is recorded
in operating expenses and an implied interest component is recorded in interest expense.
Earnings (Loss) per share
Basic earnings (loss) per share (“EPS”)
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.
For purposes of calculating diluted earnings
per common share, the numerator includes net income plus interest on convertible notes payable assumed converted as of the first
day of the period. The denominator includes both the weighted-average number of shares of common stock outstanding during the period
and the number of common stock equivalents if the inclusion of such common stock equivalents is dilutive. Dilutive common stock
equivalents potentially include stock options and warrants using the treasury stock method and convertible notes payable using
the if-converted method.
The following is a reconciliation of the denominators of basic
and diluted earnings per share for discontinued operations computations:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Discontinued Operations
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Weighted average shares outstanding used to compute basic earnings per share
|
|
|
30,552,147
|
|
|
|
28,770,983
|
|
|
|
30,476,289
|
|
|
|
28,686,187
|
|
Effect of dilutive stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,410
|
|
Weighted average shares
outstanding and dilutive securities used to compute dilutive earnings per share
|
|
|
30,552,147
|
|
|
|
28,770,983
|
|
|
|
30,476,289
|
|
|
|
28,735,597
|
|
The following securities have been excluded
from the calculation as the exercise price was greater than the average market price of the common shares:
|
|
Three and Six Months Ended
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Stock Options
|
|
|
216,000
|
|
|
|
861,000
|
|
Warrants
|
|
|
1,423,000
|
|
|
|
2,183,000
|
|
|
|
|
1,639,000
|
|
|
|
3,044,000
|
|
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 that period:
|
|
Three and Six Months Ended
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Stock Options
|
|
|
1,696,000
|
|
|
|
515,000
|
|
Warrants
|
|
|
760,000
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
5,045,000
|
|
|
|
5,934,000
|
|
|
|
|
7,501,000
|
|
|
|
6,449,000
|
|
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. Stock based compensation
expense for employees amounted to $74,000 and $93,000 for the three months ended June 30, 2020 and 2019, respectively, and $214,000
and $326,000 for the six months ended June 30, 2020 and 2019, respectively. Stock compensation expense for directors amounted to
$46,000 and $0 for the three months ended June 30, 2020 and 2019, respectively and $101,000 and $131,000 for the six months ended
June 30, 2020 and 2019, respectively. Stock compensation expense for employees and directors 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 $163,000 at both June 30,
2020 and December 31, 2019 relates to the acquisition of NTW.
Goodwill is not amortized, but is 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.
The COVID-19 pandemic was a triggering event for testing whether
goodwill has been impaired. The Company performed a qualitative assessment and determined it is more likely than not that the fair
value exceeds the carrying value of $163,000 as of June 30, 2020. The Company will continue to monitor the impacts of the COVID-19
pandemic in future quarters. Changes in the Company’s forecasts or further decreases in the value of its common stock could
cause book values to exceed fair values which may result in goodwill impairment charges in future periods.
The Company has determined that there has
been no impairment of goodwill at June 30, 2020 and December 31, 2019.
Recently Issued Accounting
Pronouncements
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to
simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles
in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.
The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related
disclosures.
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
condensed consolidated financial statements.
Note 4. PROPERTY AND EQUIPMENT
The components of property and
equipment at June 30, 2020 and December 31, 2019 consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Land
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
Buildings and Improvements
|
|
|
1,650,000
|
|
|
|
1,650,000
|
|
|
31.50 years
|
Machinery and Equipment
|
|
|
12,466,000
|
|
|
|
12,251,000
|
|
|
5 - 8 years
|
Finance Lease Machinery and Equipment
|
|
|
6,495,000
|
|
|
|
6,495,000
|
|
|
5 - 8 years
|
Tools and Instruments
|
|
|
11,336,000
|
|
|
|
11,021,000
|
|
|
1.50 - 7 years
|
Automotive Equipment
|
|
|
148,000
|
|
|
|
177,000
|
|
|
5 years
|
Furniture and Fixtures
|
|
|
290,000
|
|
|
|
290,000
|
|
|
5 - 8 years
|
Leasehold Improvements
|
|
|
530,000
|
|
|
|
530,000
|
|
|
Term of Lease
|
Computers and Software
|
|
|
428,000
|
|
|
|
425,000
|
|
|
4 - 6 years
|
Total Property and Equipment
|
|
|
33,643,000
|
|
|
|
33,139,000
|
|
|
|
Less: Accumulated Depreciation
|
|
|
(26,890,000
|
)
|
|
|
(25,561,000
|
)
|
|
|
Property and Equipment, net
|
|
$
|
6,753,000
|
|
|
$
|
7,578,000
|
|
|
|
Depreciation expense for the three months
ended June 30, 2020 and 2019 was $688,000 and $760,000, respectively. Depreciation expense for the six months ended June 30, 2020
and 2019 was $1,344,000 and $1,455,000, respectively.
Assets held under financed lease obligations
are depreciated over the shorter of their related lease terms or their estimated productive lives. Depreciation of assets under
finance leases is included in depreciation expense for 2020 and 2019. Accumulated depreciation on these assets was approximately
$6,304,000 and $5,396,000 as of June 30, 2020 and December 31, 2019, respectively.
Note 5. LEASES
The Company has operating and finance leases
for leased office and manufacturing facilities and equipment leases. The Company leases certain machinery and equipment under finance
leases and leases its offices and manufacturing facilities under operating leases. The leases have remaining lease terms of one
to six years, some of which include options to extend or terminate the leases.
During the three months ended June 30, 2020,
NTW’s warehouse lease was terminated by its landlord under the terms of its lease agreement. Additionally, the Company entered
into a new lease agreement for warehouse space in Bohemia, NY. The new lease term commenced on April 1, 2020 and expires on May
31, 2025. During the first year of the lease, the monthly rent is $10,964 and increases 3% each year thereafter. The final two
months are equal installments of $1,746.
|
|
June 30,
|
|
|
|
2020
|
|
Weighted Average Remaining Lease Term - in years
|
|
|
6.00
|
|
Weighted Average discount rate - %
|
|
|
8.88
|
%
|
The aggregate undiscounted cash flows of operating lease
payments for leases with remaining terms greater than one year are as follows:
|
|
June 30,
2020
|
|
For the twelve months ended December 31,
|
|
(unaudited)
|
|
December 31, 2020 (remaining six months)
|
|
$
|
536,000
|
|
December 31, 2021
|
|
|
1,080,000
|
|
December 31, 2022
|
|
|
1,007,000
|
|
December 31, 2023
|
|
|
1,038,000
|
|
December 31, 2024
|
|
|
1,070,000
|
|
Thereafter
|
|
|
4,731,000
|
|
Total future minimum lease payments
|
|
|
9,462,000
|
|
Less: discount
|
|
|
(4,510,000
|
)
|
Total operating lease maturities
|
|
|
4,952,000
|
|
Less: current portion of operating lease liabilities
|
|
|
(672,000
|
)
|
Total long term portion of operating lease maturities
|
|
$
|
4,280,000
|
|
Note 6. NOTES PAYABLE, RELATED PARTY
NOTES PAYABLE AND FINANCE LEASE OBLIGATIONS
Notes payable, related party
notes payable and finance lease obligations consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Revolving credit note payable to Sterling National Bank (“SNB”)
|
|
$
|
12,972,000
|
|
|
$
|
12,543,000
|
|
Term loan, SNB
|
|
|
3,516,000
|
|
|
|
3,800,000
|
|
Finance lease obligations
|
|
|
13,000
|
|
|
|
22,000
|
|
Loan Payable - equipment
|
|
|
242,000
|
|
|
|
385,000
|
|
Related party notes payable, net of debt discount
|
|
|
5,992,000
|
|
|
|
6,862,000
|
|
Convertible notes payable-third parties, net of debt discount
|
|
|
1,440,000
|
|
|
|
2,338,000
|
|
SBA loans
|
|
|
2,414,000
|
|
|
|
-
|
|
Subtotal
|
|
|
26,589,000
|
|
|
|
25,950,000
|
|
Less: Current portion of notes payable, related party notes payable and finance lease obligations
|
|
|
(22,133,000
|
)
|
|
|
(22,544,000
|
)
|
Notes payable, related party notes payable and finance lease obligations, net of current portion
|
|
$
|
4,456,000
|
|
|
$
|
3,406,000
|
|
Sterling National Bank (“SNB”)
On December 31, 2019, the Company entered
into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) expiring on December 30,
2022. The new Loan Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan
(“SNB term loan”).
Proceeds from the SNB Facility repaid the Company’s
outstanding loan facility (“PNC Facility”) with PNC Bank N.A. (“PNC”).
The formula to determine the amounts of
revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of the Company’s
eligible receivables and eligible inventory (as defined in the SNB Facility). Each day, the Company’s cash collections are
swept directly by SNB to reduce the SNB revolving loan balance and the Company then borrows according to a borrowing base formula.
The Company’s receivables are payable directly into a lockbox controlled by SNB (subject to the terms of the SNB Facility).
The repayment terms of the SNB term loan
provide for monthly principal installments in the amount of $45,238, payable on the first business day of each month, beginning
on February 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December 30, 2022. In addition,
for so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year,
beginning with the year ending December 31, 2020, the Company shall pay to SNB an amount equal to the lesser of (i) twenty-five
percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan. Such payment
shall be made to SNB and applied to the outstanding principal balance of the term loan, on or prior to April 15 of the Fiscal Year
immediately following such Fiscal Year.
The Company may voluntarily prepay balances
under the SNB Facility. Any prepayment of less than all of the outstanding principal of the SNB term loan is applied to the principal
of the SNB term loan.
The terms of the SNB Facility require that,
among other things, the Company maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter
beginning with the Fiscal Quarter ending March 31, 2020. In addition, the Company is limited in the amount of Capital Expenditures
it can make. As of June 30, 2020 the Company was in compliance with all loan covenants. The SNB Facility also restricts the amount
of dividends the Company may pay to its stockholders. Substantially all of the Company’s assets are pledged as collateral
under the SNB Facility.
As of June 30, 2020 the future minimum
principal payments for the SNB term loan are as follows:
For the twelve months ending
|
|
Amount
|
|
December 31, 2020 (remainder of the year)
|
|
$
|
271,000
|
|
December 31, 2021
|
|
|
543,000
|
|
December 31, 2022
|
|
|
2,760,000
|
|
SNB Term Loan payable
|
|
|
3,574,000
|
|
Less: debt issuance costs
|
|
|
(58,000
|
)
|
Total SNB Term loan payable, net of debt issuance costs
|
|
|
3,516,000
|
|
Less: Current portion of SNB term loan payable
|
|
|
(543,000
|
)
|
Total long-term portion of SNB term loan payable
|
|
$
|
2,973,000
|
|
Under the terms of the SNB Facility, both
the SNB revolving line of credit and the SNB term loan will bear an interest rate equal to 30-day LIBOR, (with a 1% floor), plus
2.5%. The average interest rate charged during the period ended June 30, 2020 was 3.5%.
As of June 30, 2020, our debt to SNB in
the amount of $16,488,000 consisted of the SNB revolving line of credit note in the amount of $12,972,000 and the SNB term loan
in the amount of $3,516,000. As of December 31, 2019, our debt to SNB in the amount of $16,343,000 consisted of the SNB revolving
line of credit note in the amount of $12,543,000 and the SNB term loan in the amount of $3,800,000.
Interest expense related to the SNB Facility
amounted to approximately $154,000 for the three months ended June 30, 2020, and $274,000 for the six months ended June 30, 2020.
PNC Bank N.A. (“PNC”)
The Company previously maintained the PNC
Facility. Under the PNC Facility, substantially all of the Company’s assets were pledged as collateral. The PNC Facility
provided for a $15,000,000 revolving line of credit (“PNC revolving line of credit”) and a term loan (“PNC term
loan”).
Interest expense related to the PNC Facility
amounted to approximately $333,000 for the three months ended June 30, 2019 and $563,000 for the six months ended June 30, 2019.
On December 31, 2019, both the PNC revolving
line of credit and PNC term loan were paid in full and all assets that were previously pledged as collateral were released.
Loan Payable – Equipment
The Company is committed to a loan for
manufacturing equipment purchased during 2019. The loan payable obligation totaled $242,000 and $385,000 as of June 30, 2020 and
December 31, 2019, respectively. The loan bears interest at 3% per annum.
The future minimum loan payments are as
follows:
For the twelve months ending
|
|
Amount
|
|
December 31, 2020 (remainder of the year)
|
|
$
|
145,000
|
|
December 31, 2021
|
|
|
97,000
|
|
Total Loan Payable - equipment
|
|
|
242,000
|
|
Less: Current portion of loan payable - equipment
|
|
|
242,000
|
|
Long-term portion of loan payable - equipment
|
|
$
|
-
|
|
Related Party Notes Payable
Taglich Brothers, Inc. is a corporation
co-founded by two directors of the Company, Michael and Robert Taglich. In addition, a third director of the Company is a vice
president of Taglich Brothers, Inc.
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.
On January 15, 2019, the Company issued
its 7% senior subordinated convertible promissory notes due December 31, 2020, each in the principal amount of $1,000,000 (together,
the “7% Notes”), to Michael Taglich and Robert Taglich, each for a purchase price of $1,000,000. The 7% Notes bear
interest at the rate of 7% per annum, are convertible into shares of the Company’s common stock at a conversion price of
$0.93 per share, subject to the anti-dilution adjustments set forth in the 7% Notes and are subordinate to the Company’s
indebtedness under the SNB Facility.
In connection with the 7% Notes, the Company
paid Taglich Brothers, Inc. a fee of $80,000 (4% of the purchase price of the 7% Notes), paid in the form of a promissory note
having terms similar to the 7% Notes.
On June 26, 2019, the Company was advanced $250,000 from each of Michael and Robert Taglich.
These notes bear interest at a rate of 12% per annum. In connection with these notes, the Company issued 37,500 shares of stock
to each of Michael and Robert Taglich. The maturity date, of these notes, was June 30, 2020, but was extended to December 31,
2020.
On October 21, 2019, the Company was advanced
$1,000,000 from Michael Taglich. This advance was repaid on January 2, 2020. The interest rate on this advance was 12% per annum.
Private Placement of Subordinated Notes due May 31, 2019,
together with Shares of Common Stock
On March 29, 2018 and April 4, 2018, Michael
Taglich and Robert Taglich advanced $1,000,000 and $100,000, respectively, to the Company for use as working capital. The Company
subsequently issued its Subordinated Notes originally due May 31, 2019 to Michael Taglich and Robert Taglich, together with shares
of common stock, in the financing described below, to evidence its obligation to repay the foregoing advances.
In May 2018, the Company issued $1,200,000
of Subordinated Notes due May 31, 2019 (the “2019 Notes”), together with a total of 214,762 shares of common stock
to Michael Taglich, Robert Taglich and another accredited investor. As part of the financing, the Company issued to Michael Taglich
$1,000,000 principal amount of 2019 Notes and 178,571 shares of common stock for a purchase price of $1,000,000 and to Robert Taglich
$100,000 principal amount of 2019 Notes and 17,857 shares of common stock. The Company issued and sold a 2019 Note in the principal
amount of $100,000, plus 18,334 shares of common stock to the other accredited investor for a purchase price of $100,000. This
additional note was paid in full on January 2, 2020.
Interest on the 2019 Notes is payable on
the outstanding principal amount thereof at the rate of one percent (1%) per month, payable monthly commencing June 30, 2018. Upon
the occurrence and continuation of a failure to pay accrued interest, interest shall accrue and be payable on such amount at the
rate of 1.25% per month; provided that upon the occurrence and continuation of a failure to timely pay the principal amount of
the 2019 Note, interest shall accrue and be payable on such principal amount at the rate of 1.25% per month and shall no longer
be payable on interest accrued but unpaid. The 2019 Notes are subordinate to the Company’s obligations to SNB.
Taglich Brothers acted as placement agent
for the offering and received a commission in the aggregate amount of 4% of the amount invested which was paid in kind.
During the second quarter of 2019, the
maturity date of the 2019 Notes was extended to June 30, 2020. The interest rate of the notes remains at 12% per annum. In connection
with the extension, 180,000 shares of common stock were issued on a pro-rata basis to each of the note holders, including 150,000
shares to Michael Taglich and 15,000 shares to Robert Taglich at $1.01 per share or $182,000. The costs have been recorded as a
debt discount, and are being accreted over the revised term. In connection with the SNB Loan facility, Michael and Robert Taglich
agreed to extend the maturity date of the 2019 Notes to December 31, 2020.
Private Placements of 8% Subordinated
Convertible Notes
From November 23, 2016 through March 21,
2017, the Company received gross proceeds of $4,775,000, of which $1,950,000 were received from Robert and Michael Taglich, 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 383,080 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. Payment of the principal
and accrued interest on the 8% Notes are junior and subordinate in right of payment to our indebtedness under the SNB Facility.
Interest on the 8% 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 8% Notes, provided that if accrued interest payable on $1,269,000 principal amount of the 8% Notes
issued in December 2016 is paid in additional 8% 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.
Related party advances and notes payable,
net of debt discounts to Michael and Robert Taglich, and their affiliated entities, totaled $5,992,000 and $6,862,000, as of June
30, 2020 and December 31, 2019, respectively. Unamortized debt discounts related to these notes amounted to $76,000 and $226,000
as of June 30, 2020 and December 31, 2019, respectively. Interest incurred on these related party notes amounted to approximately
$125,000 and $362,000 for the three months ended June 30, 2020 and 2019, respectively, and $253,000 and $475,000 for the six months
ended June 30, 2020 and 2019 respectively. Amortization of debt discount incurred on these related party notes amounted to approximately
$77,000 and $101,000 for the three months ended June 30, 2020 and 2019, respectively and $151,000 and $231,000 for the six months
ended June 30, 2020 and 2019, respectively. The amortization of the debt discount is included in interest and financing costs in
the Condensed Consolidated Statement of Operations.
All related party notes are due on December
31, 2020 and are subordinated to the SNB Facility. There are no principal payments due on these notes until such time.
Per the terms of the SNB Facility, prior to September 30, 2020,
with respect to any and all related party notes payable and Subordinated Notes, (i) the maturity date shall be extended to a date
that is more than six months after December, 30, 2022 or (ii) shall be converted to common stock of the Company.
Convertible Notes Payable – Third
Parties
In January 2020, the third party holders
of $805,000 principal of the 8% Notes with accrued interest thereon of $80,000 converted their notes into approximately 590,243
shares of common stock at a per share price of $1.50.
8% Notes payable to third parties totaled
$1,440,000 and $2,338,000, as of June 30, 2020 and December 31, 2019, respectively. Interest incurred on the 8% Notes amounted
to approximately $38,000 and $168,000 for the three months ended June 30, 2020 and 2019, respectively, and $80,000 and $256,000
for the six months ended June 30, 2020 and 2019, respectively. Unamortized debt discounts related to these notes amounted to $0
and $7,000 as of June 30, 2020 and December 31, 2019, respectively. Amortization of debt discount on the 8% Notes amounted to approximately
$3,000 and $5,000 for the three months ended June 30, 2020 and 2019, respectively, and $7,000 and $128,000 for the six months ended
June 30, 2020 and 2019, respectively. These costs are included in interest and financing costs in the Condensed Consolidated Statement
of Operations.
All convertible notes with third parties
are due on December 31, 2020 and are subordinated to the SNB Facility. There are no principal payments due on these notes until
such time.
Per the terms of the SNB Facility, prior
to September 30, 2020, with respect to any and all of the convertible notes payable, (i) the maturity date shall be extended to
a date that is more than six months after December, 30, 2022 or (ii) shall be converted to common stock of the Company.
SBA Loans
In May 2020, AIM, NTW and Sterling entered
into SBA Loans with SNB as the lender in an aggregate principal amount of $2,414,000. Each SBA Loan is evidenced by a Note. Subject
to the terms of the Note, the SBA Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months
of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the SBA. At least 60% of the proceeds
of each Loan must be used for payroll and payroll-related costs, in accordance with the applicable provisions of the federal statute
authorizing the loan program administered by the SBA and the rules promulgated thereunder (the “Loan Program”). The
Company may apply to SNB for forgiveness of a portion of the SBA Loan in accordance the applicable provisions of the federal statute
authorizing the Loan Program. Each Note provides for customary events of default including, among other things, cross-defaults
on any other loan with SNB. Each SBA Loan may be accelerated upon the occurrence of an event of default. As of June 30, 2020, SBA
Loans totaled $2,414,000.
The future minimum loan payments are as
follows:
For the twelve months ending
|
|
Amount
|
|
December 31, 2020 (remainder of the year)
|
|
$
|
133,000
|
|
December 31, 2021
|
|
|
1,607,000
|
|
December 31, 2022
|
|
|
674,000
|
|
Total SBA Loans
|
|
|
2,414,000
|
|
Less: Current portion of SBA Loans
|
|
|
934,000
|
|
Long-term portion of SBA Loans
|
|
$
|
1,480,000
|
|
NOTE
7. LIABILITY RELATED TO THE SALE OF FUTURE PROCEEDS FROM DISPOSITION OF SUBSIDIARY
In
connection with the sale of the Company’s wholly-owned subsidiary, AMK Welding, Inc. (“AMK”) to Meyer Tool,
Inc., (“Meyer”) in 2017, Meyer was obligated to pay the Company within 30 days after the end of each calendar quarter,
commencing April 1, 2017, an amount equal to five (5%) percent of the net sales of AMK for that quarter until the aggregate payments
made to the Company (the “Meyer Agreement”) equals $1,500,000 (the “Maximum Amount”).
As
of December 31, 2018, the Company received an aggregate of $363,000 under the Meyer Agreement.
In
order to increase liquidity, on January 15, 2019, the Company entered into a “Purchase Agreement” with 15 accredited
investors (the “Purchasers”), including Michael and Robert Taglich, pursuant to which the Company assigned to the
Purchasers all of their rights, title and interest to the remaining $1,137,000 of the $1,500,000 in payments due from Meyer for
the sale of AMK (the “Remaining Amount”) for an immediate payment of $800,000, including $100,000 from each of Michael
and Robert Taglich, and $75,000 for the benefit of the children of Michael Taglich. The timing of the payments is based upon the
net sales of AMK. If the Purchasers have not received the entire Remaining Amount by March 31, 2023, they have the right to demand
payment of their pro rata portion of the unpaid Remaining Amount from the Company (“Put Right”). To the extent the
Purchasers exercise their Put Right, the remaining payments from Meyer will be retained by the Company.
The
Purchasers have agreed to pay Taglich Brothers a fee equal to 2% per annum of the purchase price paid by such Purchasers, payable
quarterly, to be deducted from the payments of the Remaining Amount, for acting as paying agent in connection with the payments
from Meyer.
Although
the Company sold all of its rights to the Remaining Amount, as a result of its obligation to the Purchasers, the Company is required
to account for the Remaining Amount or portion thereof as income when earned. The Company recorded the $800,000 in proceeds as
a liability on its condensed consolidated balance sheet, net of transaction costs of $3,000. Transaction costs will be amortized
to interest expense over the estimated life of the Purchase Agreement.
As
payments are remitted to the Purchasers, the balance of the recorded liability will be effectively repaid over the life of the
Purchase Agreement. To determine the amortization of the recorded liability, the Company is required to estimate the total amount
of future payment to be received by the Purchasers. The Company estimates that the entire Remaining Amount will be received, and
accordingly, the Remaining Amount less the $800,000 purchase price received (the “Discount”) will be amortized into
the liability balance and recorded as interest expense. The Discount will be amortized through the earliest date that the Purchasers
can exercise their Put Right, using the straight line method (which is not materially different than the effective interest method)
over the estimated life of the Purchase Agreement with the Purchasers. Periodically the Company will assess the estimated payments
to be made to the Purchasers related to the Meyer Agreement, and to the extent the amount or timing of the payments is materially
different from their original estimates, the Company will prospectively adjust the amortization of the liability. The amount or
timing of the payments from Meyer are not within the Company’s control. Since the inception of the Purchase Agreement, the
Company estimates the effective annual interest rate over the life of the agreement to be approximately 18%.
The
liability is classified between the current and non-current portion of liability related to sale of future proceeds from disposition
of subsidiary based on the estimated recognition of the payments to be received by the purchasers in the next 12 months from the
financial statements reporting date.
The
Company recognized $119,000 and $0 of non-cash income for the three months ended June 30, 2020 and 2019, respectively, and $211,000
and $109,000 of non-cash income for the six months ended June 30, 2020 and 2019, respectively, reflected in “other income,
net” on the condensed consolidated statement of operations. Additionally, the Company recorded $36,000 and $0 of related
non-cash interest expense related to the Purchase Agreement, for the three months ended June 30, 2020 and 2019, respectively,
and $64,000 and $33,000 for the six months ended June 30, 2020 and 2019, respectively.
The
table below shows the activity within the liability account for the six months ended June 30, 2020:
Liabilities related to sale of future proceeds from disposition of subsidiaries - as of December 31, 2019
|
|
$
|
603,000
|
|
Non-Cash other income recognized
|
|
|
(211,000
|
)
|
Non-Cash interest expense recognized
|
|
|
64,000
|
|
Liabilities related to sale of future proceeds from disposition of subsidiary - as of June 30, 2020
|
|
|
456,000
|
|
Less: unamortized transaction costs
|
|
|
(3,000
|
)
|
Liability related to sale of future proceeds from disposition of subsidiary, net
|
|
$
|
453,000
|
|
Note
8. STOCKHOLDERS’ EQUITY
Common
Stock – Sale of Securities
In January 2020, the Company issued and sold
419,597 shares of its common stock for gross proceeds of $984,000 pursuant to our Form S-3 filed on October 10, 2019 as updated
on January 15, 2020. Costs of the sale amounted to $145,000.
The
Company issued 47,126 and 0 shares of common stock in lieu of cash payments for director fees for the three months ended June
30, 2020 and 2019, respectively, and 90,897 and 147,830 for the six months ended June 30, 2020 and 2019, respectively.
Note
9. CONTINGENCIES
Loss
Contingencies
A
number of actions have been 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.
On
December 20, 2018, pursuant to a Stock Purchase Agreement dated as of March 21, 2018 (“SPA”), the Company completed
the sale of all of the outstanding shares of its subsidiary, Welding Metallurgy, Inc. to CPI Aerostructures. On March 19, 2019,
in accordance with the procedures set forth in the SPA with CPI Aerostructures, the Company received a notice from CPI claiming
that the working capital deficit used to compute the purchase price was understated. The issue of the amount of the working capital
deficit was submitted to BDO USA, LLP (“BDO”), acting as an expert, and it issued a report dated September 3, 2019,
where it determined that the amount of the working capital deficit was approximately $4,145,870. On September 9, 2019 the Company
received a demand from CPI for payment of such amount. The Company advised CPI that the determination of BDO is void because,
among other things, it believes BDO exceeded the scope of its authority as set forth in the SPA. On September 27, 2019, CPI filed
a notice of motion in the Supreme Court of the State of New York, County of New York, against the Company seeking, among other
things, an order of specific performance requiring delivery of the funds deposited in escrow, together with the balance of the
working capital deficit which it claimed, and a judgment against the Company in the amount of approximately $4,200,000 of which
$2,000,000 would be satisfied by delivery of the funds in escrow. On October 7, 2019, the Company agreed to the release of $619,316
of the funds held in escrow in respect of claims related to the working capital deficit not related to the value of WMI’s
inventory. As of December 31, 2018, the Company has placed a reserve against substantially all of the escrowed amount and cannot
estimate the amount of loss. For, among others, the reasons stated above the Company intends to contest vigorously any claim CPI
may make for payment based on the BDO Report. Outside counsel for the company has advised that at this stage in the proceedings,
it cannot offer an opinion as to the probable outcome. As of June 30, 2020, there has been no new developments.
Contract
Pharmacal Corp. commenced an action on October 2, 2018, relating to a Sublease entered into between the Company and Contract Pharmacal
in May 2018 with respect to the property at 110 Plant Avenue, Hauppauge, New York. In the action Contract Pharmacal seeks damages
for an amount in excess of $1,000,000 for our failure to make the entire premises available by the Sublease commencement date.
The Company disputes the validity of the claims asserted by Contract Pharmacal and believes it has meritorious defenses to those
claims and have recently submitted a motion in opposition to its motion for summary judgement. As of June 30, 2020, it is not
possible to estimate if a loss will be incurred, as such there has been no accrual.
From
time to time we also 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. 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 averse to our interest.
Note
10. INCOME TAXES
The
Company recorded no income tax expense for the three and six months ended June 30, 2020 and 2019 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 the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated,
the impact of state and local income taxes, the ability to use tax credits and net operating loss carry forwards, and available
tax planning alternatives.
As
a result of the passage of the CARES Act, the Company received $1,416,000 from the filing of a net operating loss carryback claim.
The Company is currently evaluating the impact of other provisions of the CARES Act on its accounting for income taxes and does
not believe it has a material impact at this time.
The
Company recorded no other federal income tax benefit for both of the three and six months ended June 30, 2020 and 2019.
As
of June 30, 2020, and December 31, 2019, the Company provided a full 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.
Note
11. 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 two operating segments: Complex Machining, which consists of AIM and NTW; and Turbine
Engine Components, which consists of Sterling. Along with its operating subsidiaries, the Company reports the results of its corporate
division as an independent segment.
For
reporting purposes, EPC and ECC have been classified as discontinued operations for the three and six months ending June 30, 2019.
The
accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies.
Intersegment transfers are recorded at the transferor’s cost, and there is no intercompany profit or loss on intersegment
transfers. We evaluate performance based on revenue, gross profit contribution and assets employed.
Financial
information about the Company’s reporting segments for the three and six months ended June 30, 2020 and 2019 are as follows:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
7,308,000
|
|
|
$
|
11,701,000
|
|
|
$
|
19,372,000
|
|
|
$
|
24,119,000
|
|
Gross Profit
|
|
|
681,000
|
|
|
|
2,095,000
|
|
|
|
2,849,000
|
|
|
|
4,308,000
|
|
Pre Tax (Loss) Income from continuing operations
|
|
|
(10,000
|
)
|
|
|
1,351,000
|
|
|
|
1,160,000
|
|
|
|
2,794,000
|
|
Assets
|
|
|
48,490,000
|
|
|
|
47,176,000
|
|
|
|
48,490,000
|
|
|
|
47,176,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,186,000
|
|
|
|
1,667,000
|
|
|
|
2,569,000
|
|
|
|
3,127,000
|
|
Gross (Loss) Profit
|
|
|
(67,000
|
)
|
|
|
96,000
|
|
|
|
(54,000
|
)
|
|
|
157,000
|
|
Pre Tax Loss from continuing operations
|
|
|
(217,000
|
)
|
|
|
(111,000
|
)
|
|
|
(343,000
|
)
|
|
|
(281,000
|
)
|
Assets
|
|
|
4,430,000
|
|
|
|
5,575,000
|
|
|
|
4,430,000
|
|
|
|
5,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Pre Tax Loss from continuing operations
|
|
|
(1,357,000
|
)
|
|
|
(1,975,000
|
)
|
|
|
(2,757,000
|
)
|
|
|
(4,243,000
|
)
|
Assets
|
|
|
1,808,000
|
|
|
|
568,000
|
|
|
|
1,808,000
|
|
|
|
568,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
8,494,000
|
|
|
|
13,368,000
|
|
|
|
21,941,000
|
|
|
|
27,246,000
|
|
Gross Profit
|
|
|
614,000
|
|
|
|
2,191,000
|
|
|
|
2,795,000
|
|
|
|
4,465,000
|
|
Pretax net loss from continuing operations
|
|
|
(1,584,000
|
)
|
|
|
(735,000
|
)
|
|
|
(1,940,000
|
)
|
|
|
(1,730,000
|
)
|
Benefit from Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
|
|
-
|
|
Income from Discontinued Operations, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,000
|
|
Net Loss
|
|
|
(1,584,000
|
)
|
|
|
(735,000
|
)
|
|
|
(526,000
|
)
|
|
|
(1,658,000
|
)
|
Assets
|
|
$
|
54,728,000
|
|
|
$
|
53,319,000
|
|
|
$
|
54,728,000
|
|
|
$
|
53,319,000
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed
consolidated financial statements and notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated
financial statements and the notes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December
31, 2019 (the “2019 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties.
You should specifically consider the various risk factors identified in this report that could cause actual results to differ
materially from those anticipated in these forward-looking statements.
Business
Overview
The
financial statements contained in this report as well as the discussion below principally reflect the status of our business and
the results of our operations as of June 30, 2020.
We
are an aerospace company operating primarily in the defense industry. Our Complex Machining segment manufactures structural parts
and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants,
and other components. 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 including the Sikorsky
UH-60 Blackhawk, Lockheed Martin F-35 Joint Strike Fighter, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter
aircraft, Boeing 777 and Airbus 380 commercial airliners. Our Turbine Engine segment makes components for jet engines that are
used on the USAF F-15 and F-16, the Airbus A-330 and A-380, and the Boeing 777, in addition to a number of ground-power turbine
applications.
Air
Industries Machining, Corp. (“AIM”) became a public company in 2005. In response to recent operating losses and their
impact on our working capital, we have repositioned our business through the sale and liquidation of certain subsidiaries we acquired
since becoming a public company. We also consolidated our headquarters and the operations of our subsidiaries, AIM and Nassau
Tool Works, Inc. (“NTW”), at our primary location in Bay Shore, New York, allowing us to re-focus our operations on
our core competencies. In March 2019 we closed our subsidiaries Eur-Pac Corporation (“EPC”) and Electronic Connection
Corporation (“ECC”). As a result of our restructuring, Complex Machining and Turbine Engine Components constitute
all of our operations.
In
addition to repositioning our business to obtain profitability and positive cash flow, we remain resolute on meeting customers’
needs and continue to align production schedules to meet the needs of customers. We believe that an unyielding focus on our customers
will allow us to execute on our existing backlog in a timely fashion and take on additional commitments. We are pleased with our
progress and the positive responses received from our customers.
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.
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 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. Our operations have a large percentage of fixed factory overhead.
As a result, our profit margins are also highly variable with sales volumes as under-absorption of factory overhead decreases
profits.
A
very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacements
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 reduces the demand for both new production and replacement spares. Recent increases in
Defense Department spending has increased orders for our products.
COVID
-19
On
March 11, 2020, the World Health Organization announced that infections caused by the coronavirus disease of 2019 (“COVID-19”)
had become pandemic, and on March 13, 2020, the U.S. President announced a national emergency relating to the disease. National,
state and local authorities have adopted various regulations and orders, including mandates on the number of people that may gather
in one location and closing non-essential businesses. To date, we have been deemed an essential business and have not curtailed
our operations.
The measures adopted by
various governments and agencies, as well as the decision by many individuals and businesses to voluntarily shut down or self-quarantine,
have and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.
The effectiveness of economic stabilization efforts adopted by governments is uncertain. The likely overall economic impact of
the COVID-19 pandemic will be highly negative to the general economy and has been particularly negative on the commercial travel
industry and commercial aerospace industries.
In accordance with the
Department of Defense guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce,
our facilities have continued to operate in support of essential products and services required to meet national security commitments
to the U.S. Government and the U.S. military, however, facility closures or work slowdowns or temporary stoppages could occur.
Although our facilities are open, we have been unable to operate at full capacity or achieve high levels of productivity due
to the implementation of enhanced safety procedures, increased employee absenteeism and intermittent closings of other businesses
that supply goods or services to us.
Our Company, employees, suppliers and customers, and our global community are facing tremendous
challenges and we cannot predict how this dynamic situation will evolve or the impact it will have.
We
have implemented procedures to promote employee safety including more frequent and enhanced cleaning and adjusted schedules and
work-flows to support physical distancing. These actions have resulted in increased operating costs. In addition, a number of
our suppliers and customers have intermittently suspended or otherwise reduced their operations, and we are experiencing some
supply chain challenges. Suppliers are also experiencing liquidity pressures and disruptions to their operations as a result of
COVID-19. During the three months ended June 30, 2020 we had large numbers of employees working remotely. In June and July, the
number of employees working remotely began to decline.
On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES
Act provides aid to small businesses through programs administered by the Small Business Administration (“SBA”). The
CARES Act, among other things, includes provisions relating to payroll tax credits and deferrals, net operating loss carryback
periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property.
The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible
for a loan to fund payroll expenses, rent, and related costs. Funds made available to us through these programs have supplemented
the cash available to support our operations as more specifically discussed below under “Liquidity and Capital Resources.”
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, ASC
280 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 two operating segments: Complex Machining and Turbine Engine Components. Along with our operating
subsidiaries, we report the results of our corporate office as an independent segment.
For
reporting purposes, EPC and ECC have been classified as discontinued operations for the three and six months ending June 30, 2019.
The
accounting policies of our segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate
performance based on revenue, gross profit contribution and assets employed.
RESULTS
OF OPERATIONS
The
operations of EPC and its subsidiary ECC were closed on March 31, 2019. For purposes of the following discussion of our selected
financial information and operating results, we have presented our financial information based on our continuing operations unless
otherwise noted.
Selected
Financial Information:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
8,494,000
|
|
|
$
|
13,368,000
|
|
|
$
|
21,941,000
|
|
|
$
|
27,246,000
|
|
Cost of sales
|
|
|
7,880,000
|
|
|
|
11,177,000
|
|
|
|
19,146,000
|
|
|
|
22,781,000
|
|
Gross profit
|
|
|
614,000
|
|
|
|
2,191,000
|
|
|
|
2,795,000
|
|
|
|
4,465,000
|
|
Operating expenses and interest and financing costs
|
|
|
2,334,000
|
|
|
|
2,964,000
|
|
|
|
4,976,000
|
|
|
|
5,989,000
|
|
Loss on abandonment of leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(275,000
|
)
|
Other income, net
|
|
|
136,000
|
|
|
|
38,000
|
|
|
|
241,000
|
|
|
|
69,000
|
|
Benefit from income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
|
|
-
|
|
Loss from continuing operations
|
|
$
|
(1,584,000
|
)
|
|
$
|
(735,000
|
)
|
|
$
|
(526,000
|
)
|
|
$
|
(1,730,000
|
)
|
Balance
Sheet Data:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,068,000
|
|
|
$
|
1,294,000
|
|
Working capital
|
|
|
8,838,000
|
|
|
|
5,623,000
|
|
Total assets
|
|
|
54,728,000
|
|
|
|
51,090,000
|
|
Total stockholders’ equity
|
|
$
|
11,719,000
|
|
|
$
|
10,206,000
|
|
The
following sets forth the results of operations for each of our segments individually and on a consolidated basis for the periods
indicated:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
COMPLEX MACHINING
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
7,308,000
|
|
|
$
|
11,701,000
|
|
|
$
|
19,372,000
|
|
|
$
|
24,119,000
|
|
Gross Profit
|
|
|
681,000
|
|
|
|
2,095,000
|
|
|
|
2,849,000
|
|
|
|
4,308,000
|
|
Pre Tax (Loss) Income from continuing operations
|
|
|
(10,000
|
)
|
|
|
1,351,000
|
|
|
|
1,160,000
|
|
|
|
2,794,000
|
|
Assets
|
|
|
48,490,000
|
|
|
|
47,176,000
|
|
|
|
48,490,000
|
|
|
|
47,176,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TURBINE ENGINE COMPONENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,186,000
|
|
|
|
1,667,000
|
|
|
|
2,569,000
|
|
|
|
3,127,000
|
|
Gross (Loss) Profit
|
|
|
(67,000
|
)
|
|
|
96,000
|
|
|
|
(54,000
|
)
|
|
|
157,000
|
|
Pre Tax Loss from continuing operations
|
|
|
(217,000
|
)
|
|
|
(111,000
|
)
|
|
|
(343,000
|
)
|
|
|
(281,000
|
)
|
Assets
|
|
|
4,430,000
|
|
|
|
5,575,000
|
|
|
|
4,430,000
|
|
|
|
5,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Pre Tax Loss from continuing operations
|
|
|
(1,357,000
|
)
|
|
|
(1,975,000
|
)
|
|
|
(2,757,000
|
)
|
|
|
(4,243,000
|
)
|
Assets
|
|
|
1,808,000
|
|
|
|
568,000
|
|
|
|
1,808,000
|
|
|
|
568,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
8,494,000
|
|
|
|
13,368,000
|
|
|
|
21,941,000
|
|
|
|
27,246,000
|
|
Gross Profit
|
|
|
614,000
|
|
|
|
2,191,000
|
|
|
|
2,795,000
|
|
|
|
4,465,000
|
|
Pretax net loss from continuing operations
|
|
|
(1,584,000
|
)
|
|
|
(735,000
|
)
|
|
|
(1,940,000
|
)
|
|
|
(1,730,000
|
)
|
Benefit from Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414,000
|
)
|
|
|
-
|
|
Income from Discontinued Operations, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,000
|
|
Net Loss
|
|
|
(1,584,000
|
)
|
|
|
(735,000
|
)
|
|
|
(526,000
|
)
|
|
|
(1,658,000
|
)
|
Assets
|
|
$
|
54,728,000
|
|
|
$
|
53,319,000
|
|
|
$
|
54,728,000
|
|
|
$
|
53,319,000
|
|
Results
of Operations for the three months ended June 30, 2020
Net
Sales:
Consolidated
net sales for the three months ended June 30, 2020 were $8,494,000, a decrease of $4,874,000, or 36.5%, compared with $13,368,000
for the three months ended June 30, 2019. Net sales of our Complex Machining segment were $7,308,000 in the three months ended
June 30, 2020, a decrease of $4,393,000, or 37.5%, from $11,701,000 in the three months ended June 30, 2019. Net sales in
our Turbine Engine Components segment for the three months ended June 30, 2020 were $1,186,000, a decrease of $481,000, or 28.9%,
compared with $1,667,000 for the three months ended June 30, 2019. These decreases were directly attributable to the impact of
COVID-19.
As
indicated in the table below, two customers represented 71.9% and three customers represented 75.6% of total sales for the three
months ended June 30, 2020 and June 30, 2019, respectively.
|
|
Percentage of Sales
|
|
Customer
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Sikorsky Aircraft
|
|
|
38.6
|
%
|
|
|
30.0
|
%
|
Goodrich Landing Gear Systems
|
|
|
33.3
|
%
|
|
|
35.1
|
%
|
Rohr Inc.
|
|
|
*
|
|
|
|
10.5
|
%
|
*
Customer was less than 10% of total net sales for the three months ended June 30, 2020.
Gross
Profit:
Consolidated
gross profit from operations for the three months ended June 30, 2020 was $614,000, a decrease of $1,577,000, or 72.0%, as compared
to gross profit of $2,191,000 for the three months ended June 30, 2019. Consolidated gross profit as a percentage of sales was
7.2% and 16.4% for the three months ended June 30, 2020 and 2019, respectively. These decreases were directly attributable to
the impact of COVID-19.
Interest
and Financing Costs
Interest
and financing costs for the three months ended June 30, 2020 were $428,000 a decrease of $564,000 or 56.9% compared to $992,000
for the three months ended June 30, 2019. This decrease was due to lower interest rates and finance costs under the Company’s
new credit facility (“SNB Facility”) with SNB, which replaced the Company’s previous credit facility (“PNC
Facility”) with PNC Bank N.A. (“PNC”) as of December 31, 2019.
Operating
Expense
Consolidated
operating expenses for the three months ended June 30, 2020 totaled $1,906,000 and decreased by $66,000 or 3.3% compared to $1,972,000
for the three months ended June 30, 2019.
Net
Loss
Net
loss for the three months ended June 30, 2020 was $1,584,000, compared to a net loss of $735,000 for the three months ended June
30, 2019. The increase in net loss was largely attributable to the impact of COVID-19 as discussed above.
Results
of Operations for the six months ended June 30, 2020
Net
Sales:
Consolidated
net sales for the six months ended June 30, 2020 were $21,941,000, a decrease of $5,305,000, or 19.5%, compared with $27,246,000
for the six months ended June 30, 2019. Net sales of our Complex Machining segment were $19,372,000 in the six months ended June
30, 2020, a decrease of $4,747,000, or 19.7%, from $24,119,000 in the six months ended June 30, 2019. Net sales in our Turbine
Engine Components segment were $2,569,000 for the six months ended June 30, 2020, a decrease of $558,000, or 17.8% compared with
$3,127,000 for the six months ended June 30, 2019. These decreases were directly attributable to the impact of COVID-19.
As
indicated in the table below, two customers represented 69.3% and three customers represented 74.7% of total sales for the six
months ended June 30, 2020 and June 30, 2019, respectively.
Customer
|
|
Percentage of Sales
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Sikorsky Aircraft
|
|
|
37.1
|
%
|
|
|
29.4
|
%
|
Goodrich Landing Gear Systems
|
|
|
32.2
|
%
|
|
|
33.2
|
%
|
Rohr Inc.
|
|
|
*
|
|
|
|
12.1
|
%
|
*
Customer was less than 10% of total net sales for the six months ended June 30, 2020.
Gross
Profit:
Consolidated
gross profit from operations for the six months ended June 30, 2020 was $2,795,000, a decrease of $1,670,000, or 37.4%, as compared
to gross profit of $4,465,000 for the six months ended June 30, 2019. Consolidated gross profit as a percentage of sales was 12.7%
and 16.4% for the six months ended June 30, 2020 and 2019, respectively. These decreases were directly attributable to the impact
of COVID-19.
Interest
and Financing Costs
Interest
and financing costs for the six months ended June 30, 2020 were $808,000 a decrease of $1,147,000 or 58.7% compared to $1,955,000
for the six months ended June 30, 2019. This decrease was due to lower interest rates and finance costs under SNB Facility, which
replaced the PNC Facility as of December 31, 2019.
Operating
Expense
Consolidated
operating expenses for the six months ended June 30, 2020 totaled $4,168,000 and increased by $134,000 or 3.3% compared to $4,034,000
for the six months ended June 30, 2019.
Net
Loss
Net
loss for the six months ended June 30, 2020 was $526,000, compared to a net loss of $1,658,000 for the six months ended June 30,
2019, for the reasons discussed above. Losses for the six months ended June 30, 2020 from continuing operations was $526,000 compared
to losses of $1,730,000 from continuing operations for the six months ended June 30, 2019. Our net loss for the six months ended
June 30, 2019 includes a net gain from the discontinued operations of EPC and ECC in the amount of $72,000. The increase
in net loss was largely attributable to the impact of COVID-19 as discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
Financial
impacts related to COVID-19, including our actions and costs in response to the pandemic, were not material to our first quarter
2020 financial position, results of operations or cash flows. Beginning in April 2020 the COVID–19 crisis resulted in a
reduction to revenue and operating margins in portions of our business. This negative effect continued in May 2020 and to a somewhat
lesser extent in June 2020. The decrease in revenue resulted from employee absenteeism, supplier disruption, changes in employee
productivity, and related program delays or challenges.
With
respect to the remainder of 2020, the negative impact COVID-19 may have on the broader global economy and the pace of the economic
recovery and the aerospace industry is unknown. Given the unknown magnitude of the depth and duration of this crisis, we anticipate
a more challenging macroeconomic environment in the remainder of the year.
The
impact of COVID-19 on the commercial aerospace industry has been severe while the defense aerospace industry has not been as adversely
impacted. We continue to have a substantial backlog. We believe that the contraction in commercial demand may result in orders
being shifted to suppliers who are in a position to maintain their operations despite the impact of COVID-19. As previously announced,
we recently issued purchase orders for $2.5 million of machinery. This equipment is expected to be delivered in September and
October and come on line shortly thereafter. This new equipment will not only increase our production efficiency, it will also
increase the number of parts we can make allowing us to offer additional services to our customers. We are currently in the process
of obtaining loans to cover the cost of this equipment. Though there can be no assurance that such loans will be made available
to us, we have received indications of interest from a number of commercial lenders and believe that the payments made to satisfy
such loans will be more than absorbed by cost savings in production and new business.
The CARES Act and Significant Transactions Which Have Impacted
Our Liquidity
In May 2020, AIM, NTW and
Sterling (each a “Borrower”) entered into government subsidized loans with SNB in an aggregate principal amount of
$2.4 million (“SBA Loans”). Subject to the terms of the note evidencing each loan (the “Notes”), each SBA
Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has an initial
term of two years, and is unsecured and guaranteed by the SBA. At least 60% of the proceeds of each Loan must be used for payroll
and payroll-related costs, in accordance with the applicable provisions of the Federal statute authorizing the loan program administered
by the SBA and the rules promulgated thereunder (the “Loan Program”). The Borrower may apply to SNB for forgiveness
of a portion of the SBA Loan in accordance the applicable provisions of the federal statute authorizing the Loan Program. Each
Note provides for customary events of default including, among other things, cross-defaults on any other loan with SNB. Each SBA
Loan may be accelerated upon the occurrence of an event of default. The foregoing summary is qualified in its entirety by reference
to the Notes, a copy of which were filed with our Form 10Q for the period ended March 31, 2020 on May 14, 2020 as Exhibits 10.1,
10.2 and 10.3 and are incorporated herein by reference.
We have elected to defer
the deposit and payment of the employer’s portion of Social Security taxes pursuant to Section 2302 of the CARES Act. These
deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of June 30, 2020, we deferred
$199,000, which is included in Other Liability on the accompanying Condensed Consolidated Balance Sheet.
Pursuant to the CARES Act,
we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter of this year. In addition,
as discussed above we will defer the employer’s portion of social security taxes incurred between March 27, 2020 and December
31, 2020 and pay such taxes in two installments in 2021 and 2022, In addition to the support received through the CARES Act, the
U.S. Department of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent
for costs incurred and worked performed on relevant contracts. These actions should help mitigate COVID-19 related negative impacts
to our operating cash flows for the remainder of the year. Nevertheless, our cash flows from operations could be affected by various
risks and uncertainties, including, but not limited to the effects of the COVID-19 pandemic and other risks detailed in Part II,
Item 1A of this Quarterly Report.
On December 31, 2019, we
entered into the SNB Facility with SNB expiring on December 30, 2022. The SNB Facility provides for a $16,000,000 revolving loan
(“SNB revolving line of credit”) and a term loan (“SNB term loan”).
Proceeds from the SNB Facility
repaid our outstanding PNC Facility.
The formula to determine
the amounts of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible
receivables and inventory (as defined in the SNB Facility).
The repayment terms of
the SNB term loan provide for monthly principal installments in the amount of $45,238, payable on the first business day of each
month, beginning on February 1, 2020, with a final payment of any unpaid balance of principal and interest payable on December
30, 2022. In addition, for so long as the SNB term loan remains outstanding, if Excess Cash Flow (as defined) is a positive number
for any fiscal year, beginning with the year ending December 31, 2020, we shall pay to SNB an amount equal to the lesser of (i)
twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii) the outstanding principal balance of the term loan.
Such payment shall be made to Lender and applied to the outstanding principal balance of the term loan, on or prior to April 15
of the Fiscal Year immediately following such Fiscal Year.
The terms of the SNB Facility
require that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal
Quarter beginning with the Fiscal Quarter ending March 31, 2020. In addition, we are limited in the amount of Capital Expenditures
we can make. As of June 30, 2020 we were in compliance with all loan covenants. The SNB Facility also restricts the amount of dividends
we may pay to our stockholders. Substantially all of our assets are pledged as collateral under the SNB Facility.
As of June 30, 2020, our
debt to SNB in the amount of $16,488,000 consisted of the SNB revolving line of credit note in the amount of $12,972,000 and the
SNB term loan in the amount of 3,516,000.
Cash Flow
The following table summarizes
our net cash flow from operating, investing and financing activities for the periods indicated below:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash provided by (used in)
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,043,000
|
)
|
|
$
|
(1,493,000
|
)
|
Investing activities
|
|
|
(309,000
|
)
|
|
|
(79,000
|
)
|
Financing activities
|
|
|
2,126,000
|
|
|
|
917,000
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
774,000
|
|
|
$
|
(655,000
|
)
|
Cash
Used in Operating Activities
Cash used in operating
activities primarily consists of our net loss adjusted for certain non-cash items and changes to working capital items.
For the six months ended
June 30, 2020, net cash was impacted by a net loss of $526,000, offset by $2,298,000 of non-cash items consisting of depreciation
of property and equipment of $1,344,000, bad debt expense of $322,000, non-cash employee compensation expense of $214,000, and
other non-cash items totaling $418,000.
Operating assets and liabilities
used cash in the net amount of $2,815,000 consisting of net increases in inventory and deposits and other assets in the amounts
of $5,213,000 and $185,000, respectively, and decreases in operating lease liabilities of $349,000 and income taxes payable of
$25,000, partially offset by decreases in accounts receivable and prepaid expenses in the amounts of $1,380,000 and $74,000, respectively,
and increases in accounts payable and accrued expense, other liability and deferred revenue of $1,301,000, $199,000 and $3,000,
respectively.
Cash Used in Investing Activities
For the six months ended
June 30, 2020, cash used in investing activities was $309,000. This was comprised of the purchase of equipment.
Cash Provided by Financing Activities
Cash provided by financing
activities consists of the borrowings and repayments under our credit facilities with our senior lender, amounts borrowed pursuant
to the CARES Act, increases in and repayments of financing lease obligations and other notes payable, and the proceeds from the
sale of our equity.
For the six months, ended
June 30, 2020, net cash provided by financing activities was $2,126,000. This was primarily comprised of proceeds from our SBA
loan in the amount of $2,414,000, SNB revolving loan and the sale of common stock in the amounts of $429,000 and $984,000, respectively,
partially offset by repayments of $1,020,000 on our notes payable-related parties, $100,000 on our notes payable – third
party, $284,000 on our term loan, $143,000 on our loan for equipment and $9,000 on our finance lease obligations.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance
sheet arrangements as of June 30, 2020.
Critical Accounting Policies and Estimates
A critical accounting policy
is one that is both important to the portrayal of a company’s financial condition and results of operations and requires
management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain.
Our condensed consolidated
financial statements are presented in accordance with U.S. GAAP, and all applicable U.S. GAAP accounting standards effective as
of June 30, 2020 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation
of condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results
could differ from those estimates. The following accounting policies and estimates have been highlighted as significant because
changes to certain judgments and assumptions inherent in these policies could affect our condensed consolidated financial statements:
|
●
|
Stock-based compensation; and
|
We base our estimates,
to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors
and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and
liabilities. We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our
estimates.
Recently Issued Accounting Pronouncements
In December 2019, the FASB
issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which
is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general
principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.
The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related
disclosures.
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 condensed consolidated financial statements.